EDGAR 10-K Filing

Company CIK: 1784700
Filing Year: 2025
Filename: 1784700_10-K_2025_0000950170-25-043295.json

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ITEM 1. BUSINESS
Item 1. Business
The Company - Varagon Capital Corporation
We are a Maryland corporation and an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Substantially concurrent with the Initial Closing (as defined below) and immediately prior to our election to be regulated as a BDC, Varagon Fund I, L.P. (“VF1”), a Delaware limited partnership that was formed on February 29, 2016 and a private fund exempt from registration pursuant to Section 3(c)(7) of the 1940 Act, merged with and into the Company, with the Company continuing in existence as the surviving entity in the merger (the “Merger”). As a result of the Merger, we acquired all of VF1’s assets and liabilities (the “Existing Portfolio”), including all VF1’s interests in the joint venture, Senior Direct Lending Program (“SDLP”), in exchange for shares of our common stock. In addition, immediately prior to our election to be regulated as a BDC, the Company purchased a portfolio of existing loans (the “Warehoused Portfolio” and together with the Existing Portfolio, the “Initial Portfolio”) from certain affiliates of the Adviser using proceeds from the Initial Closing and borrowings under its credit facility with JPMorgan Chase Bank, National Association. On the date of the Initial Closing, immediately following the purchase of the Initial Portfolio, we elected to be regulated as a BDC under the 1940 Act. In addition, we have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). If we fail to qualify as a RIC for any taxable year, we will be subject to U.S. federal income tax imposed at corporate rates on any net taxable income for such year.
Investment Objective: Our investment objective is to generate current income with a focus on capital preservation and, to a lesser extent, capital appreciation by investing primarily in directly-originated leveraged loans to U.S. middle market companies. We invest in senior secured loans, but also may selectively invest in second lien and subordinated or mezzanine loans of, and equity and equity-related securities in, U.S. middle market companies. We will invest in securities that are rated below investment grade by rating agencies (which are often referred to as “junk”) or that would be rated below investment grade if they were rated. There are no assurances that we will achieve our investment objective.
We use the term “middle market companies” to generally refer to companies with earnings before interest, tax, depreciation and amortization (“EBITDA”) between $10 million and $75 million annually, though we may invest in smaller or larger companies if an attractive opportunity presents itself. We expect to lend to companies in a variety of industries and, to a limited extent, to companies outside the United States. We seek to create a balanced portfolio and the size of each investment will depend on the then-current diversification of our portfolio and the size of our capital base, among other things. The actual amount of leverage employed will depend on market conditions and other factors at the time of any proposed borrowing. Leverage is expected to be utilized, within levels permitted by the 1940 Act, to help the Company meet its investment objective. Any use of leverage, if incurred, would be expected to increase the total capital available for investment by the Company.
As a BDC, we are generally required to invest at least 70% of our assets in U.S.-based operating companies (“qualifying assets”). We may invest up to 30% of our portfolio in non-qualifying assets. Our investment in the Subordinated Certificates (defined below) and any investments in subordinated or equity tranches of collateralized loan obligations (“CLOs”) generally will be considered non-qualifying assets. On an opportunistic basis, we also may consider other investments in investment funds that are operating pursuant to certain exceptions to the 1940 Act, as well as in debt and equity of companies located outside of the United States and debt and equity of public companies that would not be qualifying assets because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act.
We generally intend to distribute, out of assets legally available for distribution, substantially all of our available earnings, on a quarterly basis, as determined by our board of directors (the “Board”), in its discretion.
From time to time, we may be exposed to significant market risk. See “Item 1.A.Risk Factors -Risks Related to our Business and Structure -Risks Related to Changes in Interest Rates.” Our investment portfolio may be concentrated in a relatively limited number of portfolio companies and industries from time to time. We are subject to certain investment restrictions with respect to leverage and type of investment. The Company, the Adviser and the Adviser’s affiliates will engage in certain origination activities and receive related structuring or similar fees.
The Adviser - VCC Advisors, LLC
Our business and investment activities are managed by the Adviser, subject to the supervision of the Board. The Adviser is registered with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and is a subsidiary of Varagon, which is also registered with the SEC as an investment adviser under the Advisers Act. Varagon provides the Adviser with experienced investment professionals, including the members of the Adviser’s Investment Committee (the “IC”), and access to Varagon’s resources. The Adviser expects to benefit significantly from Varagon’s ability to source attractive investment opportunities, conduct research and perform due diligence on potential borrowers, structure and price investments, and manage a balanced portfolio on an ongoing basis. The Adviser provides management services to the Company pursuant to an investment advisory agreement.
Varagon Capital Partners, L.P.
Launched in 2014, Varagon is a leading direct lender to performing, sponsor-backed U.S. middle market companies, with approximately $13.6 billion of assets under management as of December 31, 2024. On July 5, 2023, Varagon entered into an Agreement and Plan of Merger with affiliates of Man Group, pursuant to which, on September 6, 2023, an indirect subsidiary of Man Group merged with and into Varagon, with Varagon surviving the merger as an indirect subsidiary of Man Group (the "Transaction"). Following the consummation of the Transaction, Man Group own a majority interest in Varagon and Varagon management owns, directly or indirectly a minority interest in Varagon. Varagon believes that Man Group's extensive distribution network and operational expertise is expected to support and grow Varagon's direct lending platform.
Varagon offers complete financing solutions through a flexible and competitive product suite to middle market businesses with EBITDA generally between $10 million and $75 million. From inception (June 2014) to December 31, 2024, Varagon has invested and managed (including co-investments) over $30.0 billion in performing, senior secured loan investments across more than 349 borrowers.
Varagon believes it has built a platform with a senior management team that has extensive experience investing across the capital structure. Varagon’s senior management team members share a common investment philosophy built on a framework of assessing companies with a disciplined, fundamentals-based, deep value-approach. As of December 31, 2024, Varagon had 76 employees, 43 of whom are dedicated investment professionals, with three primary offices located in New York, New York, Fort Worth, Texas, and Chicago, Illinois. Man Group is a global active investment management firm focused on delivering attractive risk adjusted performance for clients. Headquartered in London, Man Group manages $168.6 billion in assets under management as of December 31, 2024, and operates across multiple offices globally. Man Group is listed on the London Stock Exchange under the ticker “EMG” and is a constituent of the FTSE 250 Index.
Investment Advisory Agreement
On June 2, 2022, the Company entered into an investment advisory agreement with the Adviser. In connection with the Transaction, the Company entered into a new investment agreement between the Company and the Adviser (the "Prior Investment Advisory Agreement"), which was materially identical to the investment advisory agreement, dated June 2, 2022, and became effective on September 6, 2023. At a meeting of the Company's shareholders held on June 12, 2024, the Company's shareholders voted to approve an amended investment advisory agreement by and between the Company and the Adviser (the "Investment Advisory Agreement").
The Investment Advisory Agreement amended the Prior Investment Advisory Agreement as follows:
(i)reduced the incentive fee payable by the Company to the Adviser following an initial public offering or a listing of the common stock on a national securities exchange (a "Public Listing") from 20% of all remaining Pre-Incentive Fee Net Investment Income (as defined below) above the “catch-up” to 17.5% of all remaining Pre-Incentive Fee Net Investment Income above the “catch-up”; and
(ii)more accurately reflects the original intent of the parties with respect to the “three-year look back” by revising the description of the calculation of the Income Incentive Fee (as defined below) to explicitly account for the “three-year look back” and specifically referring to the “aggregate” Pre-Incentive Fee Net Investment Income for the Trailing Twelve Quarters (as defined below) in the description of the calculation; therefore, the foregoing change is clarifying in nature and neither reflects a change in the actual calculation of the Income Incentive Fee nor would result in any change in the fees payable by the Adviser.
Other than the foregoing, no other material provisions of the Prior Investment Advisory Agreement changed.
Under the terms of the Investment Advisory Agreement, the Adviser undertakes the following:
•formulate and implement the Company’s investment program;
•determine the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
•identify, evaluate and negotiate the structure of the investments and dispositions made by the Company (including performing due diligence on prospective portfolio companies);
•execute, close, service and monitor the Company’s investments, including the exercise of any rights in its capacity as a lender;
•determine the securities and other assets that we will originate, purchase, retain, sell and dispose of such securities and other assets, as appropriate;
•exercise voting rights in respect of portfolio securities and other investments for us; and
•provide us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our capital.
The Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.
Compensation of Adviser
Pursuant to the Investment Advisory Agreement, we pay the Adviser a fee for its investment advisory and management services consisting of two components-a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee will ultimately be borne by our shareholders.
In addition, the Adviser and its affiliates pay to the Company its allocable portion of any transaction, advisory or similar fees received in connection with the Company’s investment activities. The Adviser determines the Company’s allocable portion of such fees based on the Company’s ownership of the activity or investment or securities related to the investment, as applicable. The Adviser and its affiliates retain a portion of any transaction or transaction-related fee (including break-up fees, structuring fees, monitoring fees, commitment fees, or brokerage or underwriting compensation), advisory fees, or similar fees received in connection with the Company’s investment activities to the extent permitted by the 1940 Act, and may earn other transaction or transaction-related fees, advisory fees, or similar fees from the same transactions from sources other than the Company.
Annual agency fees will be retained by the party serving as administrative agent or collateral agent, including the Adviser or an affiliate when serving as agent, subject to any limitations under the 1940 Act.
Base Management Fee
Pursuant to the Investment Advisory Agreement, prior to a Public Listing, the Company pays to the Adviser a fee (the “Management Fee”) for management services in an amount equal to an annual rate of 0.75% of the Company's "Adjusted Gross Assets." The Company's Adjusted Gross Assets is the average of the accreted or amortized cost basis of the Company's portfolio investments, excluding cash and cash equivalents and undrawn capital commitments at the end of the two most recently completed fiscal quarters (and, in the case of the first quarter-end following the Initial Closing, at the end of such fiscal quarter-end). The Management Fee is payable quarterly in arrears. Pursuant to the Investment Advisory Agreement, beginning with the first full calendar quarter following Public Listing, the Company will pay to the Adviser the Management Fee in an amount equal to an annual rate of 1.00% of the Adjusted Gross Assets payable quarterly in arrears (and, in the case of the first full calendar quarter-end following a Public Listing, at the end of such fiscal quarter-end).
Incentive Fee
Pursuant to the Investment Advisory Agreement, the Company pays to the Adviser an incentive fee consisting of two components - an incentive fee based on a percentage of net investment income (the "Income Incentive Fee") and an incentive fee based on a percentage of capital gains (the "Capital Gains Incentive Fee"). The two components of the incentive fee are independent of each other and therefore, one component may be payable to the Adviser even if the other component is not payable to the Adviser.
Income Incentive Fee
The first part of the incentive fee, the Income Incentive Fee, is calculated and payable quarterly in arrears.
Prior to a Public Listing, under the Investment Advisory Agreement, the Income Incentive Fee will be calculated, subject to the Incentive Fee Cap (as defined below), and payable quarterly in arrears in respect of the Trailing Twelve Quarters as follows:
(i)no incentive fee in any calendar quarter in which the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters does not exceed the hurdle rate of 1.75% for such Trailing Twelve Quarters;
(ii)100% of the excess of the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate until the Adviser has received a “catch-up” equal to 12.5% of the aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters; and
(iii)12.5% of the Company’s remaining aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters, if any, that exceeds the “catch-up.”
Beginning with the first full calendar quarter following a Public Listing, under the Investment Advisory Agreement, the Income Incentive Fee will be calculated, subject to the Incentive Fee Cap, and payable quarterly in arrears in respect of the Trailing Twelve Quarters as follows:
(i)no incentive fee in any calendar quarter in which the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters does not exceed the hurdle rate of 1.75% for such Trailing Twelve Quarters;
(ii)100% of the excess of the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate until the Adviser has received a “catch-up” equal to 17.5% of the aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters; and
(iii)17.5% of the Company’s remaining aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters, if any, that exceeds the “catch-up,”
“Pre-incentive fee net investment income” means interest income, dividend income, accrued interest on the Subordinated Certificates, and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies accrued during the relevant calendar quarter, minus its operating expenses during the relevant calendar quarters including the Management Fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the Income Incentive Fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
The Income Incentive Fee for a particular quarter is subject to a cap (the "Incentive Fee Cap”). Beginning with the first full calendar quarter following a Public Listing, the Incentive Fee Cap will be equal to the difference between (x) 12.5% of the Cumulative Net Return (as defined below) from the calendar quarter then ending and the eleven preceding calendar quarters (such period the “Trailing Twelve Quarters”) and (y) the aggregate Income Incentive Fees that were paid to the Adviser by the Company in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters. Following a Public Listing, the Incentive Fee Cap will be equal to the difference between (x) 17.5% of the Cumulative Net Return during the relevant Trailing Twelve Quarters and (y) the aggregate Income Incentive Fees that were paid to the Adviser by the Company in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters. Cumulative Net Return is defined as the sum of (a) pre-incentive fee net investment income in respect of the relevant Trailing Twelve Quarters and (b) cumulative aggregate realized capital gains, cumulative aggregate realized capital losses, cumulative aggregate unrealized capital depreciation and cumulative aggregate unrealized capital appreciation in respect of the relevant Trailing Twelve Quarters.
Example of Calculation of the Income Incentive Fee based on Income Assumptions
Examples of how the Income Incentive Fee would be calculated Prior to a Public Listing are as follows:
For illustrative purposes, net asset value (“NAV”) is assumed to be constant as of the beginning of all four quarters and does not give effect to gains or losses in the preceding quarters.
Quarter 1:
• Net Asset Value at the end of Quarter 1 = $100.0 million
• Quarter 1 Pre-Incentive Fee Net Investment Income = $6.0 million
• Quarter 1 Net Capital Gain = $1.0 million
• Quarter 1 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 1 Catch-up Amount = $2.0 million (calculated based on an annualized 8.00% rate)
In Quarter 1, the pre-incentive fee net investment income of $6.0 million exceeds the Incentive Fee Hurdle of $1.75 million and the catch-up amount of $2.0 million. There are no Net Capital Losses (i.e., there is a net capital gain). As a result, the Income Incentive Fee on Income for the quarter would be $750,000.This is calculated as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $1.75 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $2.0 million and $1.75 million or $250,000);
3) 12.5% of the amount above the catch-up amount (12.5% of the difference between $6.0 million and $2.0 million: $4,000,000 X 12.5% = $500,000)
Therefore, $250,000+ $500,000 = $750,000 which is the first quarter Income Incentive Fee on Income due to the Adviser. There is no Net Capital Loss and therefore no net downward adjustment giving effect to the Incentive Fee Cap.
Quarter 2:
• Net Asset Value at the end of Quarter 2 = $100.0 million
• Quarter 2 Pre-Incentive Fee Net Investment Income = $1.5 million
• Quarter 2 Net Capital Gain = $1.0 million
• Quarter 2 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of 	NAV)
• Quarter 2 Catch-up Amount = $2.0 million (calculated based on an annualized 8.00% rate)
In Quarter 2, the pre-incentive fee net investment income of $1.5 million does not exceed the Quarter 2 Incentive Fee Hurdle of $1.75 million, but the aggregate pre-incentive fee net investment income for the Trailing Twelve Quarters of $7.5 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million) exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters of $3.5 million ($1.75 million quarterly hurdle for 2 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $4.0 million ($2.0 million quarterly catch-up amount for 2 quarters). There are no Net Capital Losses. As a result, the Income Incentive Fee on Income for the quarter would be $187,500. This is calculated as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $3.5 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $4.0 million and $3.5 million or $500,000);
3) 12.5% of the amount above the catch-up amount (12.5% of the difference between $7.5 million and $4.0 million: $3,500,000 X 12.5% = $437,500);
4) Less the $750,000 paid in Quarter 1.
Therefore: $500,000+ $437,500 - $750,000 = $187,500 and is the second quarter Income Incentive Fee on Income due to the Adviser. There is no Net Capital Loss and therefore no net downward adjustment giving effect to the Incentive Fee Cap.
Quarter 3:
• Net Asset Value at the end of Quarter 3 = $100.0 million
• Quarter 3 Pre-Incentive Fee Net Investment Income = $2.0 million
• Quarter 3 Net Capital Loss = ($6.0) million
• Quarter 3 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 3 Catch-up Amount = $2.0 million (calculated based on an annualized 8.00% rate)
In Quarter 3, the aggregate pre-incentive fee net investment income of the Trailing Twelve Quarters of $9.5 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million+ Quarter 3 pre-incentive fee net investment income of $2.0 million)exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters of $5.25 million ($1.75 million quarterly hurdle for 3 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $6.0 million ($2.0 million quarterly catch-up amount for 3 quarters). However, there is an aggregate Net Capital Loss of ($4.0) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply, and the calculations are as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $5.25 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $6.0 million and $5.25 million or $750,000);
3) 12.5% of the amount above the catch-up amount (12.5% of the difference between $9.5 million and $6.0 million: $3,500,000 X 12.5% = $437,500);
4) Less the $750,000 paid in Quarter 1 and $187,500 paid in Quarter 2 (for $937,500).
Therefore: $750,000 + $437,500 -$937,500 = $250,000. There is however an aggregate Net Capital Loss of ($4.0) million and the Incentive Fee Cap applies.
Incentive Fee Cap of ($250,000) is calculated as:
1) 	12.5% of aggregate pre-incentive fee net investment income ($9.5 million) minus aggregate Net Capital Loss ($4.0 million): 12.5% X $5.5 million= $687,500;
2) Less Incentive Fees paid in prior Quarters of $937,500.
The result is a negative number and there is no third quarter Income Incentive Fee on Income due to the Adviser.
Quarter 4:
• Net Asset Value at the end of Quarter 4 = $100.0 million
• Quarter 4 Pre-Incentive Fee Net Investment Income = $3.5 million
• Quarter 4 Net Capital Gain = $3.0 million
• Quarter 4 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 4 Catch-up Amount = $2.0 million (calculated based on an annualized 8.00% rate)
In Quarter 4, the aggregate pre-incentive fee net investment income of the Trailing Twelve Quarters of $13.0 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million + Quarter 3 pre-incentive fee net investment income of $2.0 million + Quarter 4 pre-incentive fee net investment income of $3.5 million) exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters of $7.0 million ($1.75 million quarterly hurdle for 4 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $8.0 million ($2.0 million quarterly catch-up amount for 4 quarters). There are no Net Capital Losses for the period; however, there is an aggregate Net Capital Loss of ($1.0) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply, and the calculations are as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $7.0 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $8.0 million and $7.0 million or $1,000,000);
3) 12.5% of the amount above the catch-up amount (12.5% of the difference between $13.0 million and $8.0 million: $5,000,000 X 12.5% = $625,000);
4) Less the $937,500 paid in prior quarters.
Therefore: $1,000,000 + $625,000 - $937,500 =$687,500. There is, however, an aggregate Net Capital Loss of ($1.0) million and the Incentive Fee Cap applies.
The Incentive Fee Cap of $562,500 is calculated as follows:
1) 	12.5% of aggregate pre-incentive fee net investment income ($13.0 million) minus aggregate Net Capital Loss ($1.0 million): 12.5% X $12.0 million= $1,500,000;
2) Less Incentive Fees paid in prior Quarters of $937,500.
Therefore, because the Incentive Fee Cap is positive but less than the calculated Income Incentive Fee on Income of $687,500 calculated prior to applying the Incentive Fee Cap, the incentive fee is limited to the cap and a Income Incentive Fee on Income of $562,500 is payable to the Adviser for Quarter 4.
Following a Public Listing Giving Effect to the Amended Advisory Agreement
Examples of how the Income Incentive Fee would be calculated following a Public Listing as follows:
For illustrative purposes, NAV is assumed to be constant as of the beginning of all four quarters and does not give effect to gains or losses in the preceding quarters.
Quarter 1:
• NAV at the end of Quarter 1 = $100.0 million
• Quarter 1 Pre-Incentive Fee Net Investment Income = $6.0 million
• Quarter 1 Net Capital Gain = $1.0 million
• Quarter 1 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 1 Catch-up Amount = $2.1 million (calculated based on an annualized 8.48% rate)
In Quarter 1, the pre-incentive fee net investment income of $6.0 million exceeds the Incentive Fee Hurdle of $1.75 million and the catch-up amount of $2.1 million. There are no Net Capital Losses (i.e., there is a net capital gain). As a result, the Income Incentive Fee on Income for the quarter would be $1,050,000. This is calculated as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $1.75 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $2.1 million and $1.75 million or $371,212);
3) 17.5% of the amount above the catch-up amount (17.5% of the difference between $6.0 million and $2.1 million: $3,878,788 X 17.5% = $678,788)
Therefore, $371,212+ $678,788 = $1,050,000 which is the first quarter Income Incentive Fee on Income due to the Adviser. There is no Net Capital Loss and therefore no net downward adjustment giving effect to the Incentive Fee Cap.
Quarter 2:
• NAV at the end of Quarter 2 = $100.0 million
• Quarter 2 Pre-Incentive Fee Net Investment Income = $1.5 million
• Quarter 2 Net Capital Gain = $1.0 million
• Quarter 2 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 2 Catch-up Amount = $2.1 million (calculated based on an annualized 8.48% rate)
In Quarter 2, the pre-incentive fee net investment income of $1.5 million does not exceed the Quarter 2 Incentive Fee Hurdle of $1.75 million, but the aggregate pre-incentive fee net investment income for the Trailing Twelve Quarters of $7.5 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million) exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters of $3.5 million ($1.75 million quarterly hurdle for 2 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $4.2 million ($2.1 million quarterly catch-up amount for 2 quarters). There are no Net Capital Losses. As a result, the Income Incentive Fee on Income for the quarter would be $262,500. This is calculated as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $3.5 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $4.2 million and $3.5 million or
$742,424);
3) 17.5% of the amount above the catch-up amount (17.5% of the difference between $7.5 million and $4.2 million: $3,257,576 X 17.5% =
$570,076);
4) Less the $1,050,000 paid in Quarter 1.
Therefore: $742,424 + $570,076 - $1,050,000 = $262,500 and is the second quarter Income Incentive Fee on Income due to the Adviser. There is no Net Capital Loss and therefore no net downward adjustment giving effect to the Incentive Fee Cap.
Quarter 3:
• NAV at the end of Quarter 3 = $100.0 million
• Quarter 3 Pre-Incentive Fee Net Investment Income = $2.0 million
• Quarter 3 Net Capital Loss = ($6.0) million
• Quarter 3 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 3 Catch-up Amount = $2.1 million (calculated based on an annualized 8.48% rate)
In Quarter 3, the aggregate pre-incentive fee net investment income of the Trailing Twelve Quarters of $9.5 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million + Quarter 3 pre-incentive fee net investment income of $2.0 million) exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters
of $5.25 million ($1.75 million quarterly hurdle for 3 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $6.36 million ($2.1 million quarterly catch-up amount for 3 quarters). However, there is an aggregate Net Capital Loss of ($4.0) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply, and the calculations are as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $5.25 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $6.36 million and $5.25 million or $1,113,636);
3) 17.5% of the amount above the catch-up amount (17.5% of the difference between $9.5 million and $6.36 million: $3,136,364 X 17.5% = $548,864);
4) Less the $1,050,000 paid in Quarter 1 and $262,500 paid in Quarter 2 (for $1,312,500).
Therefore: $1,113,636 + $548,864 - $1,312,500 = $350,000. There is however an aggregate Net Capital Loss of ($4.0) million and the Incentive Fee Cap applies.
Incentive Fee Cap of ($350,000) is calculated as:
1) 	17.5% of aggregate pre-incentive fee net investment income ($9.5 million) minus aggregate Net Capital Loss ($4.0 million): 17.5% X $5.5 million= $962,500;
2) Less Incentive Fees paid in prior Quarters of $1,312,500.
The result is a negative number and there is no third quarter Income Incentive Fee on Income due to the Adviser.
Quarter 4:
• NAV at the end of Quarter 4 = $100.0 million
• Quarter 4 Pre-Incentive Fee Net Investment Income = $3.5 million
• Quarter 4 Net Capital Gain = $3.0 million
• Quarter 4 Incentive Fee Hurdle = $1.75 million (calculated based on an annualized 7.00% hurdle rate on $100.0 million of NAV)
• Quarter 4 Catch-up Amount = $2.1 million (calculated based on an annualized 8.48% rate)
In Quarter 4, the aggregate pre-incentive fee net investment income of the Trailing Twelve Quarters of $13.0 million (Quarter 1 pre-incentive fee net investment income of $6.0 million + Quarter 2 pre-incentive fee net investment income of $1.5 million + Quarter 3 pre-incentive fee net investment income of $2.0 million + Quarter 4 pre-incentive fee net investment income of $3.5 million) exceeds the aggregate Incentive Fee Hurdle for the Trailing Twelve Quarters of $7.0 million ($1.75 million quarterly hurdle for 4 quarters) and the aggregate catch-up amount for the Trailing Twelve Quarters of $8.48 million ($2.1 million quarterly catch-up amount for 4 quarters). There are no Net Capital Losses for the period; however, there is an aggregate Net Capital Loss of ($1.0) million for the Trailing Twelve Quarters. As a result, the Incentive Fee Cap would apply, and the calculations are as follows:
1) No pre-incentive fee net investment income up to the hurdle rate (i.e., up to $7.0 million);
2) 100% of the amount above the Incentive Fee Hurdle up to the catch-up amount (100% of the difference between $8.48 million and $7.0 million or $1,484,848);
3) 17.5% of the amount above the catch-up amount (17.5% of the difference between $13.0 million and $8.48 million: $4,515,152 X 17.5% = $790,152);
4) Less the $1,312,500 paid in prior quarters.
Therefore: $1,484,848 + $790,152 - $1,312,500= $962,500. There is, however, an aggregate Net Capital Loss of ($1.0) million and the Incentive Fee Cap applies.
The Incentive Fee Cap of $787,500is calculated as follows:
1) 	17.5% of aggregate pre-incentive fee net investment income ($13.0 million) minus aggregate Net Capital Loss ($1.0 million): 17.5% X $12.0 million = $2,100,000;
2) Less Incentive Fees paid in prior Quarters of $1,312,500.
Therefore, because the Incentive Fee Cap is positive but less than the calculated Income Incentive Fee on Income of $962,500 calculated prior to applying the Incentive Fee Cap, the incentive fee is limited to the cap and a Income Incentive Fee on Income of $787,500 is payable to the Adviser for Quarter 4.
Capital Gains Incentive Fee
The second part of the incentive fee, the capital gains incentive fee (“Capital Gains Incentive Fee”), is determined and payable in arrears as of the end of each fiscal year. Prior to a Public Listing, the amount of Capital Gains Incentive Fee is equal to 12.5% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. Beginning with the first full calendar quarter following a Public Listing, the amount of Capital Gains Incentive Fee will be equal to 17.5% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees.
In addition, the Adviser and its affiliates pay to the Company its allocable portion of any transaction, advisory or similar fees received in connection with the Company’s investment activities. The Adviser determines the Company’s allocable portion of such fees based on the Company’s ownership of the investment or securities related to the activity or investment, as applicable. The Adviser and its affiliates retain a portion of any transaction or transaction-related fee (including break-up fees, structuring fees, monitoring fees, commitment fees, or brokerage or underwriting compensation), advisory fees, or similar fees received in connection with the Company’s investment activities to the extent permitted by the 1940 Act, and may earn other transaction or transaction-related fees, advisory fees, or similar fees from the same transactions from sources other than the Company.
Limitations of Liability and Indemnification
The Adviser does not assume any responsibility to us other than to render the services described in, and on the terms of, the Investment Advisory Agreement, and will not be responsible for any action of our Board in declining to follow the advice or recommendations of the Adviser. The Investment Advisory Agreement provides that the Adviser, its officers, members and personnel, and any person controlling or controlled by the Adviser will not be liable to us or our shareholders for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting willful misfeasance, bad faith or gross negligence, in the performance of his or her duties, or by reason of his or her reckless disregard of his or her obligations and duties under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify the Adviser and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to willful misfeasance, bad faith or gross negligence, in the performance of his or her duties, or by reason of his or her reckless disregard of his or her obligations and duties under the Investment Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Board Approval of the Investment Advisory Agreement
Most recently, on March 20, 2024, the Board held a meeting to consider and approve the Investment Advisory Agreement and related matters. The Board was provided with the information it was required to consider in evaluating the Investment Advisory Agreement, including the following: (a) the nature, quality and extent of the advisory and other services to be provided to us by the Adviser; (b) the investment performance of us and the Adviser; (c) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives reflected in a chart previously provided to the Board; (d) our projected operating expenses and expense ratio compared to BDCs with similar investment objectives; (e) any existing and potential sources of indirect income to the Adviser and its affiliates from their relationships with us and the profitability of those relationships; (f) information about the services to be performed and the personnel who will be performing such services under the Investment Advisory Agreement; (g) the organizational capability and financial condition of the Adviser and its affiliates; (h) possible economies of scale arising from the Company’s size and/or anticipated growth; and (i) possible alternative fee structures or bases for determining fees.. The Board, including a majority of the directors who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act of the Company (the “Independent Directors”), will oversee and monitor the investment performance and, beginning with the second anniversary of the effective date of the Investment Advisory Agreement, will annually review the compensation we pay to the Adviser to determine that the provisions of the Investment Advisory Agreement are carried out.
Administration Agreement
Pursuant to the Administration Agreement, the Administrator (or one or more delegated service providers) furnishes us with office facilities, together with equipment and clerical, bookkeeping and recordkeeping services at such facilities. Under the Administration Agreement, our Administrator also performs, or oversees the performance of, our required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports to our shareholders and reports filed with the SEC and otherwise assist with the Company’s compliance with the rules and regulations applicable to a BDC and RIC. In addition, our Administrator assists us in determining and publishing our net asset value (“NAV”), overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. Our Administrator charges us only for the actual expenses it incurs on our behalf, or our allocable portion thereof, without any profit to our Administrator. For information about the
payment of expenses under the Administration Agreement, see “Payment of our Expenses under the Investment Advisory Agreement and the Administration Agreement” below.
On March 8, 2022, the Board held an in-person meeting to approve an administration agreement, which became effective on June 2, 2022, the date of the Company’s election to be regulated as a BDC under the 1940 Act. In connection with the Transaction, and in conjunction with entering into the Prior Investment Advisory Agreement, the Company entered into a new administration agreement between the Company and the Administrator (the "Administration Agreement"), which became effective on September 6, 2023. The Administration Agreement is materially identical to the prior administration agreement, dated June 2, 2022. Unless terminated earlier as described below, the Administration Agreement will continue in effect for a period of two years from its effective date. Thereafter, the Administration Agreement will continue automatically for successive annual periods provided that such continuance is specifically approved at least annually by (i) (A) the affirmative vote of a majority of our Board or (B) the affirmative vote of a majority of our outstanding voting securities, and (ii) the affirmative vote of a majority of our Independent Directors. In connection with such approval the Board, including a majority of Independent Directors, reviews the compensation we pay to the Administrator to determine that the provisions of the Administration Agreement are carried out satisfactorily and to determine, among other things, whether the expenses payable under the Administration Agreement are reasonable in light of the services provided. The Board also reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and our affiliates. The Board then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services. The Board also considers the possibility of obtaining such services from a different third-party and whether any other third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Board compares the total amount paid to the Administrator for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.
The Administration Agreement may be terminated at any time, without the payment of any penalty, upon not more than 60 days’ written notice, by: (i) the affirmative vote of a majority of our outstanding voting securities, (ii) the affirmative vote of a majority of our Board, including a majority of our Independent Directors, or (iii) the Administrator.
Indemnification
The Administration Agreement provides that, absent criminal conduct, willful misfeasance, bad faith or gross negligence, in the performance of his or her duties, or by reason of his or her reckless disregard of his or her obligations and duties under the Administration Agreement, our Administrator and its officers, manager, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Administrator’s services under the Administration Agreement or otherwise as our Administrator.
Sub-Administration Agreement
The Administrator has entered into a sub-administration agreement with State Street Bank and Trust Company (the “Sub-Administrator”) pursuant to which the Sub-Administrator performs certain administrative services for the Company, subject to the oversight of the Administrator, including preparing certain financial information, providing certain treasury services, and providing certain fund accounting services.
Our Administrator also provides administrative services to the Adviser. As a result, the Adviser also reimburses our Administrator for its allocable portion of our Administrator’s overhead, including rent, the fees and expenses associated with performing compliance functions for the Adviser, and its allocable portion of the compensation of any administrative support staff.
On March 8, 2022, the Board approved the Sub-Administration Agreement, which became effective on June 2, 2022, the date of the Company’s election to be regulated as a BDC.
Payment of our Expenses under the Investment Advisory Agreement and the Administration Agreement
All professionals of the Adviser, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by the Adviser and not by us. Payments under the Administration Agreement are based upon our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. In accordance with the terms of the Administration Agreement, overhead and other administrative expenses are generally allocated between us and the Administrator by reference to the relative time spent by personnel in performing administrative and similar functions on our behalf as compared to performing administrative functions on behalf of the Administrator, its other clients or the Adviser. To the extent personnel retained by the Administrator perform administrative tasks for the Adviser, the fees incurred with respect to the actual time dedicated to such tasks will be reimbursed by the Adviser.
We bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:
•organization and offering of the common stock, subject to the terms of the Expense Reimbursement Agreement (as defined below);
•the Company’s fees and expenses related to any Liquidity Event (as defined below) or the wind down and/or liquidation and dissolution of the Company;
•calculating the Company’s NAV (including the cost and expenses of any independent valuation firm);
•fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for the Company and in providing administrative services, monitoring the Company’s investments and performing due diligence on the Company’s prospective portfolio investments or otherwise relating to, or associated with, evaluating and making investments;
•fees and expenses incurred in connection with debt, if any, incurred to finance the Company’s investments or operations, and payment of interest and repayment of principal on such debt;
•fees and expenses related to sales and repurchases of the common stock and other securities;
•investment advisory and management fees;
•administration fees, if any, payable under the Administration Agreement;
•transfer agent, Sub-Administrator and custodial fees;
•expenses relating to the issue, repurchase and transfer of common stock to the extent not borne by the relevant transferring shareholders and/or assignees;
•federal and state registration fees;
•all costs associated with a Public Listing;
•federal, state and local taxes and other governmental charges assessed against the Company;
•independent directors’ fees and expenses and the costs associated with convening a meeting of the Board or any committee thereof;
•fees and expenses and the costs associated with convening a meeting of the shareholders or holders of any preferred stock, as well as the compensation of an investor relations professional responsible for the coordination and administration of the foregoing;
•costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;
•costs of any reports, proxy statements or other notices to shareholders, including printing and mailing costs;
•costs and expenses related to the preparation of the Company’s financial statements and tax returns;
•the Company’s allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
•direct costs and expenses of administration, including printing, mailing, long distance telephone, and copying;
•independent auditors and outside legal costs, including legal costs associated with any requests for exemptive relief, “no-action” positions or other guidance sought from a regulator, pertaining to the Company;
•compensation of other third-party professionals to the extent they are devoted to preparing the Company’s financial statements or tax returns or providing similar “back office” financial services to the Company;
•Adviser costs and expenses (excluding travel) in connection with identifying and investigating investment opportunities for the Company, monitoring the investments of the Company and disposing of any such investments;
•portfolio risk management costs;
•commissions or brokerage fees or similar charges incurred in connection with the purchase or sale of securities (including merger fees) and other assets;
•costs and expenses attributable to normal and extraordinary investment banking, commercial banking, accounting, auditing, appraisal, valuation, administrative agent activities, custodial and registration services provided to the Company, including in each case services with respect to the proposed purchase or sale of securities by the Company that are not reimbursed by the issuer of such securities or others (whether or not such purchase or sale is consummated);
•costs of amending, restating or modifying the Company’s charter (the “Charter”) and the Company’s bylaws (the “Bylaws”) or the Investment Advisory Agreement, the Administration Agreement or related documents of the Company or related entities;
•fees, costs, and expenses incurred in connection with any restructuring, IPO or reorganization of the Company or related entities, the termination, liquidation or dissolution of the Company or related entities, or the required redemption of all or substantially all outstanding common stock (including the fees and expenses associated with any such transaction);
•the expense reimbursements set forth in the Administration Agreement; and
•all other properly and reasonably chargeable expenses incurred by the Company or the Administrator in connection with administering the Company’s business, including rent and the allocable portion of the cost of the Company’s Chief Compliance Officer and Chief Financial Officer and their respective staffs; while certain of these expenses may not be ascertainable at any given time, any such expenses will be subject to the approval of the Board on a quarterly basis.
For avoidance of doubt, the Adviser or its affiliates are solely responsible for any placement, “finder’s” fees or other fees payable to any placement agents, intermediary or participating broker engaged by the Adviser on behalf of the Company in connection with the Company’s private offering (the “Offering”).
The Company bears expenses relating to the formation of any special purpose investment vehicles wholly owned by the Company. Income and operating expenses of the Company will be allocated among shareholders based on the number of Shares held by all shareholders on the date the applicable income or expense is accrued.
Reimbursements under the Administration Agreement
Pursuant to the Administration Agreement, the Company will reimburse the Administrator for any costs and expenses incurred by the Administrator for performing its obligations under the Administration Agreement.
Expense Reimbursement Agreement between the Company and the Adviser
To date, the Adviser and Varagon have funded all of the Organizational and Offering Expenses (as defined in the subsection entitled “The Private Offering” below) incurred by the Company. The Company has entered into an expense reimbursement agreement (the “Expense Reimbursement Agreement”) with the Adviser, pursuant to which the Company will reimburse the Adviser or Varagon, as applicable, for the Organizational and Offering Expenses incurred by the Company and funded by the Adviser or Varagon.
Any such reimbursement will be made during the first four fiscal quarters following the Fundraising Period (as defined below). As described below, the Fundraising Period may be extended by up to an additional 18 months in the sole discretion of the Board (i.e., from 24 months to up to 42 months after the Initial Closing, as defined below), which, on March 20, 2024, was extended to December 2, 2025 by the Board. See "-The Private Offering" below for more information. As a result of the foregoing, the Company will reimburse the Adviser, or, as applicable, Varagon, for the Organizational and Offering Expenses incurred by the Company during the first four fiscal quarters following the extended Fundraising Period (i.e., beginning with the fiscal quarter ending March 31, 2026). Accordingly, shareholders will indirectly bear Organizational and Offering Expenses, subject to any waiver of Organizational and Offering Expenses by the Adviser. The Company’s obligation to reimburse the Adviser or Varagon, as applicable, under the Expense Reimbursement Agreement automatically became a liability of the Company on June 2, 2022, when the Company elected to be regulated as a BDC under the 1940 Act. For the avoidance of doubt, reimbursements under the Expense Reimbursement Agreement are not conditioned on any performance threshold and are not considered a contingent liability for accounting purposes.
The Adviser elected to incur the Organizational and Offering Expenses associated with the Company for the period from July 31, 2019 through March 29, 2022. Such Organizational and Offering Expenses are not reimbursable by the Company. For more information, see “Item 8. Financial Statements and Supplementary Data - Note 2. Significant Accounting Policies” of this Annual Report on Form 10-K.
License Agreement
We have entered into a license agreement with the Adviser pursuant to which the Adviser has agreed to grant us a non-exclusive, royalty-free license to use the name “Varagon.” Under the license agreement, we have the right to use the “Varagon” name for so long as the Adviser or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Varagon” name.
Market Opportunity
The Company believes that substantial long-term changes in the debt capital markets present a compelling investment opportunity in the U.S. middle market. In particular, the Company believes that lending to private equity-backed middle market companies in the United States represents a large and highly attractive opportunity for credit managers that possess a platform of appropriate size and scale. The Company believes that it is well-positioned to benefit from the attractive market opportunity.
Large Addressable Market. We believe that middle market companies represent a significant growth segment of the U.S. economy. There are approximately 200,000 middle market companies in the U.S., the combined revenues of which would rank as the fourth largest economy in the world and which employ approximately 48 million people (Source: National Center for the Middle Market: Mid-Year 2022 Middle Market Indicator). Middle market companies often require substantial capital investments to grow and we believe the
demand for debt capital will continue, driven by a range of cyclical factors such as M&A activity and non-cyclical factors such as impending maturities of existing middle market debt and need for organic growth capital.
Shift from Traditional Financing Sources. We believe that regulatory and structural changes over the last decade have diminished the ability of traditional lenders to provide attractive financing to middle market companies. As such, traditional bank lenders have de-emphasized middle market leveraged loans in favor of relationships with low-levered borrowers that provide multiple sources of revenue, or capital markets activity for larger companies. The continued stress on the U.S. banking sector in 2023 will only continue to drive more opportunities for established direct lenders with the size and scale to service this market segment. As large private credit managers continue to disintermediate banks in the leveraged loan market, two distinct direct markets have recently developed. Many traditional core middle market (EBITDA of $10 million to $75 million) direct lenders have recently moved up-market to finance companies in the lower end of the traditional syndicated loan market (EBITDA of $100 million to $300+ million). With competitors continuing to move upmarket the Company has a unique opportunity to increase its competitiveness as a leading direct lender to the core middle market.
Strong Demand for Flexible Debt Capital. We believe that the significant amount of capital recently raised by private equity sponsors for investment in the United States middle market will help drive leveraged buyout transaction volume and demand for financing solutions. We expect private equity firms and middle market companies in the United States to continue to require capital to fund growth, acquisitions, recapitalizations, and/or refinancings within existing investments, and that these firms will seek to leverage their equity investments with senior secured and unitranche loans.
Attractive Risk-Adjusted Returns. We believe that directly-originated middle market loans offer an attractive risk-reward profile relative to broadly syndicated loans. Directly-originated middle market loans provide meaningful illiquidity premiums, reduced volatility and allow for greater control over terms and overall structures. The “originate-and-hold” nature of middle market loans typically helps to reduce volatility and correlation of these investments to public market investments as well. Despite the yield premium, we believe that the credit performance of middle market loans has generally been consistent with that of large corporate loans.
Middle Market Provides Potential Downside Protection. We believe that middle market loans provide greater safeguards, relative to the broadly syndicated loans, due to smaller investor groups, more active lender involvement, and capital structures with more conservative terms and conditions. As the Company focuses on investing in directly-originated transactions with appropriate downside protection, we believe shareholders can benefit from Varagon’s ability to negotiate better lender protections including stronger covenant packages, more frequent financial reporting, higher excess cash flow sweep requirements and higher amortization payments relative to typical syndicated debt terms.
Competitive Strengths
We believe that the Company is well-positioned to benefit from Varagon’s direct origination capabilities, platform and scale. Certain highlights of our competitive strengths are summarized below:
Scaled Investment Platform. The size and scale of Varagon’s platform provide significant hold and commitment sizes, flexible lending structures and speed of execution for private equity sponsors. Varagon strives to deliver competitive solutions across the debt capital structure to help sponsors achieve their objectives over the complete lifecycle of their investments, providing capital for organic growth, acquisitions, recapitalizations and refinancings. Varagon’s scale and focus on providing lead direct origination capabilities have allowed Varagon to generate consistent deal flow while maintaining a high degree of selectivity on those investment opportunities. Varagon also has significant capacity for add-ons and incremental investment activity for its existing portfolio companies.
Robust Sourcing Drives Lead Lender Opportunities. The investments by the Company are sourced through the direct origination efforts of Varagon investment professionals. Varagon has a seasoned team with deep financial sponsor relationships cultivated throughout their careers. As a result, private equity sponsors have regularly involved Varagon early on in transactions, providing a “first look” and offering “lead lender” opportunities. For the year ended December 31, 2024, Varagon was a lead lender in over 90% of its completed investments. As a lead lender, Varagon seeks to directly “originate-and-hold” transactions, providing greater influence over the entire investment process including diligence (increased access to management teams and data), structuring (tighter covenant packages), economics (higher coupons and upfront fees), and portfolio management (increased frequency and depth of reporting). Supplemented by the strength of the Varagon platform, the Company frequently sees additional financing opportunities with existing companies and sponsors.
Deep, Experienced Investment Team. As of December 31, 2024, Varagon had 43 dedicated investment professionals across the underwriting, sponsor coverage, and capital markets functions. The members of Varagon’s team of senior investment professionals have an average of over 20 years of experience and diverse backgrounds in direct lending, investment banking, private equity, distressed credit, special situations, mezzanine finance and commercial lending. Varagon’s investment professionals have experience investing across asset classes, industries, and business cycles. Additionally, many senior members of Varagon’s investment team have had prior roles that focused on investing in and/or operating middle market U.S. companies.
As Varagon seeks to be the lead or co-lead lender, the benefits of better access, greater control and premium pricing inure to Varagon’s investors. We believe that in all performance scenarios, and particularly in stressed or distressed scenarios, its lead or co-lead role better
positions Varagon to influence positive outcomes and minimize credit losses, thereby also reducing volatility. Varagon believes the lead lender strategy offers the Firm’s investors the potential to earn a yield premium without increased leverage or risk.
Disciplined Investment Philosophy. Varagon believes that the investment team’s deep credit investment experience across market cycles, industries, and capital structures provides the foundation for a disciplined investment philosophy. Varagon’s investment philosophy is based on a structured analytical framework, focused on deep fundamental credit analysis and conservative transaction structures. The investment team seeks to employ a disciplined and repeatable investment process that centers on long-term credit performance and principal preservation. This value-oriented investment approach is an iterative, multi-step process, at both the individual investment and overall portfolio levels, that seeks to optimize the desired risk-return profile.
Active and Diligent Portfolio Monitoring. Varagon takes a proactive approach in monitoring its portfolio investments to help identify and address sector or company-specific risks early on or assist companies with potential liquidity issues. Varagon receives and reviews detailed financial information from portfolio companies on a regular basis (no less than quarterly) and maintains a regular dialogue with sponsors and company management teams regarding current and forecasted performance. A significant majority of the Company’s investments are expected to have financial covenants, which will help facilitate efforts to effectively identify and manage risk.
Long-Term Focused Strategic Partnerships. Since inception, Varagon has established several highly-aligned, differentiated relationships that enhance its scale and product offerings for investors. Varagon launched its business in 2014 with an anchor investment from AIG, a leading international insurer with a long-term investment focus and patient capital. This initial capital provided by AIG allowed Varagon to build its market credibility and track record as a direct lead lender. In 2015, Varagon expanded its origination capabilities and investor products by forming the joint venture, SDLP, which invests in senior secured loans to middle market companies, including senior stretch loans (which typically are loans with pricing and leverage that falls between senior loans and unitranche loans) and unitranche loans with the ability to make commitments of up to $350 million. This joint venture provided additional scale, volume and market differentiation by offering attractive one-stop financing commitments to financial sponsors with even greater speed, certainty of execution, and simplicity of documentation. In 2020, Varagon formed a new strategic partnership with Aflac, which made a $3 billion investment commitment to Varagon.
Following the consummation of the Transaction, Man Group owns a majority interest in Varagon. Man Group is a global active investment management firm focused on delivering attractive risk adjusted performance for clients. Headquartered in London, Man Group manages $168.6 billion in assets under management as of December 31, 2023, and operates across multiple offices globally. Man Group is listed on the London Stock Exchange under the ticker “EMG” and is a constituent of the FTSE 250 Index.
Through its acquisition of a controlling interest in Varagon, we believe Man Group provides strategic, long-term support to the Company, which benefits from Man’s global scale and reputation. Varagon will leverage the extensive global distribution capabilities and resources and long-established infrastructure and technology of Man Group, which has deep experience building relationships with and providing best-in-class service to its clients.
Investment Selection
The Company intends to achieve its investment objective by investing primarily in loans to performing middle market companies controlled by private equity sponsors. The Company focuses on loans to middle market companies that have sustainable competitive advantages, experienced management teams, solid financial performance, stable and recurring cash flow and strong enterprise value. We expect that such companies and their sponsors will require financing from the Company for growth, acquisitions, recapitalizations, refinancings or leveraged buyouts, among other things. The Company generally invests in companies with EBITDA between $10 million and $75 million annually, though we may invest in smaller or larger companies if an attractive opportunity presents itself. We seek to create a balanced portfolio and the size of each investment will depend on the then-current diversification of the Company’s portfolio and the size of its capital base, among other things. The Adviser generally intends to directly originate its investments as a lead lender to allow for deeper diligence, greater control over terms and structure, and superior economics.
Target investments typically exhibit some or all of the following characteristics:
Business Fundamentals:
•Known industry with attractive underlying trends
•Established market position and distinct competitive advantages
•Sustainable and defensible cash flows
•Consistent historical financial performance over cycles
•Acceptable macroeconomic risk sensitivity
•Quantifiable downside scenarios
Structure & Risk Mitigation:
•Senior capital structure with appropriate leverage supported by the business’ valuation
•Comprehensive operational and performance-based covenant packages
•Detailed, regular post-close reporting to monitor performance
•Portfolio diversification in both type and number of assets
Deal Dynamics:
•Ability to conduct detailed diligence and drive negotiation of terms and structure
•Valuation cushion provided by equity and junior capital
•Reputable sponsor with experience investing in relevant sectors
Investment Process Overview
The following discussion summarizes the current investment process established by the Adviser and Varagon. It is subject to change at any time, which change will be without notice to or approval from the shareholders.
Origination and Sourcing. The Company’s investments will be sourced by the Adviser’s sponsor coverage team. The Adviser’s seasoned sponsor coverage professionals utilize their established relationships with leading financial sponsors and other middle market lenders to directly source most of our transactions. Each sponsor coverage professional maintains long-standing customer relationships and is responsible for covering a specified target market or sector. The strength and breadth of these relationships often result in sponsors providing the Adviser with early opportunities to evaluate prospective investments, allowing the Adviser to be highly selective in screening transactions. Additionally, the Adviser also sources add-on opportunities from financial sponsors of existing borrowers in the form of incremental financings or a change-of-control transaction following the initial financing transaction.
Initial Screening. Initial investment ideas are screened by the sponsor coverage team according to internal business, industry, credit, and pricing guidelines. The investment team, which includes senior members of the sponsor coverage team, the Adviser's Underwriting and Portfolio Management Team and capital markets team, will analyze the attractiveness of the opportunity. If an investment has received preliminary positive feedback, the investment team will propose a tailored financing solution for the company. Upon further evaluation, if the deal team decides the transaction is worth pursuing, a preliminary recommendation of the merits and risks of the transaction will be presented for an “early read” to senior investment team members, including members of the IC. At this stage, the IC members involved will opine on the nature of the business and industry, fundamental credit quality, areas of focus for diligence, and the proposed capital structure. The IC will evaluate the suitability of the transaction for Varagon and provide a decision for the investment team to proceed with diligence of the transaction.
Investment Due Diligence and Recommendation. Varagon’s experienced team of underwriting professionals follow a bottom-up investing approach to properly understand an investment’s merits, risks, and fundamental values. Due diligence typically includes quantitative and qualitative analyses of a company’s business, historical performance (particularly through a recession), financial statements and projections, industry trends, and a company’s growth potential. In addition, the investment team may utilize research and analyses performed by third parties to conduct comprehensive market, accounting, financial, and legal reviews. Varagon also conducts meetings with company management to gain insight into key business drivers or potential issues that could affect a company’s performance. The investment team also may leverage the insights and expertise of the respective private equity sponsor.
The diligence process is iterative and involves multiple levels of discussion and approval, which is summarized and documented in investment memos, financial models and sensitivity analyses, and a covenant analysis. The entire investment team is kept informed of the deal’s progression during weekly meetings, where additional questions and areas of focus may be internally reviewed before final IC approval.
Investment Approval. Once due diligence has been completed, the deal team provides a formal, detailed presentation and supplemental reports to the IC for approval. The IC evaluates the merits of the proposed investment. A majority of the IC (consisting of Walter Owens, Charlie Riceman and Kevin Marchetti) must approve any new transaction for Varagon, including for the Company.
Structuring and Execution. Once the IC has approved a prospective investment, the deal team will work with the company’s management team, the financial sponsor, and if applicable, any other lenders in the capital structure, to finalize the structure and terms of the investment in accordance with the terms and conditions approved by the IC. At this stage, the deal team will utilize information from the due diligence process to finalize the appropriate capital structure and pricing to reflect the inherent risk and fundamental value of the investment. Once an agreement is reached, the deal team will properly document the investment.
Portfolio Monitoring and Management. Portfolio construction and ongoing monitoring seek to optimize returns and minimize risk. Members of the Underwriting & Portfolio Management Team are responsible for post-investment management of each loan until realization. In order to track a company’s compliance with the terms and conditions of the loan agreement, the team performs ongoing
multi-layered investment monitoring. As part of reporting requirements, the deal team receives monthly and/or quarterly financial statements, which may include additional management reporting, key performance metrics and additional projections. The deal team will analyze the information from these reports to assess any underlying portfolio or industry trends and identify variances. In addition, the deal team will maintain active, ongoing dialogue with company management and the financial sponsor, which may provide an early read on potential business or credit issues.
On a quarterly basis, the investment team conducts portfolio review and valuation meetings to evaluate individual investments and overall portfolio performance. During the portfolio review process, each investment is assigned an internal risk rating to monitor and identify any actual or potential underperformance of a company that may require corrective action. Our assessment will be based on the following categories, which we refer to as the Adviser’s internal rating. The internal rating system is graded on a scale of 1 to 5, with 5 being the highest probability of default and principal loss:
Loan Rating
Summary Description
Involves the least amount of risk to initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since origination or acquisition are generally favorable.
Involves an acceptable level of risk that is similar to the risk at the time of origination or acquisition. The borrower is generally performing as expected and the risk factors are generally neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a rating of “2.”
Involves a borrower performing below expectations and indicates that the loan's risk has increased somewhat since origination or acquisition.
Involves a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination or acquisition. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due).
Involves a borrower performing substantially below expectations and indicates that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and the fair market value of the loan will be reduced to the amount that is likely to be recovered in a restructuring, sale or liquidation.
Note: Risk mitigation strategies do not imply an absence of risk.
In the event of a company’s potential or actual underperformance, the investment team will proactively address the challenges and risks identified, which may include amendments, forbearance, waivers and retaining outside consultants. As the deal team is focused on maintaining and preserving the highest value and recovery of a loan, the Adviser may take a more aggressive stance on frequency of contact, performance updates, and/or meetings with management. If a covenant breach occurs or the company fails to meet targeted performance, the Adviser will assess the situation and pursue an appropriate course of action, such as waiving covenants, renegotiating loan terms, and/or forcing a sale of the business.
The Adviser’s internal ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments. In addition, risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors.
For any investment rated 3, 4 or 5, the Adviser will increase its monitoring intensity and prepare regular updates for the IC, summarizing key performance indicators and material impending events, and suggesting recommended actions.
The Adviser will monitor and, when appropriate, change the internal ratings assigned to each investment in our portfolio. In connection with our valuation process, the Adviser and the Board, including our audit committee, will review these internal performance ratings on a quarterly basis.
Types of Investments
Once the Adviser determines that a prospective portfolio company is suitable for investment, the Adviser will work with the private equity sponsor, if applicable, the management of the potential borrower and its other capital providers to structure an investment. The Company primarily invests in floating rate, senior secured loans, which includes both first-lien and unitranche loans. To a lesser extent, the Company also may invest in other types of investments, as described below, that it believes offer compelling value, and other forms of junior capital.
Senior Secured Loans. We will structure investments in senior secured loans by obtaining security interests in the assets of the portfolio company that serve as collateral in support of the repayment of such loans. This collateral may take the form of first priority liens on the assets of the portfolio company borrower, and these securities are commonly referred to as first lien loans. Additionally, senior secured loans can be structured as unitranche loans, which are generally first-lien positions within the capital structure with leverage levels comparable to a combination of first lien and second lien or subordinated loans. Unitranche loans offer borrowers multiple
benefits, including a simpler capital stack, less complicated documentation process, lower cost of capital, blended interest rates and lower syndication risk.
Second Lien and Subordinated Loans. We will structure investments in second lien loans as junior, secured loans. We will obtain security interests in the assets of the portfolio company that serve as collateral in support of the repayment of such loans. This collateral may take the form of second priority liens on the assets of a portfolio company.
Mezzanine Loans. Structurally, mezzanine loans usually rank subordinate in priority of payment to first-lien and second-lien loans, are often unsecured, and may not have the benefit of financial covenants common in first-lien and second-lien loans. However, mezzanine loans rank senior to common and preferred equity in an issuer’s capital structure. Mezzanine loan investments generally offer lenders fixed returns in the form of interest payments and will often provide lenders an opportunity to participate in the capital appreciation, if any, of an issuer through an equity interest. This equity interest typically takes the form of an equity co-investment or warrants. Due to its higher risk profile and often less restrictive covenants compared to senior secured loans, mezzanine loans generally bear a higher stated interest rate than first-lien and second-lien loans.
Equity Investments. In some cases, we may purchase minority equity interests or receive nominally priced warrants or options to buy a minority equity interest in the portfolio company in connection with a loan, which may allow us to achieve additional returns from an investment in the portfolio company. We may structure such equity investments or warrants to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events.
While the types of investments described above will be our primary focus, we also may invest up to 30% of our portfolio in non-qualifying assets, which include without limitation the Subordinated Certificates (as defined below) and subordinated or equity tranches of collateralized loan obligations ("CLOs"), as permitted by the 1940 Act.
Senior Direct Lending Program. SDLP is a joint venture between the Company and Ares Capital Corporation (“ARCC”). SDLP was formed in 2015 by Varagon SDLP, an entity previously wholly owned and controlled by VF1 (currently, as a result of the Merger, wholly owned and controlled by the Company), and ARCC. SDLP was established for the purpose of providing senior stretch and unitranche loan financings to middle market borrowers. As SDLP is structured as a joint venture, control and management is shared equally between the Company and ARCC.
SDLP is generally able to make individual loan commitments of up to $350 million. SDLP is funded by the Company and ARCC, respectively, as loan commitments are made to its portfolio companies. Any such loan commitment and other material decisions in respect of SDLP must be approved by SDLP’s investment committee. The SDLP investment committee is comprised of two representatives from the Company and two representatives from ARCC. Material actions, including the approval of any investment made by SDLP, must be approved by at least one representative of each of the Company and ARCC. Investments in SDLP may be sourced by either the Company or ARCC through the SDLP investment committee.
SDLP finances its investments through the issuance of securities backed by its loan portfolio, including, in order of seniority, the senior notes, the intermediate funding notes, and subordinated certificates (the “Subordinated Certificates”). ARCC and the Company provide capital to SDLP through the Subordinated Certificates. The Subordinated Certificates are held 87.5% by ARCC and 12.5% by the Company, through its wholly owned subsidiary Varagon SDLP.
The Subordinated Certificates pay a coupon equal to SOFR plus 8.00% and also entitle the holders thereof to receive a portion of the excess cash flow from the loan portfolio, which may result in a return to the holders of the Subordinated Certificates that is greater than the stated coupon. The Subordinated Certificates are junior in right of payment to the senior notes and intermediate funding notes.
Structured Products. In some cases, we may invest in the first loss or subordinated tranches of structured investment vehicles such as CLOs. A CLO is typically a bankruptcy-remote securitization entity that owns senior secured, second lien or unsecured corporate loans. We may invest, directly or indirectly, in the unrated or most subordinated tranches of CLOs or other structured investment vehicles that own middle market or broadly syndicated loans, while other investors may purchase more senior tranches of any such entity’s capital structure.
Covenant-Lite Loans. On occasion, the Company or SDLP may invest in covenant-lite loans if the investment’s credit merits are particularly strong (e.g., high recurring revenue, strong retention rates, market leader, compelling value proposition, highly diversified customer base, etc.), the sponsors are highly reputable and relationship-oriented, and the economic profile is highly favorable (e.g., large established company with greater than $50 million of EBITDA and strong EBITDA margins).
Responsible Investing and Environmental, Social and Governance Policy
Varagon has established a Responsible Investing and Environmental, Social and Governance (“ESG”) Policy for the investment vehicles it manages, including the Company managed by the Adviser. Varagon considers sustainability risks in the conduct of its business both in terms of the investments it makes, and also Varagon’s own conduct as a stakeholder to its investors, investees and society in a responsible manner. Consideration of ESG risks is integrated into Varagon’s investment decision making process and engagement with borrower companies and their private equity sponsors, where possible. Varagon considers ESG factors as a part of its due diligence, underwriting and portfolio management process; however, that does not mean the Company will pursue a specific ESG investment
strategy or that a portfolio company will be selected solely on the basis of ESG factors. The Adviser will likely not make investment decisions for the Company solely on the basis of ESG considerations. In evaluating an investment that may have scored less favorably on ESG factors initially, the Adviser will consider other factors, including the prospective borrower’s proposed ESG remediation plans, in its investment decision. Notwithstanding the foregoing, the Company will not invest, directly or indirectly, in any company known to: (a) exploit child labor; (b) engage in gender-based violence or harassment; (c) demonstrate or reinforce systematic racism; (d) produce illegal products or engage in any illegal activities; (e) manufacture or sell pornography; (f) manufacture or principally sell tobacco; (g) manufacture, distribute or sell firearms; (h) engage in making payday loans; (i) engage in the business of oil and gas exploration; (j) operate casinos; or (k) engage in or with products or activities that are banned as per global conventions and agreements or involve the supply or purchase of sanctioned products covered by United Nations sanctions. The foregoing will be monitored by the Adviser as part of its investment process as described above.
Competition
Other entities, including commercial banks, commercial financing companies, BDCs and insurance companies compete to make the types of investments that we plan to make in middle market loans. Certain of these competitors may be substantially larger, have considerably greater financial, technical and marketing resources than we will have and offer a wider array of financial services. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC tax treatment. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. See “Item 1A. Risk Factors - Risk Relating to Our Business and Structure - Competition for Investments.”
Emerging Growth Company
We operate as an emerging growth company as defined in the JOBS Act and we are eligible to take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We could remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of an IPO, if any, or until the earliest of (i) the last day of the first fiscal year in which we have total annual gross revenue of $1.235 billion or more, (ii) December 31 of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, we have an annual investment income of at least $100 million, we have been publicly reporting for at least 12 months, and we have filed at least one annual report on Form 10-K), or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. In addition, we intend to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 19333, as amended (the “1933 Act”), for complying with new or revised accounting standards.
Distribution Reinvestment Plan
We have adopted an “opt-out” distribution reinvestment plan (“DRIP") that provides for reinvestment of our dividends and other distributions on behalf of our shareholders in additional common stock. As a result, if our Board authorizes, and we declare, a cash dividend or other distribution, our shareholders’ distributions will be automatically reinvested in additional common stock, unless they specifically opt-out of the DRIP to receive their cash dividends or distributions in cash.
No action will be required on part of a shareholder to have its cash dividends or distributions reinvested in shares of the Company's common stock. A shareholder may elect to have its entire distribution reinvested in cash by electing to opt out of the DRIP in its subscription agreement with the Company (the “Subscription Agreement”); thereafter, shareholders must notify the Adviser in writing, so that such notice is received by the Adviser no later than ten (10) business days prior to the record date for distributions to the shareholders. The Adviser will set up an account for common stock acquired through the DRIP for each shareholder and hold such common stock in non-certificated form. Those shareholders whose common stock is held by a broker or other financial intermediary also may opt out of the DRIP by notifying their broker or other financial intermediary of their election.
Shareholders who receive dividends and other distributions in the form of common stock are generally subject to the same U.S. federal, state and local tax consequences as are shareholders who elect to receive their dividends and distributions in cash. However, for shareholders whose cash distributions are reinvested in shares of the Company's common stock, such shareholder will not receive cash with which to pay applicable taxes on reinvested dividends and distributions. A shareholder’s adjusted tax basis for determining gain or loss upon the sale of common stock received in a dividend or distribution from us will generally be equal to the cash that would have been received if the shareholder had received the dividend or distribution in cash, unless we were to issue new common stock that is trading at or above NAV, in which case, the shareholder’s basis in the new common stock will generally be equal to their fair market value. Any common stock received in a dividend or distribution will have a new holding period for tax purposes commencing on the day following the day on which the common stock is credited to the U.S. shareholder’s account.
The DRIP will be terminable by us upon notice in writing mailed to each shareholder of record at least 30 days prior to any record date for the payment of any distribution by us.
The Private Offering
We intend to offer and sell shares of our common stock to “accredited investors” (as defined in Rule 501(a) of Regulation D promulgated under the 1933 Act) in a private placement in the United States under the exemption provided by Section 4(a)(2) of the 1933 Act and Rule 506(c) under Regulation D promulgated thereunder, and may offer and sell shares of our common stock outside the United States under the exemption provided by Regulation S. Prospective shareholders who intend to acquire shares of our common stock in the Offering are required to complete, execute and deliver a Subscription Agreement.
Shares will be offered for subscription continuously throughout the Fundraising Period (as defined below). Each investor will make a capital commitment (“Capital Commitment”) to purchase shares of our common stock pursuant to a Subscription Agreement entered into with the Company. The Company initially expected to hold subsequent closings for a period of 24 months after the Initial Closing (as defined below) (i.e., a period from June 2, 2022 through June 2, 2024) (the “Fundraising Period”), but the Fundraising Period was extended from 24 months to 42 months after the Initial Closing (i.e., a period from June 2, 2022 through December 2, 2025) by the Board on March 20, 2024, pursuant to the terms of the subscription agreements.The “Initial Closing” occurred on June 2, 2022, the first date a shareholder’s Subscription Agreement was accepted by the Company.
The Subscription Agreement provides that investors will be required to fund capital contributions to purchase shares of our common stock (“Drawdowns”) each time a capital call notice is delivered (the “Drawdown Notice”), which the Company intends to deliver at least ten (10) business days prior to the required funding date (the “Drawdown Date”). A Drawdown Notice will specify (i) the amount of the Drawdown (the “Drawdown Amount”); (ii) the portion of the Drawdown Amount to be paid by such investor; (iii) the estimated number of shares to be purchased by such investor (i.e., the portion of the Drawdown Amount to be paid by such investor divided by the per share NAV as of the date of the Drawdown Notice); and (iv) the Drawdown Date. Each Drawdown will be in such amount, in an aggregate, not to exceed an investor’s respective Capital Commitment.
All purchases will be made at a per-share price as determined by the Board (or any authorized committee thereof) as of the end of the most recent calendar quarter prior to the date of the applicable Drawdown Notice or such other date determined by the Board prior to the date of the applicable Drawdown Notice, subject to any adjustments. To ensure that each investor that enters into a Subscription Agreement with the Company during the Fundraising Period shares equitably in the Organizational and Offering Expenses (as defined below), during the first four fiscal quarters following the Fundraising Period (i.e., beginning with the fiscal quarter ending March 31, 2026), after determining the per-share price for each Drawdown, the Company will, to the extent necessary to cover any Organizational and Offering Expenses, issue to each shareholder a number of shares of common stock determined by dividing (x) the Organizational and Offering Expense Allocation (as defined below) by (y) the per share NAV of the common stock as of the date of the Drawdown Notice. To date, the Adviser has funded all of the Organizational and Offering Expenses incurred by the Company and will continue to do so until the Adviser is reimbursed, pursuant to the Expense Reimbursement Agreement. Organizational expenses will be amortized over time to the Company, which generally will be at different times than when Capital Commitments are drawn from investors in connection with such amounts. As a result, in such instances, the NAV of the common stock as of the date of the Drawdown Notice generally will be impacted by the amortization schedule and not a Drawdown.
“Organizational and Offering Expense Allocation” means the lesser of: (i) the actual amount of Organizational and Offering Expenses incurred at the end of the Fundraising Period; (ii) 0.20% of aggregate Capital Commitments accepted at the end of the Fundraising Period; or (iii) $3.0 million.
“Organizational and Offering Expenses” means all costs and expenses (whether incurred before, on or after the date of the private placement memorandum relating to the Offering) pertaining to the organization and establishment of the Company (including any subsidiaries of the Company and the transactions contemplated by the Merger and the acquisition of the Initial Portfolio), including, without limitation, any related third-party legal, tax and accounting advisory fees and expenses, capital raising expenses (including printing expenses and other similar costs, fees and expenses, and regulatory, compliance, and administrative filings) and other organizational and offering expenses, but excluding the fees of Man Investments Inc., the Company placement agent (together with its affiliates that act as the Company’s placement agent ("Man Investments"), (or any successor placement agent). The Adviser elected to incur the Organizational and Offering Expenses associated with the Company for the period from July 31, 2019 through March 29, 2022. Such Organizational and Offering Expenses are not reimbursable by the Company. For more information, see “Note 2. Significant Accounting Policies” in our consolidated audited financial statements of this Annual Report on Form 10-K.
The per-share price shall be at least equal to NAV per share in accordance with the limitations under Section 23 of the 1940 Act. The NAV per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares outstanding. The Board may set the per-share price above the NAV per share if market conditions and demand for our shares of common stock are such to allow us to sell shares at a premium to its then current NAV. Prior to an IPO or a Public Listing, no shareholder will be permitted to sell, assign, exchange, pledge, hypothecate, transfer or otherwise dispose of or agree to dispose of (“Transfer”) its common stock or Capital Commitment unless (i) the Adviser provides consent, (ii) the Transfer is in compliance with
the restrictions set forth in the Subscription Agreement, and (iii) the Transfer is made in accordance with applicable laws. No shareholder in our Offering will be required to invest more than the total amount of its Capital Commitment.
At the earlier of (i) a Liquidity Event (as defined below), (ii) three (3) years following the date of the closing in which an investor’s Capital Commitment was accepted (an investor’s “Commitment Period”) or (iii) a final, liquidating distribution to all our shareholders, an investor will be released from any further obligation with respect to its undrawn Capital Commitments; provided, however, that an investor will remain obligated to cover any Organizational and Offering Expenses as described above and the Company may maintain a reserve of an investor’s undrawn Capital Commitments to cover any Organizational and Offering Expenses. However, prior to a Public Listing, an investor will remain obligated to fund existing obligations of the Company, to the extent necessary, including to (a) pay Company expenses, including management fees and any amounts that may become due under any borrowings or other financings or similar obligations, or indemnity obligations, (b) complete investments that were in progress prior to the termination of the Commitment Period, (c) fund obligations related to investments made during the Commitment Period, including investment commitments that are funded in phases or that provide for ongoing capital calls to the Company, (d) fund follow-on investments that, in the aggregate, do not exceed 5% of total commitments, (e) fund obligations under any Company guarantee, (f) as necessary for the Company to preserve its RIC tax treatment, and/or, (g) in each of the foregoing cases, to maintain reserves therefor.
In addition to all legal remedies available to us, failure by an investor in the Offering to fund a Drawdown after receiving a Drawdown Notice will (following a cure period of ten (10) business days after the due date for such Drawdown) result in that investor being subject to certain default provisions (a “Defaulting Shareholder”). Defaulting Shareholders may forfeit their right to participate in purchasing additional shares of our common stock on any future Drawdown Date, be required to forfeit a portion of their shares of common stock, be required to appoint the Company as its true and lawful proxy to exercise all voting rights with respect to their shares of common stock to the maximum extent permitted by applicable law, and be subject to other remedies at law or in equity.
Registration Rights Agreements
In connection with the Offering, upon such time that a shareholder becomes the beneficial owner of 10% or more of shares of common stock (collectively, “Holders”), the Company intends to enter into a registration rights agreement with such Holder (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, whenever the Company proposes to register any of its shares of our common stock under the 1933 Act (including primary and secondary registrations), a Holder will have the right to include its shares of our common stock in such registration statement (a “Piggyback Registration”). The Company will give prompt written notice (and in any event within ten (10) days prior to the public filing of the registration statement relating to the Piggyback Registration) to all Holders of its intention to effect such Piggyback Registration and, subject to the terms of the Registration Rights Agreement, will include in such Piggyback Registration (and in all related registrations or qualifications under blue sky laws and in any related underwriting) all shares of common stock held by Holders (“Registrable Securities”) with respect to which the Company has received written requests for inclusion therein within ten (10) days after delivery of the Company’s notice.
Except as expressly provided in the Registration Rights Agreement, all fees and expenses incident to the Company’s performance of or compliance with the Registration Rights Agreement will be paid by the Company. For the avoidance of doubt, each person who sells shares of common stock pursuant to a Piggyback Registration under the Registration Rights Agreement will bear and pay its own outside counsel expenses and all underwriting discounts and commissions applicable to the Registrable Securities sold for such person’s account and all transfer taxes (if any) attributable to the sale of Registrable Securities.
In addition, in connection with any underwritten public offering, each Holder will enter into any lock-up, holdback or similar agreements requested by the underwriter(s) managing such offering, in each case with such modifications and exceptions as may be approved by the Holders.
Liquidity Election
The Board will use its commercially reasonable efforts to wind down and/or liquidate and dissolve the Company in an orderly manner following the fifth anniversary of the end of the Fundraising Period, unless (i) the Company has consummated, or is in the process of consummating, a Liquidity Event (as defined below) or (ii) the term is extended for up to two additional one-year periods with either the approval of a majority of shareholders or if the Company has satisfactorily completed the necessary Private Company Liquidity Requirements (as defined below).
Notwithstanding the foregoing, the Company can extend its term beyond the fifth anniversary of the end of the Fundraising Period for up to a six-month period by the Board, in its discretion, in which case, the terms described above will take effect on the applicable subsequent date.
If the Company has not completed a Liquidity Event or met the Private Company Liquidity Requirements, then beginning on the fifth anniversary of the end of the Fundraising Period (or, if the Company’s term is extended, the applicable subsequent date), the Commitment Period will be suspended (subject to a 60-day period during which the basis for such suspension may be cured). Upon the occurrence of such suspension, shareholders will not be obligated to fund Drawdowns, except for purposes permitted after the Commitment Period, and such suspension will become permanent unless it is cured or revoked within 180 days by a vote of a majority of shareholders.
Furthermore, the common stock is subject to the significant restrictions on Transfer as described above. As a result, if an investor purchases the common stock, its ability to sell the common stock will be severely limited. To provide the shareholders with some liquidity prior to a Liquidity Event, we intend to offer shareholders liquidity through an ongoing share repurchase program, at the sole discretion of the Board. We also may provide liquidity to shareholders by consummating a Public Listing or another Liquidity Event. If we do not provide liquidity through the foregoing means or otherwise, shareholders will receive liquidity in the form of repayments of portfolio investments.
Repurchase Offers
After the end of the Fundraising Period and prior to a Liquidity Event, we intend to offer to repurchase common stock for up to 2.5% of our outstanding common stock per quarter, through one or more repurchase offers. While we expect our Board to consider repurchase offers, we are not required to do so and our Board can determine in its discretion not to authorize any repurchase offers. Such offers to repurchase common stock, including the exact amount of each repurchase offer, will be subject to the applicable requirements of the Exchange Act and the 1940 Act.
If we were to engage in a repurchase offer, shareholders would be able to tender their common stock at a price equal to our NAV per share as of a recent date. Any repurchase offer presented to our shareholders will remain open for a minimum of 20 business days following the commencement of the repurchase offer. In the materials that we send to our shareholders regarding a repurchase offer, we will include the date that the repurchase offer will expire. All tenders for repurchase requests must be received prior to the expiration of the repurchase offer in order to be valid.
We do not plan to repurchase any common stock of any shareholder under the circumstances of death or disability of such shareholder.
To the extent that the number of common stock tendered to us for repurchase exceeds the number of common stock that we have determined to or we are able to purchase, we will repurchase common stock on a pro rata basis. Further, we will have no obligation to repurchase common stock if the repurchase would violate applicable law or impact our ability to maintain our RIC tax treatment. The limitations and restrictions described above may prevent us from accommodating all repurchase requests made in any year. Our share repurchase offers will have many limitations, including the limitations described above, and should not in any way be viewed as the equivalent of a secondary market.
Liquidity Event
We also may provide liquidity to shareholders by completing a Liquidity Event, in which case we will discontinue the share repurchase program described above (and be released from any obligation to make additional share repurchases).
A “Liquidity Event” is defined as any of the following: (i) an IPO or a listing of the common stock on a national securities exchange (a “Public Listing”), (ii) a sale of all or substantially all of our assets to, or other liquidity event with, an entity for consideration of either cash and/or publicly listed securities of the acquirer, which potential acquirers may include entities affiliated with Varagon, or (iii) a permanent election by the Adviser not to make new investments and to distribute proceeds of investments to shareholders as they are received. Subject to market conditions and any other factors deemed relevant by the Board in its sole discretion, the Company will target to undertake a Public Listing on or prior to the fifth anniversary of the Initial Closing.
Private Company Liquidity Requirements
The Company will have satisfactorily met the Private Company Liquidity Requirements if it has offered to repurchase, in aggregate over the immediately preceding three-year period, at least 50% of the shares of common stock that were outstanding at the beginning of such period (the “Private Company Liquidity Requirements”).
Key Person Event
Unless a Liquidity Event has occurred, we will be required to comply with the obligations below, among others, in order to continue the Company’s investment program. The Company will enter a wind-down upon the occurrence of a “Key Person Event” specified below, during which we will provide liquidity to shareholders through distributions of proceeds received from investments or, at the Adviser’s discretion, by consummating a Liquidity Event. During a wind-down, we will not be permitted to call capital for any purpose other than those permitted after the Commitment Period.
A “Key Person Event” shall occur if, at any time prior to the consummation of a Liquidity Event, fewer than three of Walter Owens, Charles Riceman, Robert Bourgeois, and Kevin Marchetti (or any replacements or additions approved by Varagon or its general partner, the “Key Persons”), are employed by, or affiliated with, the Adviser, the Administrator or any of its affiliates for any consecutive period that exceeds 60 days. Upon the occurrence of such Key Person Event, the Commitment Period shall automatically be suspended and investors will not be obligated to fund Drawdowns, except for purposes permitted after the Commitment Period, and such suspension will become permanent unless it is cured or revoked within 180 days by a vote of a majority of shareholders.
Employees
We do not currently have any employees and do not expect to have any employees. Our day-to-day investment and administrative operations are managed by the Adviser and the Administrator. The IC is supported by a team of additional experienced investment professionals. The Adviser and the Administrator may hire additional investment and administrative professionals in the future to provide services to us, based upon our needs. See “ - Investment Advisory Agreement” and “ - Administration Agreement.”
In addition, we reimburse the Administrator for its costs and expenses and our allocable portion of overhead incurred by it in performing its obligations under the Administration Agreement, including compensation paid to or compensatory distributions received by our officers (including our Chief Compliance Officer and Chief Financial Officer) and any of their respective staff who provide services to us, operations staff who provide services to us, and any internal audit staff, to the extent internal audit performs a role in our Sarbanes-Oxley internal control assessment. See “ - Administration Agreement.”
Determination of Net Asset Value
Determinations in Connection with our Investments
We will determine the NAV per share quarterly. The NAV per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares outstanding.
Our investment assets will be carried at fair value in accordance with the 1940 Act and Accounting Standards Codification (“ASC”) Topic 820-Fair Value Measurement and Disclosures (“ASC Topic 820”). Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by our Board.
Our investment strategy primarily focuses on directly originated loans, primarily senior secured loans and, to a lesser extent, second lien and subordinated or mezzanine loans of, and equity and equity-related securities in, U.S. middle market companies. Given the nature of our investments, our investments generally will be considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indexes for these investments to be traded or exchanged. As such, we will value substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board in accordance with the provisions of ASC Topic 820 and the 1940 Act.
Our audit committee is responsible for assisting our Board in valuing investments that are not publicly traded or for which market quotations are not readily available. Investments for which market quotations are readily available will be valued using market quotations, which generally will be obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, our Board, with the assistance of the Adviser and independent valuation firms, is responsible for determining the fair value in good faith in accordance with the valuation policy approved by our Board. If more than one valuation method is used to measure fair value, the results will be evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. We will consider a range of fair values based upon the valuation techniques utilized and select the value within that range that was most representative of fair value based on current market conditions as well as other factors the Adviser considers relevant. When an external event with respect to one of our portfolio companies, such as a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by the external event to corroborate our valuation.
Our Board will make this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value will involve subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market quotation, the fair value of the investments may differ significantly from the values that would have been used had a readily available market quotation existed for such investments, and the differences could be material.
ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:
•Level 1-Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
•Level 2-Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.
•Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value
measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.
With respect to investments for which market quotations are not readily available, our Board undertakes a multi-step valuation process each quarter, as described below:
•our quarterly valuation process begins with each portfolio company or investment being initially valued by the Adviser;
•preliminary valuation conclusions are then be documented and discussed with the Adviser;
•our audit committee then reviews these preliminary valuations;
•at least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm. Certain investments, however, will not be evaluated by an independent valuation firm unless the NAV and other aspects of such investments in the aggregate exceed certain thresholds; and
•our Board then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Adviser, the respective independent valuation firms and our audit committee.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the unrealized gains or losses reflected herein.
Rule 2a-5 under the 1940 Act (“Rule 2a-5”) establishes a regulatory framework for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate certain parties to perform the fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. Rule 31a-4 under the 1940 Act (“Rule 31a-4”) provides the recordkeeping requirements associated with fair value determinations. While the Board has not designated the Adviser as the fair valuation designee, the Company has established policies and procedures in compliance with the applicable requirements of Rule 2a-5 and Rule 31a-4.
Determinations in Connection with a Drawdown or Closings
In connection with a Drawdown or a subsequent closing during the Fundraising Period, as applicable, our Board, or an authorized committee thereof, is required by the 1940 Act to make the determination that we are not selling common stock at a price below our then-current NAV, exclusive of any distributing commissions or discounts (which NAV will be determined as of a time within 48 hours, excluding Sunday and holidays, next preceding the time of such determination). Our Board, or an authorized committee thereof, considers the following factors, among others, in making such determination:
•the NAV of our common stock disclosed in the most recent periodic report that we filed with the SEC;
•our management’s assessment of whether any material change in the NAV has occurred (including through the realization of net gains on the sale of our investments) during the period beginning on the date of the most recently disclosed NAV to the period ending 48 hours (excluding Sundays and holidays) prior to the Drawdown Date; and
•the magnitude of the difference between (i) a value that our Board or an authorized committee thereof has determined reflects the current NAV of our common stock (as of a time within 48 hours, excluding Sundays and holidays), which is based upon the NAV disclosed in the most recent periodic report we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the NAV since the date of the most recently disclosed NAV, and (ii) the NAV of the common stock as of the most recently completed calendar quarter.
Moreover, to the extent that there is even a remote possibility that we may (i) issue common stock at a price below the then-current NAV of our common stock at the time at which the sale is made or (ii) trigger the undertaking to suspend the offering of common stock pursuant to our private placement memorandum relating to the Offering if the NAV fluctuates by certain amounts in certain circumstances until our private placement memorandum relating to the Offering is amended, our Board or an authorized committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to undertake to determine NAV within two days prior to any such sale to ensure that such sale will not be below our then-current NAV, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine NAV to ensure that such undertaking has not been triggered.
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act.
Regulation as a Business Development Company
The following discussion is a general summary of the material prohibitions and descriptions governing BDCs generally. It does not purport to be a complete description of all of the laws and regulations affecting BDCs.
On June 2, 2022, we elected to be regulated as a BDC under the 1940 Act. A BDC must be organized in the United States for the purpose of investing in or lending to primarily private companies and offering to make significant managerial assistance available to them. A BDC may use capital provided by public shareholders and from other sources to make long-term, private investments in businesses. A BDC provides its shareholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless approved by “a majority of the outstanding voting securities” as defined by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.
As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Company. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our shareholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The ratio of a BDC's total assets (less total liabilities other than indebtedness represented by senior securities) to our total indebtedness represented by senior securities plus preferred stock, if any, must be at least 200% or 150%, if certain requirements are met. This means that generally, we can borrow up to $1 for every $1 of investor equity (or, if certain conditions are met, we can borrow up to $2 for every $1 of investor equity). The reduced asset coverage requirement would permit a BDC to double the amount of leverage it could incur.
In connection with the Company’s organization and the Initial Closing, the Board and its initial shareholder authorized us to adopt the 150% asset coverage ratio. Additionally, investors both consented to the minimum asset coverage ratio of 150% and agreed not to seek to redeem their shares of common stock in connection therewith, in each case in the Subscription Agreement. The Company may therefore be exposed, to a greater extent, to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to the Adviser will be borne by our shareholders.
We also may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Independent Directors and, in some cases, prior approval by the SEC.
We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Prior to January 19, 2021, except for registered money market funds, BDCs were prohibited from acquiring more than 3% of the voting stock of any registered investment company, investing more than 5% of the value of its total assets in the securities of one investment company or investing more than 10% of the value of its total assets in the securities of more than one investment company without obtaining exemptive relief from the SEC. However, Rule 12d1-4 under the 1940 Act, which became effective on January 19, 2021, allows us to acquire the securities of other investment companies in excess of the 3%, 5%, and 10% limitations set forth above without obtaining exemptive relief if we comply with certain conditions. If we invest in securities issued by investment companies, if any, it should be noted that such investments ordinarily will subject our shareholders to additional expenses as they will be indirectly responsible for the costs and expenses of such companies. Our investment portfolio is also subject to diversification requirements by virtue of our election to be treated as a RIC for U.S. tax purposes and our intention to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “Item 1A. Risk Factors - Risks Related to Our Business and Structure” for more information.
We generally are not able to issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV of our common stock if (1) our Board determines that such sale is in our best interests and the best interests of our shareholders, and (2) our shareholders have approved our policy and practice of making such sales within the preceding 12 months. In addition, we may generally issue new common stock at a price below NAV in rights offerings to existing shareholders, in payment of dividends and in certain other limited circumstances.
As a BDC, we are generally limited in our ability to invest in any portfolio company in which the Adviser or any of its affiliates currently has an investment or to make any co-investments with other funds managed by our investment adviser or other affiliates without meeting the required conditions specified in the exemptive order that we have received from the SEC.
We are subject to examination by the SEC for compliance with the federal securities laws.
As a BDC, we are subject to certain risks and uncertainties. See “Item 1A. Risk Factors - Risks Related to Our Business and Structure.”
Qualifying Assets. Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets”, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s gross assets. The principal categories of qualifying assets relevant to our business are any of the following:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of business in, the United States;
(b) is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
(i) does not have any class of securities that is traded on a national securities exchange;
(ii) has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;
(iii) is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; or
(iv) is a small and solvent company having gross assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.
(2) Securities of any eligible portfolio company controlled by us.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a BDC must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above. The regulations defining qualifying assets may change over time. The Company may adjust its investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions.
Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company, but may exist in other circumstances based on the facts and circumstances.
If at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets, other than office furniture and equipment, interests in real estate and leasehold improvements and facilities maintained to conduct the business operations of the BDC, deferred organization and operating expenses, and other non-investment assets necessary and appropriate to its operations as a BDC, until such time as 70% of our then current gross assets were comprised of qualifying assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Significant Managerial Assistance to Portfolio Companies. A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above in qualifying assets categories (1), (2) or (3). However, in order to count portfolio securities as qualifying assets for the purpose of the 70% requirement, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above in qualifying assets category (1)(c)(iv)) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio
company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
Temporary Investments. Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets would be qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements relating to such securities that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, the 1940 Act and certain diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes typically require the Company to limit the amount it invests with any one counterparty. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. The Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Warrants. Under the 1940 Act, a BDC is subject to restrictions on the issuance, terms and amount of warrants, options or rights to purchase shares of capital stock that it may have outstanding at any time. Under the 1940 Act, we may generally only issue warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) shareholders authorize the proposal to issue such warrants, and the Board approves such issuance on the basis that the issuance is in the best interests of the Company and the shareholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of the Company’s voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of its outstanding voting securities. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of a BDC’s total outstanding shares of capital stock.
Senior Securities. We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150%. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our shareholders or the repurchase of such securities or common stock unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We also may borrow amounts up to 5% of the value of our gross assets for temporary purposes without regard to asset coverage.
Code of Ethics. We and the Adviser have adopted a joint code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act that establishes procedures for personal investments and restricts certain transactions by our personnel. Our code of ethics does not permit investments by the Adviser’s employees in securities that may be purchased or held by us. The joint code of ethics is available on the SEC’s website at www.sec.gov, and copies of the code of ethics may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.
Compliance Policies and Procedures. We and the Adviser have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a chief compliance officer to be responsible for administering the policies and procedures. George Talarico serves as our Chief Compliance Officer.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:
•pursuant to Rule 13a-14 of the Exchange Act, our chief executive officer and chief financial officer must certify the accuracy of the financial statements contained in our periodic reports;
•pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;
•pursuant to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over financial reporting and, starting from the date on which we qualify as an "accelerated filer", must obtain an audit of the effectiveness of internal control over financial reporting performed by our independent registered public accounting firm should we become an accelerated filer; and
•pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to the Adviser. The Proxy Voting Policies and Procedures of the Adviser are set forth below. The guidelines will be reviewed periodically by the Adviser and our non-interested directors, and, accordingly, are subject to change. For purposes of the Proxy Voting Policies and Procedures described below, “we,” “our” and “us” refers to the Adviser.
An investment adviser registered under the Advisers Act has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, the Adviser must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.
These policies and procedures for voting proxies for the Adviser’s investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
It is the Adviser’s policy to make decisions with respect to client proxies and consents, including any such proxies received by the Company, in our clients’ best interests consistent with our fiduciary duties, taking into account all relevant factors, including without limitation, acting in a manner that will maximize the economic benefits to the client.
The IC, on behalf of the Adviser, votes all proxies in the best interests of the Adviser’s clients pursuant to and in accordance with the investment strategy of each client. For any client who has provided specific voting instructions, that client’s proxy shall be voted in accordance with the client’s written instructions.
Prior to exercising voting authority on any other matter, the IC will review the proxy materials and undertake a reasonable investigation to determine whether any of the matters to be voted on present a material conflict of interest between the Adviser and the interests of its clients. Where the IC determines that no material conflict of interest exists, the matter will be analyzed based on its specific facts and circumstances and the IC will vote on the matter in the best interests of its clients.
You may obtain information about how we voted proxies by making a written request for proxy voting information to: VCC Advisors, LLC, 151 West 42nd Street, 53rd Floor, New York, NY 10036.
Privacy Policy
We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. A copy of our privacy policy will be posted to our website.
Pursuant to our privacy policy, we do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts (for example, to a transfer agent or third-party administrator).
We may collect non-public information about shareholders from the Subscription Agreements or other forms, such as name, address, account number and the types and amounts of investments, and information about transactions with us or our affiliates, such as participation in other investment programs, ownership of certain types of accounts or other account data and activity. We may disclose the information that we collect from our shareholders or former shareholders, as described above, only to our affiliates and service providers and only as allowed by applicable law or regulation. Any party that receives this information uses it only for the services required by us and as allowed by applicable law or regulation, and is not permitted to share or use this information for any other purpose. To protect the non-public personal information of individuals, we restrict access to non-public personal information about our shareholders to employees of the Adviser and its affiliates with a legitimate business need for the information. In order to guard our shareholders’ non- public personal information, we maintain physical, electronic and procedural safeguards that are designed to comply with applicable law. Non-public personal information that we collect about our shareholders is generally stored on secured servers located in the United States. An individual shareholder’s right to privacy extends to all forms of contact with us, including telephone, written correspondence and electronic media, such as the Internet.
Reporting Obligations
We furnish shareholders with annual reports containing audited financial statements, quarterly reports, and such other periodic reports as we determine to be appropriate or as may be required by law. We are required to comply with all periodic reporting, proxy solicitation and other applicable requirements under the Exchange Act.
We make available on our website (www.man.com/varagon) our annual reports on Form 10-K, quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC also maintains a website (www.sec.gov) that contains such information. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report on Form 10-K.
Certain U.S. Federal Income Tax Considerations
The following discussion is a general summary of certain U.S. federal income tax considerations applicable to us and to an investment in our common stock. This discussion is based on the provisions of the Code and the regulations of the U.S. Department of Treasury promulgated thereunder, or “Treasury regulations.”
These provisions are subject to differing interpretations and change by legislative or administrative action, and any change may be retroactive. This discussion does not constitute a detailed explanation of all U.S. federal income tax aspects affecting us and our shareholders and does not purport to deal with the U.S. federal income tax consequences that may be important to particular shareholders in light of their individual investment circumstances or to some types of shareholders subject to special tax rules, such as financial institutions, broker dealers, insurance companies, tax-exempt organizations, partnerships or other pass-through entities, persons holding our common stock in connection with a hedging, straddle, conversion or other integrated transaction, certain former citizens or long-term residents of the United States, or individual Non-U.S. shareholders present in the United States for 183 days or more during a taxable year. This discussion also does not address any aspects of U.S. estate or gift tax or foreign, state or local tax. This discussion assumes that our shareholders hold their common stock as capital assets for U.S. federal income tax purposes (generally, assets held for investment). No ruling has been or will be sought from the Internal Revenue Service, or “IRS,” regarding any matter discussed herein.
For purposes of this discussion, a “U.S. shareholder” is a beneficial owner of common stock that is for U.S. federal income tax purposes:
•a U.S. citizen or individual resident of the United States;
•a corporation (or other entity treated as a corporation) created or organized in or under the laws of the United States, any state therein or the District of Columbia;
•an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust.
For purposes of this discussion, a “Non-U.S. shareholder” means a beneficial owner of common stock for U.S. federal income tax purposes that is neither a U.S. shareholder nor a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes).
If a partnership (or other entity or arrangement classified as a partnership, for U.S. federal income tax purposes) holds our common stock, the treatment of the partnership and each partner for U.S. federal income tax purposes generally will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. A partnership considering an investment in our common stock should consult its own tax advisers regarding the U.S. federal income tax consequences of the acquisition, ownership and disposition of common stock by the partnership.
Built-in Gain with Respect to Conversion Property
Substantially concurrent with the Initial Closing and immediately prior to our election to be regulated as a BDC, VF1 merged with and into the Company, with the Company as the surviving company in the Merger. As a result, the Company has taken the position that VF1 will be treated as if it had transferred all of its assets, subject to its liabilities, to the Company, in return for stock of the Company, and then distributed such stock to its partners in liquidation of their ownership interests in VF1. To the extent that any beneficial owner of the interests in VF1 on June 2, 2022, the effective date of the Merger, was a C corporation (a “corporate partner”), the Company will be required to pay a corporate-level tax on the net amount of any built-in gains attributable to the corporate partners that the Company recognizes during the five-year period beginning on the effective date of the merger. Any corporate-level built-in gain tax is payable at the time the built-in gains are recognized (which generally will be the years in which the built-in gain assets are sold by the Company in a taxable transaction). The amount of this tax will vary depending on the assets that are actually sold by the Company in the five-year period, the actual amount of net built-in gain or loss present in those assets as of the acquisition date and effective tax rates. The payment of any such corporate-level tax on built-in gains will be a Company expense that will be borne by all shareholders (not just any former corporate partners) and will reduce the amount available for distribution to shareholders. The Company did not make a special election to cause the gain to be recognized immediately prior to the deemed contribution discussed above.
As noted above, the Company has acquired the Existing Portfolio as a result of the Merger. The Company has no current plan or intent to sell the assets comprising the Existing Portfolio within the five-year period beginning on the date of the Initial Closing, although the Company, in its sole discretion acting in the best interest of the Company, may determine to so sell such assets at any time in the future. As a result, the Company does not expect to be subject to corporate-level tax on any such built-in gains.
Taxation as a Regulated Investment Company
We have elected to be treated as a RIC under Subchapter M of the Code and intend to qualify for treatment as a RIC annually. As a RIC, we generally will not be subject to U.S. federal income tax on any ordinary income or capital gains that we timely distribute to our shareholders as dividends.
To qualify as a RIC, we must, among other things:
•derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other taxable disposition of stock, securities or foreign currencies, other income derived with respect
to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership,” or “QPTP,” hereinafter the “90% Gross Income Test;” and
•diversify our holdings so that, at the end of each quarter of each taxable year:
oat least 50% of the value of our total assets is represented by cash and cash items, U.S. Government securities, the securities of other RICs and other securities, with other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of our total assets and not more than 10% of such outstanding voting securities of the issuer, and
onot more than 25% of the value of our total assets is invested (i) in the securities of any issuer (other than U.S. Government securities and the securities of other RICs), (ii) the securities of any two or more issuers (other than the securities of other RICs) that we control and that are determined to be engaged in the same business or similar or related trades or businesses, or (iii) the securities of one or more QPTPs, or the “Diversification Tests.”
As a RIC, we (but not our shareholders) are generally not subject to U.S. federal income tax on investment company taxable income and net capital gains that we distribute to our shareholders in any taxable year with respect to which we distribute an amount equal to at least the sum of (i) 90% of our investment company taxable income (which includes, among other items, dividends, interest and the excess of any net realized short-term capital gains over net realized long-term capital losses and other taxable income (other than any net capital gain), reduced by deductible expenses) determined without regard to the deduction for dividends and distributions paid and (ii) net tax-exempt interest income (which is the excess of our gross tax-exempt interest income over certain disallowed deductions), or the “Annual Distribution Requirement.” We intend to distribute annually all or substantially all of such income. Generally, if we fail to meet this Annual Distribution Requirement for any taxable year, we will fail to qualify as a RIC for such taxable year. To the extent we meet the Annual Distribution Requirement for a taxable year, but retain our net capital gains for investment or any investment company taxable income, we will be subject to U.S. federal income tax imposed at corporate rates on such retained capital gains and investment company taxable income. We intend to use commercially reasonable best efforts to distribute at least 90% of our net capital gain but may choose to retain our net capital gains for investment or any investment company taxable income, and pay the associated U.S. federal income tax, including the 4% U.S. federal excise tax described below.
We are subject to a nondeductible 4% U.S. federal excise tax on certain of our undistributed income, unless we timely distribute (or are deemed to have timely distributed) an amount equal to the sum of:
•at least 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year;
•at least 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year); and
•any income and gains recognized, but not distributed, from previous years on which we paid no U.S. federal income tax.
While we intend to distribute any income and capital gains in order to avoid imposition of this 4% U.S. federal excise tax, we may not be successful in avoiding entirely the imposition of this tax. In that case, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our shareholders while any senior securities are outstanding unless we meet the applicable asset coverage ratios. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or to avoid the 4% U.S. federal excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is, generally, ordinary income plus the excess of net short-term capital gains over net long-term capital losses). If our expenses in a given year exceed investment company taxable income, we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC's investment company taxable income, but may carry forward such losses indefinitely and use them to offset capital gains. Due to these limits on the deductibility of expenses, over the course of one or more taxable years, we may have, for tax purposes, aggregate taxable income that we are required to distribute and that is taxable to our shareholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, shareholders may receive a larger capital gain distribution than they would have received in the absence of such transactions.
Failure to Qualify as a RIC
While we have elected to be treated as a RIC and intend to qualify to be treated as a RIC annually, no assurance can be provided that we will qualify as a RIC for any taxable year. If we have previously qualified as a RIC, but were subsequently unable to qualify for treatment as a RIC, and certain remedial provisions are not applicable, we would be subject to U.S. federal income tax on all of our taxable income (including our net capital gains) imposed at regular corporate rates. We would not be able to deduct distributions to shareholders, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to our shareholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain holding period and other limitations under the Code, corporate shareholders would be eligible to claim a dividend received deduction with respect to such dividend, and non-corporate shareholders would generally be able to treat such dividends as “qualified dividend income,” which is subject to reduced rates of U.S. federal income tax. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the shareholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain. In order to requalify as a RIC, in addition to the other requirements discussed above, we would be required to distribute all of our previously undistributed earnings attributable to the period we failed to qualify as a RIC by the end of the first year that we intend to requalify as a RIC. If we fail to requalify as a RIC for a period greater than two taxable years, we may be subject to U.S. federal income tax imposed at corporate rates on any net built-in gains with respect to certain of our assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next five years.
The remainder of this discussion assumes that we qualify as a RIC for each taxable year.
Company Investments
Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction, (ii) convert lower taxed long-term capital gains and qualified dividend income into higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause us to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions and (vii) produce income that will not qualify as good income for purposes of the 90% Gross Income Test. We monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities to mitigate the effect of these rules and to prevent disqualification of us as a RIC but there can be no assurance that we will be successful in this regard.
Debt Instruments. In certain circumstances, we may be required to recognize taxable income prior to the time at which we receive cash. For example, if we hold debt instruments that are treated under applicable tax rules as having OID (such as debt instruments with an end-of-term payment and/or PIK interest payment or, in certain cases, increasing interest rates or issued with warrants), we must include in taxable income each year a portion of the OID that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any OID accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our shareholders in order to satisfy the Annual Distribution Requirement and to avoid the 4% U.S. federal excise tax, even though we will not have received any corresponding cash amount.
Warrants. Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally are treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term generally depends on how long we held a particular warrant and on the nature of the disposition transaction.
Foreign Investments. In the event we invest in foreign securities, we may be subject to withholding and other foreign taxes with respect to those securities. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty may be 35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a reduced rate of, or exemption from, withholding tax on investment income and gains. The effective rate of foreign tax cannot be determined at this time since the
amount of our assets to be invested within various countries is not now known. We do not expect to satisfy the requirement to pass through to our shareholders their share of the foreign taxes paid by us.
Passive Foreign Investment Companies. We may invest in the stock of a foreign corporation which is classified as a “passive foreign investment company” (within the meaning of Section 1297 of the Code), or “PFIC.” As a result, we may be subject to U.S. federal income tax on any “excess distribution” received on, or any gain from the disposition of such shares. Additional charges in the nature of interest generally will be imposed on us in respect of deferred taxes arising from any such excess distributions or gains. This additional tax and interest may apply even if we make a distribution as a taxable dividend by us to our shareholders in an amount equal to (1) any excess distribution or (2) the gain from the dispositions of such shares. Provided that the PFIC agrees to provide us with adequate information regarding our annual results and other aspects of its operations, we can elect to treat the PFIC as a “qualified electing fund,” or QEF. In lieu of the foregoing requirement, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed by the QEF. In the alternative, we can elect, under certain conditions, to mark-to-market at the end of each taxable year our PFIC shares. We would recognize as ordinary income any increase in the value of the PFIC shares and as an ordinary loss (up to any prior income resulting from the mark-to-market election) any decrease in the value of the PFIC shares. Under the election, we might be required to recognize in a year income in excess of our actual distributions on and proceeds from dispositions of the PFIC’s shares. Any such income would be subject to the Annual Distribution Requirements and would be taken into account for purposes of the 4% U.S. federal excise tax (described above).
Controlled Foreign Corporations. If we hold more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation, or “CFC,” we may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to our pro rata share of certain of the corporation’s income for the tax year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. shareholders. A “U.S. shareholder,” for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power or 10% or more of the total value of all classes of shares of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and will the income be taken into account for purposes of the 4% excise tax.
Income inclusions from a PFIC or CFC will be “good income” for purposes of the 90% Gross Income Test provided that they are derived in connection with our business of investing in stocks and securities or the PFIC or CFC, as applicable, distributes such income to us in the same taxable year to which the income is included in our income.
Foreign Currency Transactions. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time we accrue income or other receivables or accrue expenses or other liabilities denominated in a foreign currency and the time we actually collect such receivables or pay such liabilities generally are treated as ordinary income or loss. Similarly, on disposition of debt instruments and certain other instruments denominated in a foreign currency, gains or losses attributable to fluctuations if the value of the foreign currency between the date of acquisition of the instrument and the date of disposition also are treated as ordinary gain or loss. These gains and losses may increase or decrease the amount of our investment company taxable income to be distributed to our shareholders as ordinary income.
Taxation of U.S. Shareholders
Distributions. Distributions by us generally are taxable to U.S. shareholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. shareholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate U.S. shareholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations (“Qualifying Dividends”), they may be eligible for reduced rates of U.S. federal income tax. In this regard, it is anticipated that distributions paid by us generally will not be attributable to dividends and, therefore, generally will not qualify for the reduced rate of U.S. federal income tax applicable to Qualifying Dividends.
Distributions of our net capital gains (which are generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as “capital gain dividends” will be taxable to a U.S. shareholder as long-term capital gains, which are currently taxable at a maximum rate of 20% in the case of individuals or estates, regardless of the U.S. shareholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. shareholder’s adjusted tax basis in such U.S. shareholder’s common stock and, after the adjusted tax basis is reduced to zero, will constitute capital gains to such U.S. shareholder.
Although we currently intend to distribute any net long-term capital gains at least annually, we may retain some or all of our net long-term capital gains and elect to be deemed to have made a distribution of the retained portion to our shareholders (a “deemed distribution”). In that case, among other consequences, we will be subject to U.S. federal income tax on the retained amount, each U.S.
shareholder will be required to include their share of the deemed distribution in income as if it had been distributed to the U.S. shareholder, and the U.S. shareholder will be entitled to claim a credit equal to their allocable share of the U.S. federal income tax paid on the deemed distribution by us. The amount of the deemed distribution net of such tax will be added to the U.S. shareholder’s adjusted tax basis for their common stock. Since we expect to pay U.S. federal income tax on any retained capital gains at our regular corporate-level U.S. federal income tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of U.S. federal income tax that individual shareholders will be treated as having paid and for which they will receive a credit will exceed the U.S. federal income tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. shareholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a shareholder’s liability for U.S. federal income tax. In order to utilize the deemed distribution approach, we must provide written notice to our shareholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”
We or the applicable withholding agent will provide you with a notice reporting the amount of any ordinary income dividends (including the amount of such dividend, if any, eligible to be treated as qualified dividend income) and capital gain dividends by January 31. For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. shareholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, if we pay you a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of these months, then the dividend will be treated for tax purposes as being paid by us and received by you on December 31 of the year in which the dividend was declared. If a shareholder purchases common stock shortly before the record date of a distribution, the price of the common stock will include the value of the distribution and the shareholder will be subject to U.S. federal income tax on the distribution even though it represents a return of its investment.
Distribution Reinvestment Plan. Under the DRIP, if a U.S. shareholder owns common stock registered in its own name, the Company will reinvest dividends on behalf of the U.S. shareholder, unless the U.S. shareholder specifically opts out of the distribution reinvestment plan by delivering a written notice to the Adviser or our dividend paying agent, as applicable, prior to the record date of the next dividend or distribution. Any distributions reinvested under the DRIP will nevertheless remain taxable to the U.S. shareholder. The U.S. shareholder will have an adjusted tax basis in the additional common stock purchased through the plan equal to the amount of the reinvested distribution. The additional common stock will have a new holding period commencing on the day following the day on which the common stock is credited to the U.S. shareholder’s account.
Dispositions. A U.S. shareholder generally will recognize gain or loss on the sale, exchange or other taxable disposition of common stock in an amount equal to the difference between the U.S. shareholder’s adjusted basis in the common stock disposed of and the amount realized on their disposition. Generally, gain recognized by a U.S. shareholder on such sale or disposition of common stock will be treated as long-term capital gain or loss if the common stock has been held for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of common stock held for six months or less will be treated as a long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by the U.S. shareholder. A loss recognized by a U.S. shareholder on a disposition of common stock will be disallowed as a deduction if the U.S. shareholder acquires additional common stock (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the common stock is disposed. In this case, the basis of the common stock acquired will be adjusted to reflect the disallowed loss.
Tax Shelter Reporting Regulations. Under applicable Treasury regulations, if a U.S. shareholder recognizes a loss with respect to common stock of $2 million or more for a U.S. shareholder that is an individual, subchapter S corporation, trust or a partnership with at least one non-corporate partner or $10 million or more for a corporate U.S. shareholder that is either a corporation or a partnership with only corporate partners in any single taxable year (or a greater loss over a combination of years), the U.S. shareholder must file with the IRS a disclosure statement on Form 8886. Direct U.S. shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, U.S. shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to U.S. shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. U.S. shareholders should consult their own tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Backup Withholding. We may be required in certain circumstances to backup withhold, currently at a rate of 24%, on taxable dividends or distributions paid to non-corporate U.S. shareholders (i) who fail to furnish us or the dividend-paying agent with their correct taxpayer identification number (in the case of individuals, generally their U.S. Social Security number) or a certificate that such shareholder is exempt from backup withholding, or (ii) with respect to whom the IRS notifies the Company that such shareholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS.
Limitation on Deduction for Certain Expenses A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year. If we are not treated as a publicly offered RIC, for any calendar year, then a U.S. shareholder
that is an individual, estate or trust will be treated as though they received a distribution of a portion of our expenses, and such U.S. Shareholder may be subject to limitations on deduction of these expenses. Specifically, such “miscellaneous itemized deductions” are currently not deductible and, beginning in 2026, will be deductible only to the extent they exceed 2% of such a U.S. holder’s adjusted gross income and are not deductible for alternative minimum tax purposes. In this case, we would be required to report the relevant income and expenses on Form 1099-DIV, and affected holders will be required to take into account their allocable share of such income and expenses. We anticipate that we will not qualify as a publicly offered RIC for the current taxable year, but we may qualify as a publicly offered RIC for future taxable years.
Taxation of Non-U.S. Shareholders
Distributions; Dispositions. In general, distributions of our “investment company taxable income” to a Non-U.S. shareholder will be subject to withholding of U.S. federal tax at a 30% rate (or a lower rate provided by an applicable treaty) to the extent of our current or accumulated earnings and profits unless an applicable exception applies. No withholding will be required with respect to such distributions if (i) the distributions are properly reported to our shareholders as “interest-related dividends” or “short-term capital gain dividends,” (ii) the distributions are derived from sources specified in the Code for such dividends and (iii) certain other requirements are satisfied. The Company anticipates that a substantial portion of its distributions will qualify for this exemption from withholding. No assurance can be provided, however, that any of our distributions will qualify for this exemption. If such distributions are effectively connected with the conduct of a trade or business in the United States (a "U.S. trade or business") by the Non-U.S. shareholder (and, if a treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States), we will not be required to withhold U.S. federal tax if the Non-U.S. shareholder complies with applicable certification and disclosure requirements, although the distributions will be subject to U.S. federal income tax imposed at the rates applicable to U.S. persons. Special certification requirements apply to a Non-U.S. shareholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers.
Actual or deemed distributions of our net capital gains to a Non-U.S. shareholder properly reported by us as capital gain dividends, and gains realized by a Non-U.S. shareholder upon the sale, exchange or other taxable disposition of our common stock, will not be subject to U.S. federal income tax unless (i) the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. shareholder (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States) or, (ii) in the case of an individual, the Non-U.S. shareholder was present in the United States for 183 days or more during the taxable year and certain other conditions are met.
If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. shareholder will be entitled to a U.S. federal income tax credit or tax refund equal to the shareholder’s allocable share of the corporate-level U.S. federal income tax we pay on the capital gains deemed to have been distributed; however, in order to obtain the refund, the Non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. shareholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return.
If any actual or deemed distributions of our net capital gains, or any gains realized upon the sale, exchange or other taxable disposition of our common stock, are effectively connected with a U.S. trade or business of the Non-U.S. shareholder (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States), such amounts will be subject to U.S. income tax, on a net income basis, in the same manner, and at the graduated rates applicable to, a U.S. shareholder. For a corporate Non-U.S. shareholder, the after-tax amount of distributions (both actual and deemed) and gains realized upon the sale, exchange or other taxable disposition of our common stock that are effectively connected to a U.S. trade or business (and, if a treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States), may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty).
Non-U.S. shareholders generally will not be subject to U.S. federal income or withholding tax with respect to gain recognized on the sale or other taxable disposition of common stock.
Under the distribution reinvestment plan, our shareholders who have “opted in” our distribution reinvestment plan will have their cash distributions automatically reinvested in additional common stock, rather than receiving the cash distributions. If the distribution is a distribution of our investment company taxable income and is not properly reported by us as a short-term capital gains dividend or interest-related dividend (assuming an extension of the exemption discussed above), the amount distributed (to the extent of our current and accumulated earnings and profits) will be subject to U.S. federal withholding tax as described above and only the net after-tax amount will be reinvested in our common stock. If the distribution is effectively connected with a U.S. trade or business of the Non-U.S. shareholder (and, if a treaty applies, is attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States), generally the full amount of the distribution will be reinvested in the plan and will nevertheless be subject to U.S. federal income tax at the ordinary income rates applicable to U.S. persons. The Non-U.S. shareholder will have an adjusted tax basis in the additional common stock purchased through the plan equal to the amount reinvested. The additional common stock will have a new holding period commencing on the day following the day on which the common stock is credited to the Non-U.S. shareholder’s account.
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the common stock.
If we were unable to qualify as a RIC, any distributions by us would be treated as dividends to the extent of our current and accumulated earnings and profits. We would not be eligible to report any such dividends as interest-related dividends, short-term capital gain
dividends, or capital gain dividends. As a result, any such dividend paid to a Non-U.S. shareholder that is not effectively connected with a U.S. trade or business of the Non-U.S. shareholder (and, if an income tax treaty applies, attributable to a permanent establishment maintained by the Non-U.S. shareholder in the United States) would be subject to the 30% (or reduced applicable treaty rate) withholding tax discussed above regardless of the source of the income giving rise to such distribution. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the Non-U.S. shareholder’s adjusted tax basis, and any remaining distributions would be treated as a gain from the sale of the Non-U.S. shareholder’s common stock subject to taxation as discussed above. For the consequences to the Company for failing to qualify as a RIC, see “ - Failure to Qualify as a RIC” above.
Information and Backup Withholding
The amount of dividends that we pay to any documented Non-U.S. shareholder will be reported to the Non-U.S. shareholder and to the IRS annually on an IRS Form 1042-S, regardless of whether any tax was actually withheld. Copies of these information returns also may be made available under the provisions of a specific income tax treaty or agreement to the tax authorities of the country in which the Non-U.S. shareholder resides. However, a Non-U.S. shareholder generally will not be subject to backup withholding and certain other information reporting with respect to payments that we make to the Non-U.S. shareholder, provided that we do not have actual knowledge or reason to know that such Non-U.S. shareholder is a “United States person,” within the meaning of the Code, and the Non-U.S. shareholder has furnished to us or the dividend paying agent an IRS Form W-8BEN-E or IRS Form W-8BEN (or an acceptable substitute form) establishing that it is a Non-U.S. shareholder or otherwise established an exemption from backup withholding. A Non-U.S. shareholder generally will be entitled to credit any amounts withheld under the backup withholding rules against the Non-U.S. shareholder's U.S. federal income tax liability or may claim a refund provided that the required information is furnished to the IRS in a timely manner.
Non-U.S. shareholders are urged to consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedures for obtaining such an exemption, if available.
FATCA
Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either: (i) enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by certain specified U.S. persons (or held by foreign entities that have certain specified U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to collect and share such information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest and dividends. While the Code would also require withholding on payments of the gross proceeds from the sale of any property that could produce U.S. source interest or dividends, the U.S. Treasury has indicated its intent to eliminate this requirement in subsequent proposed regulations, which state that taxpayers may rely on the proposed regulations until final regulations are issued. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a specified U.S. person and certain financial information associated with the holder's account. In addition, subject to certain exceptions, FATCA also imposes a 30% withholding on certain payments to certain foreign entities that are not FFIs unless such foreign entities certify that they do not have a greater than 10% owner that is a specified U.S. person or provide the withholding agent with identifying information on each greater than 10% owner that is a specified U.S. person. Depending on the status of a Non-U.S. shareholder and the status of the intermediaries through which they hold their common stock, Non-U.S. shareholders could be subject to this 30% withholding tax with respect to distributions on their common stock. Under certain circumstances, a Non-U.S. shareholder might be eligible for refunds or credits of such taxes.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Investments in the Company involve a high degree of risk. There can be no assurance that our investment objective will be achieved, or that a shareholder will receive a return of its capital. In addition, there will be occasions when the Adviser and its affiliates may encounter potential conflicts of interest in connection with us. The following considerations should be carefully evaluated before making an investment in the Company.
The following is a summary of the principal risks that you should carefully consider before investing in our common stock.
•We have a limited operating history and the Adviser has no prior experience managing a BDC.
•Capital markets are experiencing a period of disruption and instability.
•Economic recessions or downturns could impair our portfolio companies and harm our operating results.
•We are subject to risks related to changes in interest rates.
•The lack of liquidity in our investments may adversely affect our business.
•We borrow money, which magnifies the potential for gain or loss and may increase the risk of investing in us.
•Our ability to enter into transactions with our affiliates is restricted.
•The Company will be subject to U.S. federal income tax imposed at corporate rates if it is unable to qualify as a RIC.
•There is currently no public market for our common stock, and a market for our common stock may never develop.
•Shareholders may not redeem their shares of common stock.
•We may compete for investment opportunities with other entities managed by Varagon, subjecting our Adviser to certain conflicts of interest.
•Our fee structure may create incentives for our Adviser to make speculative investments or use substantial leverage.
•Our investments in middle market companies may be risky, and we could lose all or part of our investments.
Risks Related to the Company’s Business and Structure.
Limited Operating History and No Prior Experience Managing a BDC. VF1 began operations in July 2016 as a limited partnership with a more focused investment mandate and less capital than the Company has. The Company merged with VF1, with the Company as the surviving entity, at the Initial Closing and immediately prior to our election to be regulated as a BDC on June 2, 2022, when the Company began operations. Therefore, we have limited financial information on which a prospective investor can evaluate an investment in our common stock or our prior performance. As a result, we are subject to the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and the value of a shareholder’s investment could decline substantially or become worthless. In addition, the Adviser has not previously managed a BDC. While we believe that the past professional experiences, including investment and financial experience, will allow the Adviser to manage the Company successfully, there can be no assurance that this will be the case.
Non-Specified Investments and Discretion in Determining Use of Drawdown Amounts. Capital drawn will be used to finance or invest in portfolio companies and investment vehicles that will not be meaningfully described to the shareholders prior to such financing or investment. We also intend to conduct repurchase offers, from time to time, beginning after the end of the Fundraising Period, and we may use a portion of the capital drawn for the repurchase of the common stock pursuant to such repurchase offers. Further, the Adviser will have broad discretion in determining the specific uses of Drawdown Amounts. The Adviser is neither obligated to allocate the Company’s resources to any particular subset or niche market, nor precluded from allocation any of such resources to a particular subset or niche market. Shareholders will not have opportunity to evaluate the economic, financial or other information on which the Adviser bases its decisions on how to use Drawdown Amounts. Shareholders must rely on the judgment and ability of the Adviser with respect to the investment of the Company’s capital. The Company also will pay operating expenses, and may pay other expenses such as due diligence expenses of potential new investments, from Drawdown Amounts. The Company’s ability to achieve the Company’s investment objective may be limited to the extent that Drawdown Amounts are used to pay operating expenses. No assurance can be given that the Company will be successful in identifying portfolio companies suitable for financing or investment or that, if such financings or investments are made, the objectives of the Company will be achieved. These factors increase the uncertainty, and thus the risk, of investing in the Company. The Company’s investments may be materially affected by conditions in the financial markets and overall economic conditions occurring globally and in particular markets where the Company may invest its assets.
The Adviser’s methods of minimizing such risks may not accurately predict future risk exposures. Risk management techniques are based in part on the observation of historical market behavior, which may not predict market divergences that are larger than historical indicators. Also, information used to manage risks may not be accurate, complete or current, and such information may be
misinterpreted. Although the Adviser intends to utilize appropriate risk management strategies, such strategies cannot fully insulate the Company from the risks inherent in its planned activities. Moreover, in certain situations the Adviser may be unable to, or may choose not to, implement risk management strategies because of the costs involved or other relevant factors.
General Market and Economic Conditions. General economic conditions may affect the Company’s activities. Changing economic, political, regulatory or market conditions, interest rates, general levels of economic activity, the price of securities and debt instruments and participation by other investors in the financial markets may affect the value and number of investments made by the Company or considered for prospective investment. The Company’s investment strategy and the availability of opportunities satisfying its risk-adjusted return parameters rely in part on the continuation of certain trends and conditions observed in the market for originated debt as well as the larger financial markets. No assurance can be given that such conditions, trends or opportunities will arise or continue, as applicable. Trends and historical events do not imply, forecast or predict future events and, in any event, past performance is not necessarily indicative of future results. There can be no assurance that the assumptions made, or the beliefs and expectations currently held, by the Company will prove correct and actual events and circumstances could vary significantly. While the Company expects that the current environment will yield attractive investment opportunities, investments are expected to be sensitive to the performance of the overall economy. A negative impact on U.S. or global economic fundamentals or consumer or business confidence will likely increase market volatility and reduce liquidity, both of which could adversely affect the overall performance of borrowers to which the Company may have extended loans, and these or similar events will affect the ability to execute the investment strategy pursued by the Company.
The value of investments may fluctuate in accordance with changes in the financial condition of portfolio companies and other factors that affect the markets in which the Company invests. Economic, political, global health, regulatory or market developments can affect a single obligor, obligors within an industry, economic sector or geographic region, or the market as a whole. Different parts of the market and different types of investments can react differently to these developments. Every investment has some level of market volatility risk. Economic slowdowns or downturns could lead to financial losses in the Company’s investments. In addition, many portfolio companies may be similarly subject to the same economic conditions, which could adversely impact the ability to repay loans made or acquired by the Company. As a result, companies that the Company expected to be stable may operate, or expect to operate, at a loss or have significant variations in operating results, may require substantial additional capital to support their operations or maintain their competitive position, or may otherwise have a weak financial condition or be experiencing financial distress. Market conditions, including increased competition, also may cause the Company’s portfolio to comprise assets that differ significantly from the Adviser’s expectations at the time of the initial offering of common stock.
Capital Markets are Experiencing a Period of Disruption and Instability. As a BDC, we must maintain our ability to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue new business opportunities. The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019, the conflict between Russia and Ukraine that began in late February 2022, and the ongoing war in the Middle East (see “Terrorist Attacks, Acts of War, Natural Disasters or Pandemics” for more information). Even after the COVID-19 pandemic subsided, the U.S. economy, as well as most other major economies, have continued to experience unpredictable economic conditions, and we anticipate our businesses would be materially and adversely affected by any prolonged economic downturn or recession in the United States and other major markets. In addition, disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets.
The current economic conditions have resulted in an adverse impact on the ability of lenders to originate loans, the volume and type of loans originated, the ability of borrowers to make payments and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by the Company and returns to the Company, among other things. The U.S. credit markets (in particular for middle-market loans) have experienced the following among other things: (i) increased draws by borrowers on revolving lines of credit and other financing instruments; (ii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans and increased uses of PIK features; and (iii) greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues.
These conditions and future market disruptions and/or illiquidity could have an adverse effect on our (and our portfolio companies') business, financial condition, results of operations and cash flows. Ongoing unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to our portfolio companies and/or us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our portfolio investments. We may have to access, if available, alternative markets for debt and equity capital, and a severe disruption in the global financial markets, deterioration in credit and financing conditions, continued increase in interest rates or uncertainty regarding U.S. government spending and deficit levels or other global economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Even if capital markets remain stable or improve, conditions could deteriorate again in the future. Past economic downturns or recessions have had a significant negative impact on the operating performance and fair value of middle market companies. For example, between 2008 and 2009, the U.S. and global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capital
markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular.
Economic Recessions or Downturns Could Impair our Portfolio Companies and Harm our Operating Results. The companies in which we have invested and intend to invest may be susceptible to economic slowdowns or recessions, and as a result, may be unable to repay our debt investments during these periods. In the past, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, in past periods of instability, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest.
Our portfolio companies may be susceptible to economic downturns or recessions. During these periods, the value of our portfolio may decrease if we are required to write down the values of our investments, and we may have non-performing assets or non-performing assets may increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of any collateral securing our loans, and decrease the value of our equity investments. A severe recession may further decrease the value of such collateral and result in losses of value in our portfolio and a decrease in our revenues, net income, assets and net worth. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable. In addition, a prolonged economic downturn or recession could extend our investment time horizon by limiting our ability to achieve timely liquidity events, such as a sale, merger or IPO, or the refinancing of our debt investments, and could ultimately impact our ability to realize anticipated investment returns. These events could prevent us from increasing investments and adversely impact our operating results.
The occurrence of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our investments, and our ongoing operations, costs and profitability. Any such unfavorable economic conditions, including rising interest rates, also may increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from the debt markets. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results and financial condition.
Risks Related to Changes in Interest Rates. Because we may borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. Rising borrowing costs may contribute to the difficulty of companies in servicing their debt obligations and may lead to increases in default rates. Certain changes in interest rates could have a material adverse effect on the Company and its investments. Moreover, changes in interest rates could have a material negative impact on the financial condition of borrowers, the valuations for loans, the unanticipated repayments of loans, and pressure to renegotiate terms on existing loans.
In response to market indicators showing a rise in inflation, the Federal Reserve raised certain benchmark interest rates in an effort to slow inflation. This rising interest rate environment may impact our cost of capital and net investment income. Following a period of elevated interest rates, in the third quarter of 2024, the Federal Reserve cut rates for the first time since March 2020 and, most recently, cut rates in the fourth quarter of 2024. The Federal Reserve has indicated that there may be additional rate cuts in the future; however, future reductions to benchmark rates are not certain. Increases in interest rates can make it more expensive to use debt to finance our investments. General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our ability to achieve our investment objective and the rate of return on invested capital. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
Risks Relating to Hedging Transactions. We may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as futures, options, interest rate swaps, and forward contracts, subject to the requirements of the 1940 Act. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to pay distributions to our shareholders.
The success of our hedging strategy will depend on our ability to correctly identify appropriate exposures for hedging. In connection with our issuance of the Company’s Series A Senior Notes, Tranche A, due December 21, 2026, and Series A Senior Notes, Tranche B, due December 21, 2028, which bear interest at a fixed rate, we entered into interest rate swaps to continue to align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. In addition, the degree of correlation
between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary, as may the time period in which the hedge is effective relative to the time period of the related exposure. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. If restrictions on exercise were imposed, we might be unable to exercise an option we had purchased. If we were unable to close out an option that we had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless.
Our Business is Dependent on Bank Relationships and Recent Strain on the Banking System May Adversely Impact Us. The financial markets have encountered volatility associated with concerns about the balance sheets of banks, especially small and regional banks that may have significant losses associated with investments that make it difficult to fund demands to withdraw deposits and other liquidity needs. Although the federal government previously announced measures to assist these banks and protect depositors, there can be no assurance that similar measures will be implemented during future periods of volatility. Our business is dependent on bank relationships, including small and regional banks, and we proactively monitor the financial health of banks with which we (or our portfolio companies) do or may in the future do business. To the extent that our portfolio companies work with banks that have been, or may be, negatively impacted by the foregoing, such portfolio companies’ ability to access their own cash, cash equivalents and investments may be threatened. In addition, such affected portfolio companies may not be able to enter into new banking arrangements or credit facilities, or receive the benefits of their existing banking arrangements or credit facilities. Any such developments could harm our business, financial condition, and operating results, and prevent us from fully implementing our investment plan. Continued strain on the banking system may adversely impact our business, financial condition and results of operations.
Price Declines in the Corporate Leveraged Loan Market. Conditions in the medium- and large-sized U.S. corporate debt market may experience disruption or deterioration in the future, which may cause pricing levels to decline or be volatile. As a result, our NAV could decline through an increase in unrealized depreciation and incurrence of realized losses in connection with the sale of our investments, which could have a material adverse impact on our business, financial condition and results of operations.
Defaults Under a Credit Facility. In the event we default under the SMBC Facility, or other borrowings, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under such borrowings, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under a borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. As part of certain credit facilities, the right to make capital calls of shareholders may be pledged as collateral to the lender, which will be able to call for capital contributions upon the occurrence of an event of default under such credit facility. To the extent such an event of default does occur, shareholders could therefore be required to fund any shortfall up to their remaining Capital Commitments, without regard to the underlying value of their investment.
Provisions in our Credit Facilities May Limit Discretion. We currently have in place the SMBC Facility, and in the future may enter into additional borrowings. The SMBC Facility is backed by a portion of our loans and securities on which the lenders have a security interest. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument we enter into with lenders. We expect that any security interests we grant will be set forth in a pledge and security agreement and evidenced by the filing of financing statements by the agent for the lenders. In addition, we expect that the custodian for our securities serving as collateral for such loan would include in its electronic systems notices indicating the existence of such security interests and, following notice of occurrence of an event of default, if any, and during its continuance, will only accept transfer instructions with respect to any such securities from the lender or its designee. If we breach a covenant under the terms of the SMBC Facility and seek a waiver, we may not be able to obtain a waiver from the required lenders. If we were to default under the terms of any debt instrument relating to the SMBC Facility and do not obtain a waiver, the agent for the applicable lenders would be able to assume control of the timing of disposition of any or all of our assets securing such debt, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the SMBC Facility has, and any future credit facility may have, customary cross-default provisions. If the indebtedness under the SMBC Facility or under any future borrowings is accelerated, we may be unable to repay or finance the amounts due.
The terms of certain credit facilities that we enter into may provide (and, in the case of the SMBC Facility, provide) that, if we do not draw on the borrowings available under such credit facility, then we must pay a commitment fee to the lender for the difference between the total commitment amount and the actual amounts we have then borrowed. To the extent that draw amounts are significantly below the stated minimum funding amount, we could be required to make a sizable “make whole” payment to the applicable lender. In addition, the terms of certain credit facilities that we enter into may provide that an optional termination of that credit facility or reduction, in full or in part, of the borrowings available under that credit facility generally will require us to may a “make whole” payment and pay a fee based on the amount of borrowings terminated or reduced, as applicable, under that credit facility. In each of these circumstances, our ability to pay such fees depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. This, in certain circumstances, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, any security interests and/or negative covenants required by the SMBC Facility may limit our ability to create liens on assets to secure additional debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. In addition, if our borrowing base under the SMBC Facility were to decrease, we may be required to secure additional assets in an amount sufficient to cure any borrowing base deficiency. In the event that all of our assets are secured at the time of such a borrowing base deficiency, we could be required to repay advances under the SMBC Facility or make deposits to a collection account, either of which could have a material adverse impact on our ability to fund future investments and to make distributions.
We also may be subject to limitations as to how borrowed funds may be used, which may include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as well as regulatory restrictions on leverage which may affect the amount of funding that may be obtained. There also may be certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. An event of default under the SMBC Facility could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our liquidity and cash flow and impair our ability to grow our business.
We are subject to risks associated with our debt securitization. We are subject to a variety of risks relating to our debt securitization, including those set forth below. We use the term “debt securitization” to describe a form of secured borrowing under which an operating company (sometimes referred to as an “originator” or “sponsor”) acquires or originates loans or other assets that earn income, whether on a one-time or recurring basis (collectively, “income producing assets”), and borrows money on a non-recourse basis against a legally separate pool of loans or other income producing assets. In a typical debt securitization, the originator transfers the loans or income producing assets to a single-purpose, bankruptcy-remote subsidiary (also referred to as a “special purpose entity”),which is established solely for the purpose of holding loans and income producing assets and issuing debt secured by these income producing assets. The special purpose entity completes the borrowing through the issuance of notes secured by the loans or other assets. The special purpose entity may issue the notes in the capital markets to a variety of investors, including banks, non-bank financial institutions and other investors. In our debt securitizations, institutional investors purchase certain notes issued by our indirect, wholly owned subsidiary, in private placements. Pursuant to a collateral management agreement governing our debt securitization, we may incur liability as the collateral manager to our indirect, wholly owned subsidiary. Additionally, as collateral manager to our indirect, wholly owned subsidiary, we manage multiple tranches of debt associated with the debt securitization. We also hold equity in the debt securitization, and this first loss position may create a more concentrated risk of loss compared to our overall portfolio.
The Notes and the membership interests that we hold that were issued by our CLO are subordinated obligations of the Issuer and we could be prevented from receiving cash from such CLO. The notes offered in the debt securitization (the “Notes”) were issued by VCC CLO 1, LLC, our indirect, wholly owned subsidiary (the “Issuer”). The Notes that were issued by the Issuer and retained by us, through VCC CLO 1 Depositor, LLC, our direct wholly owned subsidiary, are the most junior class of notes issued by the Issuer, are subordinated in priority of payment to the other notes issued by the Issuer and will be subject to certain payment restrictions set for thin the indenture governing the Notes issued by such Issuer. Therefore, we only receive cash distributions on the Notes if the Issuer has made all cash interest payments to all other notes it has issued. Consequently, to the extent that the value of the portfolio of loan investments held by the Issuer has been reduced as a result of conditions in the credit markets, or as a result of defaulted loans or individual fund assets, the value of the Notes that we have retained at their redemption could be reduced. If the Issuer does not meet the asset coverage tests or the interest coverage test set forth in the documents governing such debt securitization, cash would be diverted from the Notes that we hold to first pay the more senior notes issued by the Issuer in amounts sufficient to cause such tests to be satisfied. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with the Issuer or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows. The Issuer is the residual claimant on funds, if any, remaining after holders of all classes of notes issued by the Issuer have been paid in full on each payment date or upon maturity of such notes under such debt securitization documents. As the indirect holder of the membership interests in the Issuer, we could receive distributions, if any, only to the extent that the Issuer makes distributions out of funds remaining after holders of all classes of notes issued by the Issuer have been paid in full on the payment date any amounts due and owing on such payment date or upon maturity of such notes. In the event that we fail to receive cash from the Issuer, we could be unable to make distributions in amounts sufficient to maintain our ability to qualify as a RIC, or at all.
We may be subject to conflicts of interest caused by our role as a collateral manager in CLO transactions. We serve as collateral manager to the Issuer in the debt securitization under a collateral management agreement, and we may serve as collateral manager for additional CLOs in the future. There may be conflicts of interest associated with sponsoring and managing a CLO, including from the issuance of debt securitizations through CLOs we create to refinance our secured borrowings. In creating a CLO, we depend in part on distributions from the CLO’s assets out of its earnings and cash flows to enable us to make distributions to shareholders. The ability of a CLO to make distributions will be subject to various limitations, including the terms and covenants of the debt it issues. A CLO also may take actions that delay distributions in order to preserve ratings and to keep the cost of present and future financings lower or the CLO may be obligated to retain cash or other assets to satisfy over-collateralization requirements commonly provided for holders of the CLO’s debt, which could impact our ability to receive distributions from the CLO. Our use of CLOs that we manage to satisfy financing
needs, including through the declaration of distributions or the negotiation of terms and covenants in the debt it issues, may create conflicts of interest.
Competition for Investments. Other entities, including commercial banks, commercial financing companies, BDCs and insurance companies compete to make the types of investments that we plan to make in middle market loans. Certain of these competitors may be substantially larger, have considerably greater financial, technical and marketing resources than we will have and offer a wider array of financial services. For example, some competitors may have a lower cost of funds or access to funding sources that are not available to us. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. There may be intense competition for financings or investments of the type we intend to make, and such competition may result in less favorable financing or investment terms than might otherwise exist. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC tax treatment. There can be no assurance that there will be a sufficient number of attractive potential investments available to us to achieve target returns. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Downgrades of the U.S. Credit Rating, Impending Automatic Spending Cuts or Government Shutdowns could Negatively Impact our Liquidity, Financial Condition and Earnings. U.S. debt ceiling and budget deficit concerns have increased the possibility of credit-rating downgrades or a recession in the United States. U.S. lawmakers have passed legislation to raise the federal debt ceiling on multiple occasions, but there is no guarantee that any such legislation will be passed in the future. Despite taking action to suspend the debt ceiling, ratings agencies have threatened to lower the long-term sovereign credit rating on the United States, including Fitch downgrading the U.S. government’s credit rating from AAA to AA+ in August 2023 and Moody’s lowering the U.S. government’s credit rating outlook from “stable” to “negative” in November 2023. There is no guarantee that there will not be a further downgrade in the future.
The impact of the increased debt ceiling and/or downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. These developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time, and may lead to additional shutdowns in the future. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Broad Authority for Board Action. The Board has the authority to modify or waive certain of our operating policies and strategies without prior notice (except as required by the 1940 Act) and without approval. However, absent shareholder approval, the Board may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our common stock. Nevertheless, the effects may adversely affect our business and impact our ability to make distributions.
Changes in Law, Regulation or Policies. Our portfolio companies and we are subject to regulation at the local, state, and federal levels. Changes to the laws and regulations governing our operations may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. These changes could result in material differences to the strategies and plans described herein and may result in a shift in investment focus. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment in us.
The Republican Party currently controls the Presidency, the Senate and the House of Representatives, which increases the likelihood that legislation may be adopted. Any new or changed laws or regulations, as well as changes in the positions of regulatory agencies, which may lead to changes in the level of oversight in the financial service industry, could have a material adverse effect on our business, and we expect to see continued regulatory uncertainty in the near term. The nature, timing and economic effects of any potential changes to the current legal and regulatory framework affecting the financial service industry remains uncertain.
Changes in Tax Legislation. Legislative or other actions relating to taxes could have a negative effect on us. Matters pertaining to U.S. federal income tax are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. The Trump Administration has proposed significant changes to the Code and existing U.S. federal income tax regulations, and there are a number of proposals in Congress that would similarly modify the Code. The likelihood of any such legislation being enacted is uncertain. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could result in adverse tax consequences to us and our shareholders, such as affecting our ability to qualify as a RIC or otherwise impacting the U.S. federal income tax consequences applicable to us and our investors. Shareholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our common stock.
Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, negatively impact us. The United States has recently enacted and proposed to enact new tariffs. There continues to be ongoing discussion and
commentary regarding other potential significant changes to U.S. trade policies, treaties and tariffs, creating uncertainty about existing trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers or the cost of such goods and have a material adverse effect on their business, financial condition and results of operations, which in turn could negatively impact us.
Reliance on Personnel. The Company's success depends upon the diligence, skill and network of business contacts of the Adviser's investment professionals. They will evaluate, negotiate, structure, close and monitor our investments in accordance with the terms of the Investment Advisory Agreement. There can be no assurance that the Adviser’s personnel will continue to be associated with the Adviser throughout the life of the Company. Adviser personnel, and any investment professionals that the Adviser may subsequently retain, will identify, evaluate, negotiate, structure, close, monitor and manage our investments. The Company's future success will depend to a significant extent on the continued service and coordination of Adviser personnel. If the Adviser does not maintain its existing relationships with sources of investment opportunities and does not develop new relationships with other sources of investment opportunities available to us, the Adviser may not be able to grow the Company's investment portfolio. In addition, individuals with whom Adviser personnel have relationships are not obligated to provide us with investment opportunities. Therefore, the Company and the Adviser can offer no assurance that such relationships will generate investment opportunities for us.
Our ability to achieve our investment objective also will depend on the Adviser’s ability to manage the Company and to grow our investments and earnings. This will depend, in turn, on the Adviser’s ability to identify, invest in and monitor portfolio companies that meet our investment criteria. The achievement of our investment objective will depend upon the Adviser’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. The Adviser’s team of investment professionals will have substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. The personnel of the Adviser may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them from servicing new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Similarly, the success of the SDLP, in which we hold the Subordinated Certificates, depends upon the diligence, skill and network of business contacts of the Company, and in the case of the SDLP, also of ARCC, our joint venture partner to the SDLP.
Resignation of Adviser. Generally, the Adviser has the right, under the Investment Advisory Agreement, to resign at any time upon not less than 60 days’ written notice, regardless of whether we have found a replacement. In certain circumstances, the Adviser may only be able to terminate the Investment Advisory Agreement upon 60 days’ written notice. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, as applicable, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected, and the value of our common stock may decline.
Lack of Diversification and Risks Associated with Significant Investments. Our portfolio may hold a limited number of investments. Beyond the asset diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and our investments may be concentrated in a relatively limited number of portfolio companies and industries from time to time. As our portfolio is less diversified than the portfolios of some larger funds, we are more susceptible to failure if a single loan or investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.
Moreover, even if we invest in a large number of investments, our portfolio is expected to include investments that may be significant, individually or in the aggregate. If a significant investment in one or more companies fails to perform as expected, such a failure could have a material adverse effect on our financial condition and results of operations, and the magnitude of such effect could be more significant than if we had further diversified our portfolio.
Valuation of Portfolio Securities. Investments are valued at the end of each calendar quarter. Most of our investments may be in loans that do not have readily available market quotations. Assets that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by the Board. In connection with that determination, portfolio company valuations will be prepared using sources, preliminary valuations obtained from independent valuation firms depending on the availability of information on our assets and the type of asset being valued, all in accordance with our valuation policy. The participation of the Adviser in the valuation process could result in a conflict of interest because the Adviser’s management fee is based in part on our gross assets.
Because fair values, and particularly fair values of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time, and are often based to a large extent on estimates, comparisons and qualitative evaluations of private information, our determinations of fair value may differ materially from the values that would have been determined if a ready market for these securities existed. This could make it more difficult for our shareholders to value accurately our portfolio investments and could lead to
undervaluation or overvaluation of our interests. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility.
NAV as of a particular date may be materially greater than or less than the value that would be realized if assets were to be liquidated as of such date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in our NAV. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in NAV.
Potential Fluctuations in Quarterly Results. We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire and the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in the markets in which we operate and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as indicative of performance in future periods. These factors could have a material adverse effect on our results of operations, the value of an investment in our common stock and our ability to pay distributions.
Certain Provisions of the MGCL, the Charter and the Company’s Bylaws Could Deter Takeover Attempts. The Charter and the Bylaws as well as the Maryland General Corporation Law (the “MGCL”) contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for the Company. Among other things, the Charter and the Bylaws:
•provide that the Board is classified, which may delay the ability of shareholders to change the membership of a majority of the Board;
•do not provide for cumulative voting;
•provide that, except for vacancies on the Board caused by the removal of a director by shareholders before the time that the Company has three Independent Directors, newly created directorships and vacancies on the Board may be filled only by a majority vote of directors then in office;
•provide that directors may be removed only for cause, and only by a supermajority vote of the shareholders entitled to elect such directors;
•provide that shareholders may only take action (i) at an annual or special meeting of shareholders or (ii) by unanimous written consent;
•require a supermajority vote of shareholders to effect amendments to certain provisions of the Charter;
•vest in the Board the exclusive power to amend the Bylaws; and
•require shareholders to provide advance notice of new business proposals and director nominations under specific procedures.
In addition, except as otherwise provided in the Charter, the affirmative vote of at least 75% of the votes entitled to be cast thereon, with each class or series of stock voting as a separate class, as well as the affirmative vote of at least 75% of the Board is required to effect a number of actions, including certain business combinations, that the holders of shares of common stock may view as desirable or in their best interest.
Under the MGCL, certain “business combinations,” including mergers, consolidations, share exchanges, or, in circumstances specified in the statute, asset transfers or issuances or reclassifications of equity securities, between a Maryland corporation and any person who owns 10% or more of the voting power of the corporation’s outstanding voting stock, and certain other parties (each an “interested shareholder”), or an affiliate of the interested shareholder, are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder to the extent such statute is not superseded by applicable requirements of the 1940 Act. Thereafter, any of the specified business combinations must be approved by two supermajority votes of the shareholders unless, among other conditions, holders of the corporation’s common stock receive a minimum price for their shares. However, the Board intends to adopt a resolution exempting from the above restrictions any business combination between the Company and any other person, provided that such business combination is first approved by the Board (including a majority of the Independent Directors). This resolution, however, may be altered or repealed in whole or in part at any time.
These anti-takeover provisions may inhibit a change of control in circumstances that could give the shareholders the opportunity to realize a premium over the market price for the common stock.
Terrorist Attacks, Acts of War, Natural Disasters or Pandemics. Terrorist acts, acts of war, natural disasters, epidemics, pandemics, conflicts, social unrest and other social, political and economic conditions may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to recent global economic instability. Future terrorist activities, military or security operations, natural disasters, pandemics could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we
invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.
The ongoing invasion of Ukraine by Russia and related sanctions have increased global political and economic uncertainty. In late February 2022, Russia launched a large-scale military attack on Ukraine. The invasion significantly amplified already existing geopolitical tensions among Russia, Ukraine, Europe, NATO and the West, including the United States. In response to the ongoing military action by Russia, various countries, including the United States, the United Kingdom, and European Union issued broad-ranging economic sanctions against Russia. Additional sanctions may be imposed in the future. Such sanctions (and any future sanctions) and other actions against Russia may adversely impact, among other things, the Russian economy and various sectors of the economy, including, but not limited to, financials, energy, metals and mining, engineering and defense and defense-related materials sectors; result in a decline in the value and liquidity of Russian securities; result in boycotts, tariffs, and purchasing and financing restrictions on Russia’s government, companies and certain individuals; weaken the value of the ruble; downgrade the country’s credit rating; freeze Russian securities and/or funds invested in prohibited assets and impair the ability to trade in Russian securities and/or other assets; and have other adverse consequences on the Russian government, economy, companies and region. Further, several large corporations and U.S. states have announced plans to divest interests or otherwise curtail business dealings with certain Russian businesses.
In addition, the recent outbreak of hostilities in the Middle East and escalating tensions in the region may create volatility and disruption of global markets.
The ramifications of the hostilities and sanctions, however, may not be limited to Russia and the Middle East and Russian and Middle Eastern companies, respectively, but may spill over to and negatively impact other regional and global economic markets (including Europe and the United States), companies in other countries (particularly those that have done business with Russia) and on various sectors, industries and markets for securities and commodities globally, such as oil and natural gas. Accordingly, the actions discussed above and the potential for a wider conflict could increase financial market volatility, cause severe negative effects on regional and global economic markets, industries, and companies and have a negative effect on the Company’s investments and performance, which may, in turn, impact the valuation of such portfolio companies. In addition, parties in such conflicts may take retaliatory actions and other countermeasures, including cyberattacks and espionage against other countries and companies around the world, which may negatively impact such countries and the companies in which the Company invests. The extent and duration of the military action or future escalation of such hostilities, the extent and impact of existing and future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted. These and any related events could have a significant impact on the Company’s performance and the value of an investment in the Company.
Cybersecurity Risks. We, and others in our industry, are the targets of malicious cyber activity. A successful cyber-attack, whether perpetrated by criminal or state-sponsored actors, against us or our service providers, or an accidental disclosure of non-public information could have an adverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data, especially personal and other confidential information.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems, networks, and data, like those of other companies, could be subject to unauthorized access, acquisition, use, alteration, or destruction, such as from the insertion of malware (including ransomware), physical and electronic break-ins or unauthorized tampering, or system failures and disruptions of our computer systems, networks and data. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, personal and other information processed, stored in, and transmitted through our computer systems and networks. Such an attack could cause, among other adverse effects, interruptions or malfunctions in our operations, misstated or unreliable financial data, misappropriation of assets, loss of personal information, liability for stolen information, any of which could result in financial losses, litigation, regulatory enforcement action and penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation.
We may have to make a significant investment to fix or replace any inoperable or compromised systems or to modify or enhance its cybersecurity controls, procedures and measures. Similarly, the public perception that we or our affiliates may have been the target of a cybersecurity threat, whether successful or not, also could have a material adverse effect on our reputation and lead to financial losses from loss of business, depending on the nature and severity of the threat.
Third parties with which we do business (including vendors that provide us with services) are sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee and borrower information. Cybersecurity failures or breaches to service providers (including, but not limited to, accountants and custodians), and the issuers of securities in which we invest, also have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its NAV, impediments to trading, the inability of our shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, acquisition, use, alteration or
destruction of data, or other cybersecurity incidents that affects our data, resulting in increased costs and other consequences, as described above.
The Company does not control the cybersecurity measures put in place by such third parties, and such third parties could have limited indemnification obligations to the Company and its affiliates. If such a third party fails to adopt or adhere to adequate cybersecurity procedures, or if despite such procedures its networks or systems are breached, information relating to investor transactions and/or personal information of investors may be lost or improperly accessed, used or disclosed. The Company, the Adviser and its affiliates have implemented processes, procedures and internal controls to mitigate cybersecurity risks and cyber intrusions, including in its vendors, but these measures, as well as the Company’s increased awareness of the nature and extent of a risk of a cyber-incident, may be ineffective and do not guarantee that a cyber-incident will not occur or that the Company’s financial results, operations or confidential information will not be negatively impacted by a cybersecurity or cyber intrusion incident. Substantial costs may be incurred in order to prevent any cyber incidents in the future.
Privacy and information security laws and regulatory changes (including any regulations to report material cybersecurity incidents to the SEC), and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.
Technological innovations, including those related to artificial intelligence and machine learning, may negatively impact us. There continues to be significant evolution and developments in the use of artificial intelligence (“AI”) technologies. We cannot fully determine the impact or cybersecurity risk of such evolving technology to our business at this time. Subject to internal compliance policies, the Adviser may incorporate, directly or through third-party vendors, the use of AI into its business and operations, and anticipates that usage and adoption of AI in the marketplace will continue to grow. As with other innovations, AI presents risks and challenges that could affect its accuracy. While the use of AI is intended to make processes more efficient, AI models may not achieve sufficient levels of accuracy. AI algorithms may be flawed, the datasets on which such algorithms are trained may be insufficient, raise privacy concerns or contain biased information, which could undermine the decisions, predictions or analysis AI applications produce, subjecting the user to competitive harm, legal liability, and brand or reputational harm. A number of jurisdictions have passed laws and implemented regulations, or are considering the same, related to the use of AI and affecting AI companies, which could limit or adversely affect our business to the extent we, or our portfolio companies, use AI in our operations. The misuse or misappropriation of data could have an adverse impact on the user's reputation and could subject the user to legal and regulatory investigations and/or actions. We cannot control the use of AI or machine learning in our portfolio companies or third-party products or services and therefore could be exposed to associated risks if our portfolio companies, third-party service providers or any counterparties use AI or machine learning in their business activities.
California Consumer Privacy Act (“CCPA”) Considerations. The Company and the Adviser are subject to the requirements of the CCPA. The CCPA imposes a number of obligations on covered businesses, including, among others: (a) obligations to comply with certain privacy requests made by California residents; (b) requirements to provide enhanced privacy notice disclosures; and (c) a requirement to ensure that all individuals responsible for handling consumer inquiries about the business’s privacy practices are informed of the CCPA’s requirements. The CCPA is enforceable by the California Attorney General as of July 1, 2020 and authorizes civil penalties for domestic and intentional violations. The CCPA also provides a private right of action but only in connection with certain “unauthorized access and exfiltration, theft, or disclosure” of a California resident’s non-encrypted or non-redacted personal information, if the business failed to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the personal information. There is a risk that the measures taken to comply with the CCPA will not be implemented correctly or that individuals within the business will not be fully compliant with the new procedures. If there are breaches of these measures, the Company and the Adviser and their respective affiliates (as relevant) could face significant administrative and monetary sanctions as well as reputational damage which could have a material adverse effect on the operations, financial condition and prospects of the Company. The above considerations also apply to the portfolio companies of the Company and other counterparties with which the Company conducts investment activities.
Exposure to Financial Institutions. The Company may invest or participate in financial instruments issued by financial institutions, such as investment and commercial banks, insurance companies, savings and loan associations, mortgage originators and other companies engaged in the financial services industry (collectively, “financial institutions”). In addition, financial institutions will act as counterparties to the Company in connection with the Company’s investment activities and may provide certain services to the Company. The Company also may gain exposure to these entities through derivative transactions, including, without limitation, interest rate swaps, options, credit default swaps and credit linked notes, and through long and short strategies. In the course of conducting their business operations, financial institutions are exposed to a variety of risks that are inherent to the financial services industry. Significant risks that could affect the financial condition and results of operations of financial institutions include, but are not limited to, fluctuations in interest rates, exchange rates, equity and commodity prices and credit spreads caused by global and local market and economic conditions; credit-related losses that can occur as a result of an individual, counterparty or issuer being unable or unwilling to honor its contractual obligations; the potential inability to repay short-term borrowings with new borrowings or assets that can be quickly converted into cash while meeting other obligations; operational failures or unfavorable external events; potential changes to the established rules and policies of various U.S. and non-U.S. legislative bodies and regulatory and exchange authorities, such as federal and state securities, bank regulators and industry participants; risks associated with litigation, investigations and/or proceedings by
private claimants and governmental and self-regulatory agencies arising in connection with a financial institution’s activities; and its continuing ability to compete effectively in the market.
Litigation Risks. The Company is subject to a variety of litigation risks, particularly if one or more of its portfolio companies face financial or other difficulties. It is by no means unusual for participants to use the threat of, as well as actual, litigation as a negotiating technique. Legal disputes, involving any or all of the Company, the Adviser, or their respective affiliates, may arise from their activities and investments and could have a significant adverse effect on the Company, including the expense of defending against claims by third parties and paying any amounts pursuant to settlements or judgments.
Legal and Regulatory Risks, Generally. Legal and regulatory changes could occur that may adversely affect the Company. For example, the Company may invest in a number of different industries, some of which are or may become subject to regulation by one or more government agencies in the jurisdictions in which they operate. New and existing regulations, changing regulatory schemes and the burdens of regulatory compliance all may have a material negative impact on the performance of companies that operate in these industries. The Adviser cannot predict whether new legislation or regulation governing those industries will be enacted by legislative bodies or governmental agencies, or the effect that such legislation or regulation might have. There can be no assurance that new legislation or regulation, including changes to existing laws and regulations, will not have a material negative impact on the Company’s investment performance.
State Licensing Requirements. We may be required to obtain various state licenses in order to, among other things, originate commercial loans. Applying for and obtaining required licenses can be costly and take several months. There is no assurance that we will obtain all of the licenses that we need on a timely basis. Furthermore, we will be subject to various information and other requirements in order to obtain and maintain these licenses, and there is no assurance that we will satisfy those requirements. Our failure to obtain or maintain licenses might restrict investment options and have other adverse consequences.
Risks Related to RICs and BDCs
The Company will be Subject to U.S. Federal Income Tax Imposed at Corporate Rates if it is Unable to Qualify as a RIC. Although we have elected to be treated, and intend to qualify annually, as a RIC, no assurance can be given that we will be able to qualify for and maintain our qualification as a RIC. To obtain and maintain our qualification as a RIC, we must meet the following source-of-income, asset diversification, and distribution requirements.
The source-of-income requirement will be satisfied if we derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income derived with respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership,” (as defined in the Code).
The asset diversification requirement will be satisfied if at the end of each quarter of our taxable year (i) at least 50% of the value of our total assets are represented by cash and cash items, U.S. government securities, the securities of other RICs and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer, and (ii) no more than 25% of the value of our assets are invested in securities of (a) any one issuer (other than U.S. government securities and securities of other RICs), of one issuer, (b) the securities, other than securities of other RICs of any two or more issuers that are controlled, as determined under the applicable Code rules, by us and are engaged in the same or similar or related trades or businesses, or (c) the securities of one or more “qualified publicly traded partnerships.” Failure to meet those requirements may result in us having to dispose of certain investments quickly in order to prevent the loss of our qualification as a RIC. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses. We may have difficulty satisfying the diversification requirement during our ramp-up phase until we have a portfolio of investments.
The annual distribution requirement generally will be satisfied if we timely distribute (or are deemed to distribute) to our shareholders on an annual basis at least 90% of our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, if any. Because we may use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify as a RIC.
If we fail to qualify as a RIC for any reason and therefore become subject to U.S. federal income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.
Limits on Capital Raising; Asset Coverage Ratio. Our business will require a substantial amount of capital. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities, other evidences of indebtedness or preferred stock, and may borrow money from banks or other financial institutions, which are referred to collectively herein as “senior securities,” up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met, which we met in connection with our Initial Closing) after each issuance of senior securities. Our ability to pay dividends or issue additional senior securities would be restricted if our asset coverage ratio were not at least 200% (or 150% if certain requirements under
the 1940 Act are met, which we met in connection with our Initial Closing). If the value of our assets declines, we may be unable to satisfy this requirement. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales or repayment may be disadvantageous. As a result of issuing senior securities, we also will be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, such preferred stock will rank “senior” to our common stock in our capital structure, preferred shareholders will have separate voting rights for certain purposes and may have rights, preferences or privileges more favorable than those of our common stock and the issuance of common stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our shareholders or otherwise be in the best interest of our shareholders.
To the extent we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of common stock to finance our operations. As a BDC, we will not generally be able to issue our common stock at a price below NAV without first obtaining required approvals of our shareholders and our Independent Directors. If we raise additional funds by issuing more of our common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our shareholders at that time would decrease and our shareholders may experience dilution. In addition to issuing securities to raise capital as described above, we could, in the future, securitize our loans to generate cash for funding new investments. An inability to successfully securitize our loan portfolio could limit our ability to grow our business, fully execute our business strategy and improve our profitability.
The 1940 Act Permits us to Incur Additional Leverage with Certain Consents. The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% or 150%, if certain requirements are met. Under the 1940 Act, we are allowed to increase our leverage capacity if shareholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive shareholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the 1940 Act allows the majority of our Independent Directors to approve an increase in our leverage capacity, and such approval would become effective after one year. In addition, the 1940 Act requires non-listed BDCs, like the Company, to offer to repurchase 25% of its securities each quarter following the calendar quarter in which the BDC obtains such approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.
In connection with the Initial Closing, investors both consented to the minimum asset coverage ratio of 150% and agreed not to seek to redeem their shares of common stock in connection therewith, in each case in the subscription agreements.
Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the NAV attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.
The Company May Have Difficulty Paying its Required Distributions if the Company Recognizes Income Before or Without Receiving Cash Representing Such Income. For U.S. federal income tax purposes, the Company will include in its taxable income certain amounts that the Company has not yet received in cash, such as original issue discount, which may arise if the Company receives warrants in connection with the origination of a loan or possibly in other circumstances, or contractual PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances as a result of contractual PIK arrangements will be included in the Company’s taxable income before the Company receives any corresponding cash payments. The Company also may be required to include in its taxable income certain other amounts that it will not receive in cash. Since, in certain cases, the Company may recognize taxable income before or without receiving corresponding cash payments, the Company may have difficulty meeting the annual distribution requirement necessary to maintain its qualification as a RIC. Accordingly, to satisfy its RIC distribution requirements, the Company may have to sell some of its investments at times and/or at prices that it would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities. If the Company is not able to obtain cash from other sources, it may fail to qualify as a RIC and thus become subject to U.S. federal income tax. For additional discussion regarding the tax implications of the Company’s election to be taxed as a RIC, please see “Item 1. Business - Certain U.S. Federal Income Tax Considerations.”
Distribution and Asset Coverage Ratio Requirements May Impact the Company’s Ability to Grow. In order to satisfy the requirements applicable to RICs and to avoid payment of excise taxes, we intend to distribute to our shareholders substantially all of our ordinary income and capital gain net income except for certain net capital gains, which we intend to retain and to elect to treat as deemed distributions to our shareholders. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which would include all of our borrowings and any preferred stock that we may issue in the future, of at least 200% (or 150% if certain requirements under the 1940 Act are met, which we met in connection with our Initial Closing). This requirement will limit the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us
from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. While we expect to be able to borrow and to issue additional debt and equity securities, there is no assurance that debt and equity financing will be available to us on favorable terms or at all. In addition, as a BDC, we are not permitted to issue equity securities priced below NAV without shareholder and Independent Director approval. However, if we do obtain the necessary approvals to issue securities at prices below their NAVs, a shareholder’s investment in our common stock will experience dilution as a result of such issuance. If additional funds are not available to us, we could be forced to curtail or cease our lending and investment activities, and our NAV could decrease.
Unrealized Depreciation on Our Loan Portfolio Indicating Future Realized Losses and Reduction in Income Available for Distribution. As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by the Board. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the loans whose market values or fair values decreased. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.
Qualifying Asset Requirement. As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Similarly, this requirement could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments. Conversely, if we failed to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would subject us to substantially more regulatory restrictions and significantly decrease our operating flexibility.
Our ability to enter into transactions involving derivatives and unfunded commitment transactions may be limited. In 2020, the SEC adopted Rule 18f-4 under the 1940 Act, which relates to the use of derivatives and other transactions that create future payment or delivery obligations by BDCs (and other funds that are registered investment companies). Under Rule 18f-4, BDCs that use derivatives are subject to a value-at-risk (“VaR”) leverage limit, certain derivatives risk management program and testing requirements, and requirements related to board reporting. These requirements apply unless the BDC qualifies as a “limited derivatives user,” as defined in Rule 18f-4. A BDC that enters into reverse repurchase agreements or similar financing transactions could either (i) comply with the asset coverage requirements of Section 18, as modified by Section 61 of the 1940 Act, when engaging in reverse repurchase agreements or (ii) choose to treat such agreements as derivatives transactions under Rule 18f-4. In addition, under Rule 18f-4, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this requirement, it is required to treat the unfunded commitment as a derivatives transaction subject to the aforementioned requirements of Rule 18f-4. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts. We qualify as a “limited derivatives user,” and as a result the requirements applicable to us under Rule 18f-4 may limit our ability to use derivatives and enter into certain other financial contracts. However, if we fail to qualify as a limited derivatives user and become subject to the additional requirements under Rule 18f-4, compliance with such requirements may increase cost of doing business, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Limits on Transactions with Affiliates. We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the Independent Directors of the Board and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we generally will be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of the Board. The 1940 Act also prohibits certain “joint transactions” with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of the Board and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates or entering into prohibited joint transactions with such persons absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. We have received an exemptive order from the SEC that allows us, subject to the satisfaction of certain conditions, to enter into transactions with certain of our affiliates. These restrictions may limit the scope of investment opportunities that would otherwise be available to us and there can be no assurance that we will be able to participate in all investment opportunities that are suitable to us.
Our Status as an “Emerging Growth Company” under the JOBS Act May Make it More Difficult to Raise Capital as and When We Need it. Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
Risks Related to the Private Placement of Common Stock
Capital Commitments and Drawdowns. Until the earlier of a Liquidity Event and a repurchase of all common stock of a shareholder or such later time as set forth under “Item 1. Business - The Private Offering,” each such shareholder will be obligated to fund Drawdowns to purchase additional common stock based on its Capital Commitment at the time the Company makes such financing or investment. To satisfy such obligations, shareholders may need to maintain a substantial portion of their Capital Commitments in assets that can be readily converted to cash. Failure by a shareholder to timely fund its Capital Commitment may result in some of its common stock being forfeited or subject the shareholder to other remedies available to the Company. Failure of shareholders to contribute their Capital Commitments also could cause the Company to be unable to realize its investment objectives. A default by a substantial number of shareholders or by one or more shareholders who have made substantial Capital Commitments would limit the Company’s opportunities for investment or diversification and would likely reduce returns to the Company. In addition, the Adviser will have broad discretion in determining the specific uses of Drawdown Amounts. See “Non-Specified Investments and Discretion in Determining Use of Drawdown Amounts” for more information.
Exchange Act Filing Requirements. Because the common stock is registered under the Exchange Act, ownership information for any person who beneficially owns 5% or more of the common stock will have to be disclosed in a Schedule 13G or other filings with the SEC. Beneficial ownership for these purposes is determined in accordance with the rules of the SEC, and includes having voting or investment power over the securities. Our shareholders who subscribe for over 5% of our common stock or, in some circumstances, our shareholders who choose to reinvest their dividends and who therefore see their percentage stake in the Company increased to more than 5% of our common stock, will trigger this filing requirement. Each shareholder is responsible for determining their filing obligations and preparing the filings. In addition, our shareholders who hold more than 10% of a class of our common stock may be subject to Section 16(b) of the Exchange Act, which recaptures for the benefit of the Company profits from the purchase and sale of registered stock within a six-month period.
Common Counsel; Interest of Counsel. Eversheds Sutherland (US) LLP, counsel for the Company in connection with the offering of our common stock, advises the Adviser and its affiliates on various matters. Prospective investors should be aware that, to the extent the Company and the Offering would benefit from a review by independent counsel, such benefit has not been provided by the Company.
Investment by ERISA Plans. We intend to conduct our operations so that they will not trigger “prohibited transactions” for benefit plan investors. We will use reasonable efforts to conduct our affairs so that our assets will not be deemed to be “plan assets” under the plan asset regulations promulgated by the Department of Labor. The fiduciary of each prospective benefit plan investor must independently determine that our common stock is an appropriate investment for such plan, taking into account the fiduciary’s obligations under the Employee Retirement Income Security Act of 1974 and the facts and circumstances of each investing benefit plan.
Limited Liquidity. There is currently no public market for our common stock, and a market for the common stock may never develop. The common stock is not registered under the 1933 Act, or any state securities law and is restricted as to transfer by law and the terms of the Subscription Agreement. Shareholders generally may not Transfer common stock unless (i) the Adviser provides prior written consent, which the Adviser may grant or withhold in its sole discretion, (ii) the Transfer is in compliance with the restrictions set forth in the Subscription Agreement, and (iii) the Transfer is made in accordance with applicable laws. Except in limited circumstances for legal or regulatory purposes or in connection with repurchase offers, as described below, shareholders are not entitled to redeem their common stock. While we may undertake a Liquidity Event, there can be no assurance that any potential liquidity event can be achieved. Furthermore, a Public Listing does not ensure that an actual market will develop for a listed security. In addition, following a Public Listing, shareholders may be restricted from selling or disposing of their shares of common stock by applicable securities laws or contractually by a lock-up agreement with the underwriters of any public offering of the common stock conducted in connection with a Public Listing or otherwise. Accordingly, the shareholders must be prepared to bear the economic risk of an investment in the common stock for an indefinite period of time, as there is no guarantee that any liquidity event other than the ultimate dissolution of the Company will occur, and it cannot be determined when such dissolution can be achieved.
Absence of SEC and Applicable State Securities Commission Reviews. Because we are conducting a private offering that will not be registered under the 1933 Act or under applicable state securities or “blue sky” laws, any offering material will not be reviewed by the SEC or by the equivalent agency of any state or governmental entity. Review by any such agency might result in additional disclosures or substantially different disclosures from those actually included in any offering material.
Certain Regulatory Considerations, Securities Act of 1933. Pursuant to Rule 506 of Regulation D promulgated under the 1933 Act, the Company’s reliance on the “private placement” exemption from registration provided under Regulation D may become unavailable if “covered persons” become subject to a “disqualifying event.” “Covered persons” include beneficial owners of 20% or more of the Company’s outstanding equity securities, calculated on the basis of total voting power rather than on the basis of ownership of any single class of securities (a “20% Beneficial Owner”). In the event that a shareholder that is a 20% Beneficial Owner becomes subject to a disqualifying event, the Company may treat such shareholder as a Defaulting shareholder or take such other equitable measures as it may determine.
Shareholders May Experience Dilution. Shareholders will not have preemptive rights to subscribe to or purchase any common stock issued in the future. To the extent we issue additional equity interests, including in a public offering or at subsequent closings during the Fundraising Period, a shareholder’s percentage ownership interest in the Company will be diluted. In addition, depending upon the terms
and pricing of any additional offerings and the value of our investments, a shareholder also may experience dilution in the NAV and fair value of our common stock.
Preferred Stock Could be Issued. Although we have no current intention to do so, under the terms of the Charter, the Board is authorized, to the fullest extent permitted by the 1940 Act, to authorize us to issue preferred stock in one or more classes or series without shareholder approval. The Board, subject to the terms of any class or series of stock outstanding at the time, is required to set the preferences, conversion, and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class or series, including preferred stock with terms that might adversely affect the interest of our existing shareholders. If we issue preferred stock, there can be no assurance that such issuance would result in a higher yield or return to the shareholders. The issuance of preferred stock would likely cause the NAV of the common stock to become more volatile.
Significant Financial and Other Resources to Comply with the Requirements of Being a Public Reporting Entity. We are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires the Company to file annual, quarterly and current reports with respect to its business and financial condition. The Sarbanes-Oxley Act requires that the Company maintain effective disclosure controls and procedures and internal controls over financial reporting, which are discussed below. In order to maintain and improve the effectiveness of disclosure controls and procedures and internal controls, significant resources and management oversight will be required. The Company has implemented disclosure controls and procedures, processes, policies and practices for the purpose of addressing the standards and requirements applicable to public companies. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on business, financial condition, results of operations and cash flows. The Company expects to incur significant additional annual expenses related to these steps and, among other things, directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, additional administrative expenses payable to the Administrator to compensate them for hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.
The systems and resources necessary to comply with public company reporting requirements will increase further once the Company ceases to be an “emerging growth company” under the JOBS Act. As long as the Company remains an emerging growth company, it intends to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. This may increase the risk that material weaknesses or other deficiencies in the Company’s internal control over financial reporting go undetected. The Company will remain an emerging growth company for up to five years following an IPO, although if the market value of its common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, it would cease to be an emerging growth company as of the following December 31.
Risks and Conflicts Related to the Adviser
Limited Experience Managing a BDC. The personnel of Varagon and the Adviser have limited prior experience managing a BDC. The 1940 Act and the Code impose numerous constraints on the operations of BDCs that do not apply to the other types of investment vehicles. For example, under the 1940 Act, BDCs are generally required to invest at least 70% of their total assets primarily in securities of U.S. private or thinly traded companies that satisfy certain provisions of the 1940 Act. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a BDC, which could be material. The Adviser’s limited experience in managing a portfolio of assets under such constraints may hinder the Company’s ability to take advantage of attractive investment opportunities and, accordingly, the Company’s investment returns could be substantially lower than the returns achieved by other vehicles managed by Varagon.
Conflicts Related to Obligations the Adviser Has to Other Clients. Certain Adviser personnel serve, or may serve, as officers, directors, members, or principals of entities that operate in the same or a related line of business as we do, or of investment funds, accounts, or investment vehicles managed by the Adviser or affiliates of the Adviser. Similarly, the Adviser may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, the Adviser and certain personnel may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of the Company or our shareholders. The Adviser intends to allocate any investment opportunities in a fair and equitable manner over time; however, there is no assurance that we will be able to participate in all investment opportunities or that investment opportunities will be allocated in a fair and equitable manner over time.
Our investment strategy primarily includes investments in senior secured loans, but we may selectively make investments in second lien and subordinated or mezzanine loans, and equity and equity-related securities. As a result, members of the Adviser’s senior investment team and the IC, in their roles at the Adviser, may face conflicts in the allocation of investment opportunities among us and other entities sponsored or managed by the Adviser, Varagon and its affiliates with similar or overlapping investment objectives in a manner that is fair and equitable over time and consistent with the Adviser’s allocation policy. Generally, when a particular investment would be appropriate for us as well as other entities sponsored or managed by the Adviser, Varagon and its affiliates, such investment will be apportioned by the Adviser’s senior investment team in accordance with (1) the Adviser’s internal conflict of interest and allocation policies, (2) the requirements of the Advisers Act and (3) certain restrictions under the 1940 Act regarding co-investments with affiliates.
Such apportionment may not be strictly pro rata, depending on the good faith determination of all relevant factors, including without limitation differing investment objectives, diversification considerations and the terms of our or the respective governing documents of such investment funds, accounts or investment vehicles. These procedures could, in certain circumstances, limit whether a co-investment opportunity is available to us, the timing of acquisitions and dispositions of investments, the price paid or received by us for investments or the size of the investment purchased or sold by us. The Adviser believes this allocation system is fair and equitable, and consistent with its fiduciary duty to us. In particular, we have disclosed to investors how allocation determinations are made among any investment vehicles sponsored or managed by the Adviser or its affiliates.
As a BDC, the Company may be prohibited under the 1940 Act from conducting certain transactions with its affiliates without the prior approval of the Independent Directors and, in some cases, the prior approval of the SEC. We generally will only be permitted to co-invest with such investment funds, accounts and vehicles where the only term that is negotiated is price. The Company has received an exemptive order from the SEC that permits it, among other things, to co-invest with certain other persons and certain funds managed and controlled by Varagon or an affiliate, subject to the satisfaction of certain conditions. However, there can be no assurance that we will be able to participate in all investment opportunities that are suitable to us.
Fee-Related and Other Economic Potential Conflicts. As a BDC, we are generally limited in our ability to invest in any portfolio company in which the Adviser or any of its affiliates currently has an investment or to make any co-investments with other funds managed by our investment adviser or other affiliates without an exemptive order from the SEC, subject to certain exceptions.
Nonetheless, potential conflicts may arise when the Adviser or its affiliates manage accounts that make performance payments or base management fees to the Adviser or its affiliates at different net rates or subject to different types of calculation methodologies from arrangements with the Company. The Adviser and its affiliates may have an economic incentive to allocate more favorable investment opportunities to, or otherwise for, an account from which the Adviser or an affiliate receives a higher performance payment or in which the Adviser or an affiliate has an ownership or other economic interests. In connection with certain investments made by the Company and investments made by certain clients, the Adviser or its affiliates may receive transaction fees and/or other consideration from portfolio investments in which one or more clients may invest or propose to invest, including portions of investments held by the Company or its subsidiaries, which may create additional conflicts of interest in connection with the structuring and allocation of investments.
Potential Conflicts Arising from the Ability of Varagon to Appoint Members of the IC. Varagon is responsible for appointing the members of the IC, which may include Varagon employees and independent members, and Varagon may replace members of the IC in its sole discretion. Therefore, a conflict may arise in the future to the extent that Varagon appoints an individual to the IC who has conflicts with the Company.
Potential Conflicts Arising from the Placement Agent. Man Group is the ultimate parent company of Man Investments, which is also the ultimate parent of the Adviser. Man Investments is acting as the placement agent in connection with the Offering and will receive compensation relating to such services from Varagon or its affiliates. Potential conflicts may arise in connection with the foregoing.
Possession of Material Non-Public Information, Limiting the Adviser’s Investment Discretion. Adviser personnel, including members of the IC, may serve as directors of, or in a similar capacity with, portfolio companies in which we invest, the securities of which are purchased or sold on our behalf. In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
Management Fees and Incentive Fees. Even if the value of a shareholder’s investment declines, the management fee and, in certain cases, the incentive fee payable by us to the Adviser still will be payable to the Adviser. The management fee payable to the Adviser is calculated as a percentage of the Company’s adjusted gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts. This management fee calculation may create an incentive for the Adviser to purchase assets with borrowed funds when it is unwise to do so or to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to the Adviser is calculated based on a percentage of our return on invested capital. The incentive fee arrangement may encourage the Adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, in the event of a Public Listing, the Management Fee will increase from 0.75% to 1.00% of the average of the Company’s adjusted gross assets (for these purposes, “adjusted gross assets” exclude undrawn capital commitments and cash and cash equivalents but include assets purchased with borrowed amounts). Further, in the event of a Public Listing, the Income Incentive Fee and the Capital Gains Incentive Fees will increase from 12.5% to 20%, but otherwise will be calculated as set forth herein.
Limitation on Liability of the Adviser. The Adviser does not assume any responsibility to us other than to render the services described in, and on the terms of, the Investment Advisory Agreement, and will not be responsible for any action of our Board in declining to follow the advice or recommendations of the Adviser. The Investment Advisory Agreement provides that the Adviser, its officers, members and personnel, and any person controlling or controlled by the Adviser will not be liable to us or our shareholders for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts
constituting willful misfeasance, bad faith or gross negligence, in the performance of his or her duties, or by reason of his or her reckless disregard of his or her obligations and duties under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify the Adviser and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to willful misfeasance, bad faith or gross negligence, in the performance of his or her duties, or by reason of his or her reckless disregard of his or her obligations and duties under the Investment Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Risks Associated with the Company’s Investments
Nature of Investments. We primarily invest in senior secured loans, but also may selectively invest in second lien and subordinated or mezzanine loans, and equity and equity-related securities.
Senior Secured Loans. There is a risk that the collateral securing our senior secured loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. In some circumstances, our liens on the collateral securing our loans could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be compelled to enforce our remedies.
Second Lien and Subordinated Loans. We may invest in secured subordinated loans, including second and lower lien loans. Second lien loans are generally second in line in terms of repayment priority. A second lien loan may have a claim on the same collateral pool as the first lien or it may be secured by a separate set of assets. Second lien loans generally give investors priority over general unsecured creditors in the event of an asset sale. The priority of the collateral claims of third or lower lien loans ranks below holders of second lien loans and so on. Such junior loans are subject to the same general risks inherent to any loan investment, including credit risk, market and liquidity risk, and interest rate risk. Due to their lower place in the borrower’s capital structure and possible unsecured or partially secured status, such loans involve a higher degree of overall risk than senior secured loans of the same borrower.
Mezzanine Loans. Our mezzanine loans generally will be subordinated to senior secured loans on a payment basis, are typically unsecured and rank pari passu with other unsecured creditors. As such, other creditors may rank senior to us in the event of insolvency. This may result in an above average amount of risk and loss of principal.
Lower Grade Obligations. In addition, our investments will be in lower grade obligations. The lower grade investments in which we invest may be rated below investment grade (often referred to as “junk”) by one or more nationally recognized statistical rating agencies at the time of investment or may be unrated but determined by the Adviser to be of comparable quality. Loans or debt securities rated below investment grade are considered speculative with respect to the issuer’s capacity to pay interest and repay principal. The major risks of non-investment grade investments include:
•Non-investment grade securities may be issued by less creditworthy issuers. Issuers of non-investment grade securities may have a larger amount of outstanding debt relative to their assets than issuers of investment grade securities. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over the claims of holders of non-investment grade securities, leaving few or no assets available to repay holders of non-investment grade securities.
•Prices of non-investment grade securities are subject to extreme price fluctuations. Adverse changes in an issuer’s industry and general economic conditions may have a greater impact on the prices of non-investment grade securities than on other higher rated fixed-income securities.
•Issuers of non-investment grade securities may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments, or the unavailability of additional financing.
•Non-investment grade securities frequently have redemption features that permit an issuer to repurchase the security from us before it matures. If the issuer redeems non-investment grade securities, we may have to invest the proceeds in securities with lower yields and may reduce income.
•Non-investment grade securities may be less liquid than higher rated fixed-income securities, even under normal economic conditions. There are fewer dealers in the non-investment grade securities market, and there may be significant differences in the prices quoted by the dealers. Judgment may play a greater role in valuing these securities and we may be unable to sell these securities at an advantageous time or price.
•We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.
Equity and Equity-related Investments. When we invest in senior secured loans, second lien and subordinated or mezzanine loans, we may acquire equity and equity-related securities in such portfolio company, such as rights and warrants that may be converted into or exchanged for the issuer’s common stock or the cash value of the issuer’s common stock. In addition, we may invest directly in the equity securities of portfolio companies. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We will generally have little, if any, control over the timing of any gains we may realize from our equity investments. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may be unable to exercise any put rights we acquire, which would grant us the right to sell our equity securities back to the portfolio company, for the consideration provided in its investment documents if the issuer is in financial distress.
Investments in the Subordinated Certificates and Subordinated Interests of Structured Vehicles. The Company invests in the Subordinated Certificates, and in the future may invest in similar first loss or subordinated interests of other structured investment vehicles, including without limitation CLOs (together with other structured investment vehicles, “Structured Vehicles”). Structured Vehicles have leverage embedded in their structures, which can affect the risk and return profile of various tranches of such structures. The Company expects to invest, directly or indirectly, in the unrated or most subordinated tranches of Structured Vehicles that own middle market or other loans and that may be advised by affiliates of the Adviser.
The Company’s rights with respect to first loss or subordinated interest investments in Structured Vehicles, such as the SDLP and CLO equity investments, differ from other types of investments. For example, the Company will not have recourse against the issuers or obligors of the underlying asset pools. If proceeds from the underlying asset pools are not sufficient to provide payments on, or reduce the residual value of, the tranches that the Company, directly or indirectly, holds, the Company will lose money. In addition, the amount of distributions on the Subordinated Certificates will be affected by, among other things, the timing of purchases of underlying loans, the rates of repayment of or distributions on the underlying loans, the rates of delinquencies and defaults on and liquidations of the underlying loans and any unexpected significant expenses incurred by the Structured Vehicle. Moreover, upon the Structured Vehicle’s failure to satisfy its financial covenants or other covenants or upon the occurrence of any other event of default, proceeds otherwise available for distribution to the subordinated tranches of Structured Vehicle (such as the Subordinated Certificates) may be required instead to redeem senior tranches or held to satisfy applicable covenants. Interests of the holders of the senior tranches of a Structured Vehicle, in the event of a default or otherwise, may diverge from the interest of the holders of the subordinated tranches, including the Company. In an event of default, payment to the Company may be deferred or significantly reduced and the Company may be unable to exercise additional remedies under the governing documents.
Certificates, including the Subordinated Certificates, issued in connection with Structured Vehicles may not be registered under the 1933 Act, and may have a limited market or no market, and the Company may not be able to sell such certificates at favorable prices, if at all. Generally, certificates in which the Company invests would be unrated (as is the case with the Subordinated Certificates); however, a downgrade in more senior tranches could still negatively impact the value of the unrated tranches. In addition, certain downgrades in the ratings of the rated tranches, or a withdrawal of the ratings of a tranche, may result in an event of default under the Structured Vehicle’s governing documents. Moreover, there is no assurance that any holder of any of the issued securities of a Structured Vehicle will fund its respective capital contributions when required. A failure by any such holder to fund any commitment when required, including in the case of the SDLP, may impair the ability of the Structured Vehicle to fund amounts required, resulting in an impairment in the value of the Structured Vehicle, and therefore the Company’s investment in its certificates.
In the case of the SDLP, the Company, as a minority indirect holder of the Subordinated Certificates, in numerous instances will not control the timing of a redemption or refinancing of, or purchase of certain assets from, the SDLP following certain trigger events, as these rights are reserved to the majority Certificate holder. In the event that the majority Certificate holder elects to direct a redemption or refinancing or exercises its right to purchase those assets from SDLP, the Company will have the right to participate ratably in the proceeds allocated to the Subordinated Certificates and the right to purchase its pro rata portion of any assets sold to the majority Certificate holder on the same terms. Nonetheless, investment and other material decisions of the SDLP require the approval of the SDLP’s investment committee, on which investment committee each of the Company and ARCC exercises two votes. As a result, the Company does not have sole discretionary authority in respect of actions of the SDLP. The Company has no current plan or intent to sell the Subordinated Certificates within the five-year period beginning on the date of the Initial Closing, although the Company, in its sole discretion acting in the best interest of the Company, may determine to so sell the Subordinated Certificates at any time in the future.
In October 2014, six federal agencies adopted joint final rules implementing the credit risk retention requirements of Section 941 of the Dodd-Frank Act (the “Final U.S. Risk Retention Rules”) in respect of a variety of financing securitization structures. There is uncertainty as to whether or not the Final U.S. Risk Retention Rules would apply to the SDLP and similar CLOs. While we believe that the SDLP has been structured to comply with the Final U.S. Risk Retention Rules (the “RR Structure”) were they to apply, there can be no assurance that the applicable governmental authorities will agree that the RR Structure, will satisfy any such requirements of the Final
U.S. Risk Retention Rules. To the extent the Final U.S. Risk Retention Rules were determined to apply to the SDLP and the RR Structure was determined to not be compliant with the Final U.S. Risk Retention Rules, the Company, through its indirect interest in the Subordinated Certificates, could be required to pay damages, transfer interests, be subject to cease and desist orders or other regulatory action, which could materially adversely affect the value of the Subordinated Certificates.
Risks Associated with Investments in Middle Market Companies. Investment in private and middle market companies involves a number of significant risks including:
•such companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with its investment;
•such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns;
•such companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the portfolio company and, in turn, on us;
•such companies generally have less predictable operating results, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;
•debt investments in such companies generally may have a significant portion of principal due at the maturity of the investment, which would result in a substantial loss to us if such borrowers are unable to refinance or repay their debt at maturity;
•our executive officers, directors and the Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in such companies;
•such companies generally have less publicly available information about their businesses, operations and financial condition and, if we are unable to uncover all material information about these companies, we may not make a fully informed investment decision; and
•such companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.
Portfolio Company Debt and Equity. Our portfolio companies may have, or may be permitted to incur, other debt or issue equity securities that rank equally with, or senior to, the debt in which we invest. By their terms, such debt instruments or equity securities may entitle the holders to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments with respect to our investments. These debt instruments or equity securities would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt or equity securities. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments or equity securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt or equity securities ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt or equity in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Risks Relating to our Investment in SDLP.
We may make indirect investments in portfolio companies through joint ventures, including SDLP. In general, the risks associated with indirect investments in portfolio companies through a joint venture are similar to those associated with a direct investment in a portfolio company. While we intend to analyze the credit and business of a potential portfolio company in determining whether to make an investment in SDLP, we will nonetheless be exposed to the creditworthiness of SDLP. In the event of a bankruptcy proceeding against the portfolio company, the assets of the portfolio company may be used to satisfy its obligations prior to the satisfaction of our investment in the SDLP (i.e., our investment in SDLP could be structurally subordinated to the other obligations of the portfolio company). In addition, we may be required to rely on ARCC, our joint venture partner in SDLP, when making decisions regarding SDLP’s investments, accordingly, the value of the investment could be adversely affected if our interests diverge from those of ARCC in SDLP. See “Risks Associated with the Company’s Investments - Investments in the Subordinated Certificates and Subordinated Interests of Structured Vehicles” for more information relating to risks associated with the Subordinated Certificates.
Subordinated Liens on Collateral. Certain debt investments that we may make in portfolio companies will be secured on a subordinated priority basis by the same collateral securing more senior secured debt of such companies. A significant portion of our first lien and unitranche loans may be subordinated to “first-out” revolving loans following certain events with respect to such loans. While such first
lien and unitranche loans are expected to have many attributes of senior secured loans, these investments may involve additional risks that could adversely affect such investments. In addition, certain loans that we may make in portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the debt. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before we are so entitled. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then, to the extent not repaid from the proceeds of the sale of the collateral, we will only have an unsecured claim against the company’s remaining assets, if any.
We also may make unsecured debt investments in portfolio companies, meaning that such investments may not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured debt agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before we are so entitled. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy its unsecured debt obligations after payment in full of all secured debt obligations. If such proceeds were not sufficient to repay the outstanding secured debt obligations, then its unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the debt investments we make in portfolio companies with senior debt outstanding also may be limited pursuant to the terms of one or more inter-creditor agreements that we enter into with the holders of senior debt. Under such an inter-creditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
The Company’s Investments Will Be Illiquid and Long Term. We generally will make loans to private companies that are illiquid and may be difficult for us to sell if the need arises. Although portfolio financings and investments by us may generate current income, the return of capital and the realization of gains, if any, from a financing or investment generally will occur only upon the partial or complete satisfaction of the financing conditions or disposition of such investment, which may not occur for a number of years after the investment is made. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded such investments. In addition, we will not be able to sell securities we purchase publicly, if we hold any, unless the sale of such securities is registered under applicable securities laws, or unless an exemption from such registration requirements is available. In addition, in some cases, we may be prohibited by contract from selling certain securities we invest in for a period of time or we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we hold a significant portion of a company’s equity or if we have material non-public information regarding that company. Furthermore, under the 1940 Act, if there is no readily available market for these investments, we are required to carry these investments at fair value as determined by the Board. As a result, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments.
Risks Relating to Covenant-Lite Loans. On occasion, the Company and/or SDLP may invest in covenant-lite loans if the investment’s credit merits are particularly strong (e.g., high recurring revenue, strong retention rates, market leader, compelling value proposition, highly diversified customer base, etc.), the sponsors are highly reputable and relationship-oriented, and the economic profile is highly favorable (e.g., large established company with greater than $50 million of EBITDA and strong EBITDA margins). We use the term “covenant-lite” loans to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent the Company and/or SDLP invests in “covenant-lite” loans, the Company and/or SDLP may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.
Limited Number of Portfolio Companies. To the extent we assume large positions in the securities of a small number of issuers or industries, our NAV may fluctuate to a greater extent than that of a more diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. In addition, the aggregate returns we realize may be significantly adversely
affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, a downturn in any particular industry in which we are invested could significantly affect our aggregate returns.
Follow-on Investments in Portfolio Companies. Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in seeking to:
•increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;
•exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or
•preserve or enhance the value of our investment.
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation.
Portfolio Company Leverage. Our portfolio companies will typically have capital structures with significant leverage. Leveraged companies in which we invest may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold. Although the Adviser will seek to structure transactions in an attempt to minimize these risks, such leverage may increase our exposure to adverse economic factors such as changes in interest rates, downturns in the general economy or deterioration in the condition of the portfolio company or its sector in its particular industry. Such developments may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees that we may have obtained in connection with our investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its assets representing collateral for its obligations, which could trigger cross defaults under other agreements and jeopardize the value of any equity securities we own and the portfolio company’s ability to meet its obligations under any debt that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.
Defaults by Portfolio Companies. Our business is at risk if one of our borrowers defaults. A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under the loans or debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
Additionally, the return of principal of loans will depend in large part on the creditworthiness and financial strength of borrowers. If there is a default by the borrower under a loan, we will, in many circumstances, have contractual remedies pursuant to the loan agreements, including, in many cases, the sale of collateral. However, exercising such contractual rights may involve delays or costs, and any available collateral may prove to be unsaleable or saleable only at a price less than the loaned amount, which could result in a loss to the Company. There can be no guarantee that legal action will allow for the recovery of all outstanding loan balances due to the Company. We may choose to enter into forbearance agreements or delay legal action if it believes that such action improves the opportunity for a better outcome. The pursuit or delay of legal action may significantly increase the amount of time required to collect principal balances or lead to principal losses.
Prepayments by Portfolio Companies. We will be subject to the risk that the debt investments we make in portfolio companies may be repaid prior to maturity. The Adviser expects that our investments will generally allow for repayment at any time subject to certain penalties. When this occurs, the Adviser may reinvest a portion of these proceeds in temporary investments, pending their future investment in accordance with our investment strategy. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment also may be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us.
Risks Related to Non-Controlling Investments. We expect that at least a majority of investments we make will be non-controlling investments, meaning we will not be in a position to control the management, operation and strategic decision-making of the companies in which we invest. As a result, we will be subject to the risk that a portfolio company we do not control, or in which we do not have a majority ownership position, may make business decisions with which we disagree, and the equity holders and management of such a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt investments that we will typically hold in our portfolio companies, we may not be able to dispose of our investments in the event that we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of such portfolio company.
Risks Associated with Bankruptcy Cases. As part of the Company’s lending activities, the Company may originate loans to companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization
and liquidation proceedings. While the Company expects that the terms of such financing may result in significant financial returns to the Company, it involves a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful financing to companies experiencing significant business and financial difficulties is unusually high. There is no assurance that the Company will correctly evaluate the value of the assets collateralizing the Company’s loans or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a company that the Company invests in, the Company may lose all or part of the amounts advanced to the portfolio company or may be required to accept collateral with a value less than the amount of the loan advanced by the Company to the portfolio company.
Many of the events within a bankruptcy case are adversarial and often beyond the control of the creditors. While creditors generally are afforded an opportunity to object to significant actions, there can be no assurance that a bankruptcy court would not approve actions that may be contrary to the interests of the Company. Furthermore, there are instances where creditors and equity holders lose their ranking and priority as such if they are considered to have taken over management and functional operation of a debtor.
Generally, the duration of a bankruptcy case can only be roughly estimated. The reorganization of a company usually involves the development and negotiation of a plan of reorganization, plan approval by the creditors and confirmation by a bankruptcy court. This process can involve substantial legal, professional and administrative costs to the debtor company and the Company; it is subject to unpredictable and lengthy delays; and during the process the Company’s competitive position may erode, key management may depart and the debtor company may not be able to operate adequately. In some cases, the debtor company may not be able to reorganize and may be required to liquidate assets. The debt of companies in financial reorganization, in most cases, will not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value. Such investments can result in a total loss of principal. U.S. bankruptcy law permits the classification of “substantially similar” claims in determining the classification of claims in reorganization for purposes of voting on a plan of reorganization. Because the standard for classification is vague, there exists a significant risk that the Company’s influence with respect to a class of securities can be lost by the inflation of the number and amount of claims in, or other gerrymandering of, the class. In addition, certain administrative costs and claims that have priority by law over the claims of certain creditors (for example, claims for taxes) may be quite high.
Furthermore, there are instances where creditors and equity holders lose their ranking and priority as such when they take over management and functional operating control of a debtor. Therefore, depending on the facts and circumstances, including the extent to which the Company actually provided managerial assistance to a portfolio company or its representative or the Adviser sat on the board of directors of such portfolio company, a bankruptcy court might re-characterize the Company’s debt investment and subordinate all or a portion of its claim to that of other creditors.
A representative of the Company may serve on creditors’ committees or other groups to ensure preservation or enhancement of its position as a creditor or equity holder. A member of any such committee or group may owe certain obligations generally to all parties similarly situated that the committee represents. If the Company’s representative concludes that the obligations they owe to other parties as a committee or group member conflict with the duties they owe to the Company, they will resign from that committee or group, and the Company will not realize the benefits, if any, of participating on the committee or group. In addition, and also as discussed above, if the Company is represented on a committee or group, it may be restricted or prohibited under applicable law from, disposing of or increasing its investments in such debtor company while it continues to be represented on such committee or group.
In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. For example, the Company could become subject to a lender’s liability claim, if, among other things, the Company actually renders significant managerial assistance.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operation. Our headquarters are currently located at 151 West 42nd Street, 53rd Floor, New York, NY 10036, and are provided by our Administrator in accordance with the terms of our Administration Agreement.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We, and our consolidated subsidiaries and the Adviser are not currently subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us or them. From time to time, we, our consolidated subsidiaries and/or the Adviser may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business also is subject to extensive regulation, which may result in regulatory proceedings against us.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Until the completion of any Public Listing, our common stock will be offered and sold in the United States in transactions exempt from registration under the 1933 Act under Section 4(a)(2) and Regulation D promulgated thereunder or may be offered and sold outside the United States in transactions exempt from registration under the 1933 Act in accordance with Regulation S. There is no public market for our common stock currently, nor can we give any assurance that one will develop. For this reason, we are not providing the performance graph required by Item 201(e) of Regulation S-K.
Because the shares of common stock are being acquired by investors in one or more transactions “not involving a public offering,” they are “restricted securities” pursuant to Rule 144 under the 1933 Act and may be required to be held indefinitely. Our common stock may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) our consent is granted, and (ii) the shares of common stock are registered under applicable securities laws or specifically exempted from registration (in which case the shareholder may, at our option, be required to provide us with a legal opinion, in form and substance satisfactory to us, that registration is not required). Accordingly, an investor must be willing to bear the economic risk of investment in our common stock until a Liquidity Event has occurred. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of our common stock may be made except by registration of the transfer on our books. Each transferee will be required to execute an instrument agreeing to be bound by these restrictions and the other restrictions imposed on our common stock and to execute such other instruments or certifications as are reasonably required by us.
Holders
As of March 21, 2025, we had 50 shareholders of record.
Repurchase Offers
After the end of the Fundraising Period and prior to a Liquidity Event, we intend to offer to repurchase shares of common stock for up to 2.5% of our outstanding shares of common stock per quarter, through one or more repurchase offers. While we expect our Board to consider repurchase offers, we are not required to do so, and our Board can determine in its discretion not to authorize any repurchase offers. Such offers to repurchase shares of common stock, including the exact amount of each repurchase offer, will be subject to the applicable requirements of the Exchange Act and the 1940 Act.
If we were to engage in a repurchase offer, shareholders would be able to tender their shares of common stock at a price equal to our NAV per share as of a recent date. Any repurchase offer presented to our shareholders will remain open for a minimum of 20 business days following the commencement of the repurchase offer. In the materials that we send to our shareholders regarding a repurchase offer, we will include the date that the repurchase offer will expire. All tenders for repurchase requests must be received prior to the expiration of the repurchase offer in order to be valid.
We do not plan to repurchase any shares of common stock of any shareholder under the circumstances of death or disability of such shareholder.
To the extent that the number of shares of common stock tendered to us for repurchase exceeds the number of shares of common stock that we have determined to, or we are able to purchase, we will repurchase shares of common stock on a pro rata basis. Further, we will have no obligation to repurchase shares of common stock if the repurchase would violate applicable law or impact our ability to maintain our RIC tax treatment. The limitations and restrictions described above may prevent us from accommodating all repurchase requests made in any year. Our share repurchase offers will have many limitations, including the limitations described above, and should not in any way be viewed as the equivalent of a secondary market.
As of December 31, 2024, we have not offered to repurchase shares of common stock.
Unregistered Sales of Equity Securities and use of Proceeds
All sales of unregistered securities during the year ended December 31, 2024 were reported in a Form 8-K filed with the SEC.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.
Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refer to Varagon Capital Corporation. The term “Adviser” refers to VCC Advisors, LLC, our investment adviser; the term “Varagon” refers to Varagon Capital Partners, L.P.; the parent company of the Adviser; and the term “Administrator” refers to Varagon Capital Partners, L.P., when acting in its capacity as our administrator.
Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to:
•an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
•an economic downturn could disproportionately impact the companies which we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;
•an economic downturn could impact availability and pricing of our financing;
•a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;
•interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy;
•the impact of supply chain constraints and labor difficulties on our portfolio companies and the global economy generally;
•the elevated levels of inflation, and its impact on our portfolio companies and on the industries in which we invest;
•the impact of geopolitical conditions, including increased tariffs and trade barriers, the ongoing conflicts between Ukraine and Russia and ongoing conflict in the Middle East, and its impact on financial market volatility, global economic market, and various sectors, industries and markets for commodities globally;
•changes in the financial, capital, and lending markets;
•currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars;
•social, political, economic and other conditions and events (including natural disasters, epidemics, pandemics and terrorism) could adversely affect our results and the financial performance of our portfolio companies;
•our future operating results;
•our business prospects and the prospects of our portfolio companies;
•the expected return or impact of our investments;
•our contractual arrangements and relationships with third parties;
•the ability of our portfolio companies to achieve their objectives;
•competition with other entities and our affiliates for investment opportunities;
•the speculative and illiquid nature of our investments;
•the use of borrowed money to finance a portion of our investments;
•the adequacy of our financing sources and working capital;
•the loss of key personnel;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;
•the ability of the Adviser to attract and retain highly talented professionals;
•the ability of the Adviser to adequately allocate investment opportunities among the Company and Varagon’s advisory clients;
•any conflicts of interest posed by the structure of the management fee and incentive fee to be paid to the Adviser;
•our ability to qualify and maintain our qualification, for U.S. federal income tax purposes, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and our ability to operate as a business development company (“BDC”);
•the effect of legal, tax and regulatory changes; and
•other risks, uncertainties and other factors we identify under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We were formed on July 31, 2019 as a corporation under the laws of Maryland. We are an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, the Company has elected, and intends to qualify annually, to be treated as a RIC under the Code. The Company’s fiscal year end is December 31.
The Adviser serves as the Company’s investment adviser. The Adviser is registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and is a subsidiary of Varagon, which is also registered with the SEC as an investment adviser under the Advisers Act. Subject to the overall supervision of the Company’s board of directors (the “Board”), the Adviser manages the day-to-day operation of and provides investment advisory and management services to the Company.
The Company’s investment objective is to generate current income with a focus on capital preservation and, to a lesser extent, capital appreciation by investing primarily in directly originated leveraged loans to U.S. middle market companies.
The Company intends to achieve its investment objective by investing primarily in senior secured loans to performing middle market companies controlled by private equity sponsors. The Company focuses on loans to middle market companies that have sustainable competitive advantages, experienced management teams, solid financial performance, stable and recurring cash flow and strong enterprise value. The Company expects that such companies and their sponsors will require financing from the Company for growth, acquisitions, recapitalizations, refinancings or leveraged buyouts, among other things. The Company generally expects to invest in companies with EBITDA between $10 million and $75 million annually, though we may invest in smaller or larger companies if an attractive opportunity presents itself. The Company also generally intends to directly originate its investments as a lead lender to allow for deeper diligence, greater control over terms and structure, and superior economics.
VCC Equity Holdings, LLC (“VCCEH”), VCC Funding, LLC (“VCCF”), Varagon SDLP, LLC (“VSDLP”), and VCC CLO 1 Depositor, LLC ("VCC CLO Depositor") are wholly owned subsidiaries of the Company and are consolidated in the Company’s consolidated financial statements from June 2, 2022, the commencement of investment operations, or the date of their respective formation, in accordance with the Company’s consolidation policy. VCCEH is taxed as a corporation for U.S. federal income tax purposes and was formed to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The assets held by VCCEH guarantee the borrowings outstanding under the SMBC Facility (as defined below) (See "Note 6. Borrowings" in our consolidated audited financial statements). VCCF, a bankruptcy remote special purpose entity, whose assets were pledged as collateral supporting the amounts outstanding under the JPM Facility before its termination on November 26, 2024 (See Note 6. Borrowings"), held no collateral assets as of December 31, 2024. VSDLP holds the Company's interest in the SDLP (as defined below). VCC CLO Depositor, which in turn wholly owns VCC CLO 1, LLC ("VCC CLO"), was formed for the purpose of issuing a term debt securitization.
On March 29, 2022, in connection with its seed audit, the Company issued 100 shares of the Company's common stock for $10.00 to Varagon, which were subsequently redeemed on June 2, 2022, in connection with the Merger (as described below). On June 2, 2022, Varagon Fund I, L.P., a Delaware limited partnership and a private fund exempt from registration pursuant to Section 3(c)(7) of the 1940 Act (“VF1”), merged with and into the Company (the “Merger”), with the Company continuing as the surviving entity. As a result of the Merger, the Company acquired all of VF1’s assets and liabilities (the “Existing Portfolio”), including all of VF1’s interests in the joint venture, Senior Direct Lending Program (“SDLP”), in exchange for shares of the Company’s common stock. Accordingly, the Company received $40.9 million in cash and $145.2 million in investments at fair value, which consisted of a non-cash purchase of a $142.1 million investment and $3.1 million of total accumulated earnings. In addition, $191.3 million of VF1 investor commitments were converted into capital commitments to the Company (of which, $185.5 million was funded). In addition, the Company issued 18.6 million of shares of common stock at $10.00 per share to the limited partners of VF1 in exchange for the assets and liabilities of VF1. Additionally, on June 2, 2022, the Company received $296.9 million of capital commitments (of which, $175.2 million was funded)
(the “Initial Closing”) and the Company issued 17.5 million shares of common stock at $10.00 per share to new investors. The Company also became the sole member of its wholly owned subsidiaries VCCF and VSDLP. On June 2, 2022, immediately prior to its election to be regulated as a BDC, the Company purchased a portfolio of existing loans for $449.4 million (the “Warehoused Portfolio” and together with the Existing Portfolio, the “Initial Portfolio”) from certain affiliates of the Adviser using proceeds from the Initial Closing and borrowings under the JPM Facility (as described below) pursuant to loan sale and purchase agreements. In connection with the purchase of the Initial Portfolio, the Board reviewed and approved the fair value of the Initial Portfolio based on the Adviser’s internal analysis and input from third-party valuation firms.
Varagon Transaction with Man Group plc
On July 5, 2023, Varagon entered into an Agreement and Plan of Merger (the “Merger Agreement”) with affiliates of Man Group plc (“Man Group”), pursuant to which a newly formed indirect subsidiary of Man Group merged with and into Varagon, with Varagon surviving the merger as an indirect subsidiary of Man Group (the “Transaction”). The Transaction closed on September 6, 2023. As a result, following the Transaction, Man Group owns a majority interest in Varagon and Varagon management continues to own, directly or indirectly, a minority interest in Varagon. Although the ownership of Varagon changed as a result of the Transaction, there were no material changes to the investment advisory or administrative services performed by the Adviser or Varagon in its capacity as the Company’s administrator.
Key Components of Our Results of Operations
Investments
We focus primarily on the direct origination and syndication of loans to middle market companies domiciled in the United States.
Our level of investment activity (both the number of investments and the size of each investment) varies substantially from period to period depending on many factors, including the amount of debt and equity capital generally available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. Based on current market conditions, the pace of our investment activities, including originations and repayments, may vary. The historic strength of the financing and mergers and acquisitions markets and the historically low interest rate environment previously led to increased originations and repayments. However, there have been headwinds in the financing and merger and acquisitions markets resulting from inflation, supply chain disruptions, labor and resource shortages, commodity inflation, a shifting interest rate environment, geopolitical events (including increased tariffs and trade barriers, the war in Ukraine, conflict in the Middle East, and U.S. and China relations), and the uncertain economic outlook for the United States and globally, which could include a recession. We are closely monitoring the effect that market volatility, including as a result of the elevated interest rate environment, may have on our portfolio companies and our investment activities, and we will continue to seek to invest in defensive businesses with low levels of cyclicality and strong levels of free cash flow generation.
As a BDC, we may not acquire any assets other than “qualifying assets” specified in Section 55(a) of the 1940 Act, unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. Qualifying assets include investments in “eligible portfolio companies”, which, under the 1940 Act, includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million. In addition, we must be organized in the United States to qualify as a BDC.
Revenues
We plan to generate revenues in the form of interest income from the debt securities we hold and dividends and capital appreciation on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. The debt we invest in typically will not be rated by any rating agency, but if it were, it is likely that such debt would be below investment grade. Our investment bias will be toward adjustable-rate senior secured loans. We do not anticipate a secondary market to develop for our private investments. We expect most of our investments to be in corporations, partnerships, limited liability companies or other business entities, including in investment vehicles that issue certificates to us. We also may generate revenue in the form of commitment, loan origination, structuring or diligence fees, fees for providing managerial assistance to our portfolio companies, repayment fees, and waiver and amendment fees associated with our portfolio investments based on our pro rata ownership of the applicable term loan investment or our interest in securities (including the subordinated certificates (the "Subordinated Certificates") issued by SDLP, a joint venture between the Company and Ares Capital Corporation ("ARCC")) related to an underlying investment, as applicable. Certain of these fees may be capitalized and amortized as additional interest income over the life of the related loan.
Expenses
All professionals of the Adviser, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, will be provided and paid for by the Adviser and not by us. Payments under the Administration Agreement are based upon our allocable portion of overhead and other expenses incurred by our administrator, Varagon (in its capacity as our administrator, the "Administrator"), in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. In accordance with the terms of the Administration Agreement, overhead and other administrative expenses are generally allocated between the Administrator and us by reference to the relative time spent by personnel in performing administrative and similar functions on our behalf as compared to performing administrative functions on behalf of the Administrator, its other clients or the Adviser. To the extent personnel retained by the Administrator perform administrative tasks for the Adviser, the fees incurred with respect to the actual time dedicated to such tasks will be reimbursed by the Adviser. We will bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:
•organization and offering of the common stock, subject to the terms of the Expense Reimbursement Agreement;
•the Company’s fees and expenses related to any of the following: (i) an initial public offering (“IPO”) or a listing of the common stock on a national securities exchange (a “Public Listing”), (ii) a sale of all or substantially all of our assets to, or other liquidity event with, an entity for consideration of either cash and/or publicly listed securities of the acquirer, which potential acquirers may include entities affiliated with Varagon, or (iii) a permanent election by the Adviser not to make new investments and to distribute proceeds of investments to shareholders as they are received, or the wind down and/or liquidation and dissolution of the Company;
•calculating the Company’s net asset value ("NAV") (including the cost and expenses of any independent valuation firm);
•fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for the Company and in providing administrative services, monitoring the Company’s investments and performing due diligence on the Company’s prospective portfolio investments or otherwise relating to, or associated with, evaluating and making investments;
•fees and expenses incurred in connection with debt, if any, incurred to finance the Company’s investments or operations, and payment of interest and repayment of principal on such debt;
•fees and expenses related to sales and repurchases of the common stock and other securities;
•investment advisory and management fees;
•administration fees, if any, payable under the Administration Agreement;
•transfer agent, sub-administrator and custodial fees;
•expenses relating to the issue, repurchase and transfer of common stock to the extent not borne by the relevant transferring shareholders and/or assignees;
•federal and state registration fees;
•all costs associated with a Public Listing;
•federal, state and local taxes and other governmental charges assessed against the Company;
•independent directors’ fees and expenses and the costs associated with convening a meeting of the Board or any committee thereof;
•fees and expenses and the costs associated with convening a meeting of the shareholders or holders of any preferred stock, as well as the compensation of an investor relations professional responsible for the coordination and administration of the foregoing;
•costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;
•costs of any reports, proxy statements or other notices to shareholders, including printing and mailing costs;
•costs and expenses related to the preparation of the Company’s financial statements and tax returns;
•the Company’s allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
•direct costs and expenses of administration, including printing, mailing, long distance telephone, and copying;
•independent auditors and outside legal costs, including legal costs associated with any requests for exemptive relief, “no-action” positions or other guidance sought from a regulator, pertaining to the Company;
•compensation of other third-party professionals to the extent they are devoted to preparing the Company’s financial statements or tax returns or providing similar “back office” financial services to the Company;
•Adviser costs and expenses (excluding travel) in connection with identifying and investigating investment opportunities for the Company, monitoring the investments of the Company and disposing of any such investments;
•portfolio risk management costs;
•commissions or brokerage fees or similar charges incurred in connection with the purchase or sale of securities (including merger fees) and other assets;
•costs and expenses attributable to normal and extraordinary investment banking, commercial banking, accounting, auditing, appraisal, valuation, administrative agent activities, custodial and registration services provided to the Company, including in each case services with respect to the proposed purchase or sale of securities by the Company that are not reimbursed by the issuer of such securities or others (whether or not such purchase or sale is consummated);
•costs of amending, restating or modifying the Company’s charter and the Company’s bylaws or the Investment Advisory Agreement, the Administration Agreement or related documents of the Company or related entities;
•fees, costs, and expenses incurred in connection with any restructuring, IPO or reorganization of the Company or related entities, the termination, liquidation or dissolution of the Company or related entities, or the required redemption of all or substantially all outstanding common stock (including the fees and expenses associated with any such transaction);
•the expense reimbursements set forth in the Administration Agreement; and
•all other properly and reasonably chargeable expenses incurred by the Company or the Administrator in connection with administering the Company’s business, including rent and the allocable portion of the cost of the Company’s Chief Compliance Officer and Chief Financial Officer and their respective staffs; while certain of these expenses may not be ascertainable at any given time, any such expenses will be subject to the approval of the Board on a quarterly basis.
Leverage
The ratio of a BDC's total assets (less total liabilities other than indebtedness represented by senior securities) to its total indebtedness represented by senior securities plus preferred stock, if any, must be at least 200% or 150%, if certain requirements are met. In connection with the Company’s organization and the Initial Closing, the Board and its initial shareholder authorized us to adopt the 150% asset coverage ratio. Additionally, investors both consented to the minimum asset coverage ratio of 150% and agreed not to seek to redeem their shares of common stock in connection therewith, in each case in the subscription agreement. The Company therefore may be exposed, to a greater extent, to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In any period, our interest expense will depend largely on the extent of our borrowing, and we expect interest expense will increase as we increase our debt outstanding. As of December 31, 2024, the Company's asset coverage ratio was 181.63%.
Portfolio and Investment Activity
As of December 31, 2024, our portfolio had a fair value of approximately $804.1 million. The following table summarizes our portfolio and investment activity during the year ended December 31, 2024, and December 31, 2023 (dollars in thousands):
For the year ended December 31,
Investments made in new portfolio companies
$
157,572
$
39,128
Investments made in existing portfolio companies
175,458
50,766
Aggregate amount in exits and repayments
(213,529
)
(70,951
)
Net investment activity
$
119,501
$
18,943
Portfolio Companies, at beginning of period
Number of new portfolio companies
Number of exited portfolio companies
(15
)
(6
)
Portfolio companies, at end of period
The following table shows the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2024 (dollars in thousands):
As of December 31, 2024
Amortized Cost
Percentage
Fair Value
Percentage
Senior Secured First Lien Loans
$
634,455
77.1
%
$
627,526
78.0
%
Equity
4,780
0.6
4,437
0.6
Subordinated Certificates of the SDLP
183,982
22.3
172,152
21.4
Total Investments
$
823,217
100.0
%
$
804,115
100.0
%
The following table presents the fair value measurements of the Company's investments, by major class according to the fair value hierarchy, as of December 31, 2023 (dollars in thousands):
As of December 31, 2023
Amortized Cost
Percentage
Fair Value
Percentage
Senior Secured First Lien Loans
$
506,153
72.5
%
$
497,911
72.6
%
Equity
3,989
0.6
3,641
0.5
Subordinated Certificates of the SDLP
188,471
26.9
184,485
26.9
Total Investments
$
698,613
100.0
%
$
686,037
100.0
%
The following table shows weighted average current yield to maturity based on the amortized cost and fair value as of December 31, 2024 and December 31, 2023:
As of December 31, 2024
As of December 31, 2023
Weighted Average Current Yield for Total Portfolio (Amortized Cost)
Weighted Average Current Yield for Total Portfolio (Fair Value)
Weighted Average Current Yield for Total Portfolio (Amortized Cost)
Weighted Average Current Yield for Total Portfolio (Fair Value)
Senior Secured First Lien Loans
10.5
%
11.2
%
11.7
%
12.4
%
Equity
N/A
N/A
N/A
N/A
Subordinated Certificates of the SDLP (1)
13.5
%
14.3
%
14.3
%
14.6
%
Total
11.2
%
11.9
%
12.4
%
13.0
%
(1) "Weighted average yields” of investments are computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount or premium earned on the relevant accruing investments, divided by (b) the total relevant investments at amortized cost or at fair value, as applicable.
The weighted average yield of our debt and income producing securities is not the same as a return on investment for our shareholders, but rather relates to our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses. The weighted average yield was computed using the effective interest rates as of each respective date, including accretion of original issue discount, but excluding investments on non-accrual status, if any. There can be no assurance that the weighted average yield will remain at its current level.
Portfolio Asset Quality
Our Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Adviser grades the credit risk of all debt investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio debt investment relative to the inherent risk at the time the original debt investment was made (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors.
Loan Rating
Summary Description
Involves the least amount of risk to our initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since origination or acquisition are generally favorable.
Involves an acceptable level of risk that is similar to the risk at the time of origination or acquisition. The borrower is generally performing as expected and the risk factors are generally neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a rating of 2.
Involves a borrower performing below expectations and indicates that the loan’s risk has increased somewhat since origination or acquisition.
Involves a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination or acquisition. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due).
Involves a borrower performing substantially below expectations and indicates that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we anticipate will be recovered.
The weighted average risk rating of our investments based on fair value was 2.0 as of December 31, 2024 and 2.0 as of December 31, 2023.
Based on a generally uncertain economic outlook in the United States (which includes a possible recession), we are maintaining close communications with our portfolio companies to proactively assess and manage potential risks across our debt investment portfolio. We also have increased oversight and analysis of credits in any vulnerable industries to mitigate any decline in loan performance and reduce credit risk. While we are not seeing signs of an overall, broad deterioration in our operating results or those of our portfolio companies at this time, there can be no assurance that the performance of certain of our portfolio companies will not be negatively impacted by economic conditions, which could have a negative impact on our future results.
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of December 31, 2024 and December 31, 2023 (dollars in thousands):
As of December 31, 2024
As of December 31, 2023
Investment Performance Rating
Fair Value
Percentage
Fair Value
Percentage
$
20,996
2.6
%
$
7,924
1.2
%
$
743,105
92.4
654,568
95.4
$
40,014
5.0
23,545
3.4
$
-
-
-
-
$
-
-
-
-
Total
$
804,115
100.0
%
$
686,037
100.0
%
The following table shows the amortized cost of our performing and non-accrual debt investments as of December 31, 2024 and December 31, 2023 (dollars in thousands):
As of December 31, 2024
As of December 31, 2023
Amortized Cost
Percentage
Amortized Cost
Percentage
Performing
$
818,437
100.0
%
$
694,624
100.0
%
Non-Accrual
-
-
-
-
Total
$
818,437
100.0
%
$
694,624
100.0
%
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. Management may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.
Senior Direct Lending Program
In 2015, VSDLP, a wholly owned subsidiary of the Company, and ARCC formed SDLP, a joint venture established for the purpose of providing senior stretch and unitranche loan financings to middle market borrowers. The Company received, indirectly through its membership interest in VSDLP, limited liability company membership interests and Subordinated Certificates in each case in SDLP, as a result of the Merger. The SDLP finances its investment activity through the issuance of securities (“SDLP Securities”) backed by its loan portfolio, including, in order of seniority, rated senior notes (the “Senior Note”), a rated intermediate funding note (the “IFN”), and capital provided by the Company and ARCC through the Subordinated Certificates. The Subordinated Certificates are the most junior securities issued by SDLP and collateralize the profits earned or losses incurred across the SDLP loan portfolio. As of December 31, 2024 and December 31, 2023, the Company and ARCC own 12.5% and 87.5%, respectively, of the outstanding Subordinated Certificates.
SDLP is capitalized as transactions are completed and all portfolio decisions and generally all other decisions in respect of SDLP must be approved by an investment committee of SDLP consisting of representatives of the Company (and/or VSDLP) and ARCC (the “SDLP Investment Committee”).
As of December 31, 2024 and December 31, 2023, the Company and ARCC had agreed to make capital available to the SDLP totaling $1.7 billion and $1.7 billion, respectively, in the aggregate, of which $206.3 million and $206.3 million, respectively, is to be made available from the Company. The Company and ARCC will continue to provide capital to the SDLP in the form of Subordinated
Certificates. This capital will only be committed to the SDLP upon approval of transactions by the SDLP Investment Committee as discussed above. As of December 31, 2024 and December 31, 2023, the Company has funded $187.1 million and $189.7 million, respectively, of its commitment to the SDLP and had $19.2 million and $16.6 million in unfunded commitments remaining to the SDLP, respectively.
The Subordinated Certificates pay a coupon equal to SOFR plus 8.0% and also entitle the holders thereof to receive a portion of the excess cash flow from the loan portfolio, after expenses, which may result in a return to the holders of the Subordinated Certificates that is greater than the stated coupon. The Subordinated Certificates are junior in right of payment to the Senior Notes and IFNs.
The amortized cost and fair value of the Subordinated Certificates held by the Company were $184.0 million and $172.2 million, respectively, as of December 31, 2024, and $188.5 million and $184.5 million, respectively, as of December 31, 2023. The Company’s yield on its investment in the Subordinated Certificates at amortized cost and fair value was 13.5% and 14.4%, respectively, as of December 31, 2024, and 14.3% and 14.6%, respectively, as of December 31, 2023. For the years ended December 31, 2024 and 2023, the Company earned interest income of $27.7 million and $25.9 million, respectively, from its investment in the Subordinated Certificates. As of December 31, 2024 and December 31, 2023, $6.3 million and $6.8 million, respectively, was in Interest receivable on the consolidated statements of assets and liabilities.
As of December 31, 2024 and December 31, 2023, the SDLP’s portfolio was comprised entirely of first lien senior secured loans to U.S. middle-market companies and were in industries similar to the companies in the Company’s portfolio. As of December 31, 2024, loans in two portfolio companies were on non-accrual status. As of December 31, 2023, loans in one portfolio company were on non-accrual status. Below is a summary of the SDLP’s portfolio as of December 31, 2024 and December 31, 2023 (dollars in millions):
As of December 31, 2024
As of December 31, 2023
Total first lien senior secured loans(1)
$
4,759
$
5,431
Largest loan to a single borrower(1)
$
$
Total of five largest loans to borrower(1)
$
1,692
$
1,650
Number of borrowers in the SDLP
Commitments to fund delayed draw loans (2)
$
$
(1) At principal amount.
(2) As discussed above, these commitments have been approved by the SDLP Investment Committee.
Below is a listing of SDLP’s individual investments as of December 31, 2024 (dollars in thousands):
Company
Type of Investment
Reference Rate and Spread (1)
Interest Rate
Maturity
Par
Amortized Cost
Fair Value
Footnotes
Senior Secured First Lien Loans
Aerospace & Defense
Qnnect, LLC and Connector TopCo, LP
Term Loan
SOFR
+
5.25%
(Q)
10.33%
11/2/2029
$
272,375
$
272,375
$
272,375
(2)
Qnnect, LLC and Connector TopCo, LP
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.33%
11/2/2029
3,146
3,146
3,146
(2)
275,521
275,521
Automobile Components
Arrowhead Holdco Company
Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
174,307
174,307
146,418
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
35,956
35,956
30,203
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
41,293
41,293
34,686
(2)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.50%
(Q)
7.16%
8/31/2028
25,642
25,642
21,539
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
2,342
2,342
1,967
(2)
North Haven Falcon Buyer, LLC
Term Loan
SOFR
+
8.00%
(Q)
12.51%
5/19/2027
203,274
200,709
132,128
(2)(3)
North Haven Falcon Buyer, LLC
Delayed Draw Term Loan
SOFR
+
8.00%
(Q)
12.33%
5/19/2027
34,034
33,192
22,122
(2)(3)
513,441
389,063
Chemicals
SePRO Holdings, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
7/26/2030
118,315
118,315
115,948
(2)
118,315
115,948
Commercial Services & Supplies
ISQ Hawkeye HoldCo, Inc.
Term Loan
SOFR
+
4.75%
(M)
9.13%
8/20/2031
226,072
226,072
226,072
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
8/20/2031
82,329
82,329
82,329
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.25%
8/20/2031
3,750
3,750
3,750
(2)
Pritchard Industries, LLC
Term Loan
SOFR
+
5.75%
(S)
10.28%
10/13/2027
195,865
195,865
191,948
(2)
Pritchard Industries, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.28%
10/13/2027
46,831
46,831
46,362
(2)
554,847
550,461
Construction & Engineering
Valcourt Holdings II, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.42%
11/21/2029
259,905
259,905
259,905
(2)
Valcourt Holdings II, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.42%
11/21/2029
66,014
66,014
66,014
(2)
325,919
325,919
Consumer Staples Distribution & Retail
FS Squared Holding Corp.
Term Loan
SOFR
+
4.75%
(M)
8.50%
12/23/2030
250,833
250,833
246,444
(2)
250,833
246,444
Electronic Equipment, Instruments & Components
EIS Legacy Holdco, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.30%
11/5/2031
220,500
220,500
218,295
(2)
220,500
218,295
Food Products
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
175,310
175,310
143,754
(2)
Manna Pro Products, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
28,993
28,993
23,775
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
13,827
13,827
11,338
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
46,651
46,651
38,254
(2)
264,781
217,121
Health Care Providers and Services
Center for Autism and Related Disorders, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
7,307
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
132,765
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
19,452
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
4,820
-
-
(2)(3)
NMN Holdings III Corp
Term Loan
SOFR
+
4.50%
(M)
8.86%
7/31/2031
228,934
228,934
226,645
(2)
228,934
226,645
Health Care Technology
Surescripts, LLC
Term Loan
SOFR
+
4.00%
(Q)
8.33%
11/3/2031
112,500
112,500
111,375
(2)
112,500
111,375
Hotels, Restaurants & Leisure
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.74%
6/29/2029
59,700
59,700
59,700
(2)
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.81%
6/29/2029
20,798
20,798
20,798
(2)
Triwizard Holdings, Inc.
Term Loan
SOFR
+
5.25%
(Q)
9.58%
6/29/2029
167,450
167,450
167,450
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
43,474
43,474
43,474
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
11,664
11,664
11,664
(2)
Concert Golf Partners Holdco LLC
Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
231,075
231,075
231,075
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.00%
6/8/2026
50,000
50,000
50,000
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.12%
6/8/2026
24,420
24,420
24,420
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
10.50%
6/8/2026
74,168
74,168
74,168
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.25%
6/8/2026
149,181
149,181
149,181
(2)
HGC Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.16%
6/8/2026
102,375
102,375
102,375
(2)
934,305
934,305
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
300,825
300,825
291,800
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
26,460
26,460
25,666
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
40,044
40,044
38,843
(2)
367,329
356,309
Insurance
THG Acquisition, LLC
Term Loan
SOFR
+
4.75%
(M)
9.11%
10/31/2031
122,656
122,656
121,430
(2)
122,656
121,430
Machinery
Harvey Tool Company, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
9.73%
10/26/2027
34,677
34,677
34,677
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
10/26/2027
220,501
220,501
220,501
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
10/26/2027
12,915
12,915
12,915
(2)
268,093
268,093
Trading Companies & Distributors
Penn Detroit Diesel Allison, LLC
Term Loan
SOFR
+
5.75%
(M)
10.21%
12/14/2027
32,913
32,913
32,913
(2)
32,913
32,913
Total Investments, December 31, 2024
$
4,590,887
$
4,389,842
(1) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to SOFR, or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q) or monthly (M). For each such loan, the interest rate provided was the rate in effect as of December 31, 2024.
(2) Loan includes interest rate floor feature.
(3) The investment was on non-accrual status as of December 31, 2024.
Below is a listing of SDLP’s individual investments as of December 31, 2023 (dollars in thousands):
Company
Type of Investment
Reference Rate and Spread (1)
Interest Rate
Maturity
Par
Amortized Cost
Fair Value
Footnotes
Senior Secured First Lien Loans
Aerospace & Defense
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
$
11,478
$
11,478
$
11,363
(2)
Precinmac (US) Holdings Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
45,911
45,911
45,452
(2)
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.54%
8/31/2027
157,588
157,588
156,012
(2)
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
41,110
41,110
40,699
(2)
Qnnect, LLC and Connector TopCo, LP
Delayed Draw Term Loan
SOFR
+
7.00%
(Q)
12.38%
11/2/2029
3,179
3,179
3,179
(2)
Qnnect, LLC and Connector TopCo, LP
Term Loan
SOFR
+
7.00%
(Q)
12.38%
11/2/2029
275,175
275,175
275,175
(2)
534,441
531,880
Auto Components
Arrowhead Holdco Company
Term Loan
SOFR
+
4.50%
(Q)
10.04%
8/31/2028
169,531
169,531
152,578
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
34,859
34,859
31,373
(2)
Arrowhead Holdco Company
Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
24,859
24,859
22,374
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
2,270
2,270
2,043
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
40,033
40,033
36,030
(2)
North Haven Falcon Buyer, LLC
Delayed Draw Term Loan
SOFR
+
8.00%
(Q)
13.50%
5/19/2027
32,199
32,199
26,081
(2)
North Haven Falcon Buyer, LLC
Term Loan
SOFR
+
8.00%
(Q)
13.52%
5/19/2027
192,273
192,272
155,741
(2)
496,023
426,220
Commercial Services & Supplies
ISQ Hawkeye HoldCo, Inc.
Term Loan
SOFR
+
6.00%
(M)
11.38%
8/17/2029
228,385
228,385
228,385
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.38%
8/17/2029
67,198
67,198
67,198
(2)
Pritchard Industries, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.93%
10/13/2027
47,311
47,311
46,365
(2)
Pritchard Industries, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.93%
10/13/2027
197,885
197,885
193,927
(2)
Valcourt Holdings II, LLC
Term Loan
SOFR
+
5.75%
(S)
11.27%
11/21/2029
262,536
262,536
257,286
(2)
Valcourt Holdings II, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(S)
11.27%
11/21/2029
-
-
-
(2)
803,315
793,161
Diversified Consumer Services
Excelligence Learning Corporation
Term Loan
SOFR
+
6.00%
(Q)
11.46%
1/18/2024
145,432
145,429
145,432
(2)
145,429
145,432
Food & Staples Retailing
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
3/28/2025
83,991
83,991
83,991
(2)
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
64,989
64,989
64,989
(2)
FS Squared Holding Corp.
Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
170,089
170,089
170,089
(2)
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
4,252
4,252
4,252
(2)
323,321
323,321
Food Products
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
13,970
13,970
13,132
(2)
Manna Pro Products, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
29,294
29,294
27,536
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
47,131
47,131
44,303
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
177,136
177,136
166,508
(2)
267,531
251,479
Health Care Providers and Services
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
4,820
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
19,452
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
132,765
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
7,307
-
-
(2)(3)
-
-
Hotels, Restaurants & Leisure
Triwizard Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
11.72%
6/29/2029
169,150
169,150
169,150
(2)
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.72%
6/29/2029
-
-
-
(2)
Concert Golf Partners Holdco LLC
Term Loan
SOFR
+
5.50%
(Q)
11.25%
4/2/2029
233,445
233,445
233,445
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.25%
4/2/2029
40,012
40,012
40,012
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.03%
6/8/2026
24,670
24,670
24,670
(2)
HGC Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.04%
6/8/2026
103,425
103,425
103,425
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.08%
6/8/2026
50,000
50,000
50,000
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.62%
6/8/2026
53,865
53,865
53,865
(2)
674,567
674,567
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
303,188
303,188
300,156
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
40,367
40,367
39,963
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
26,670
26,670
26,403
(2)
370,225
366,522
Insurance
Benecon Midco II, LLC
Term Loan
SOFR
+
5.25%
(M)
10.71%
12/4/2026
170,188
170,188
170,188
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
24,463
24,463
24,463
(2)
THG Acquisition, LLC
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
14,550
14,550
14,550
(2)
THG Acquisition, LLC
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
206,190
206,190
206,190
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
58,320
58,320
58,320
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
22,025
22,025
21,805
(2)
495,736
495,516
Machinery
Harvey Tool Company, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.03%
10/26/2027
34,940
34,940
34,591
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
10/26/2027
221,631
221,631
219,415
(2)
NCWS Intermediate, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.53%
12/29/2026
61,696
61,696
61,696
(2)
NCWS Intermediate, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.53%
12/29/2026
205,398
205,398
205,398
(2)
NCWS Intermediate, Inc.
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.03%
12/29/2026
12,600
12,600
12,600
(2)
536,265
533,700
Software
Emergency Communications Network, LLC
Term Loan
SOFR
+
8.75%
(Q)
14.13%
6/30/2024
252,313
252,295
219,512
(2)
Pegasus Global Enterprise Holdings, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.75%
5/29/2025
259,306
259,306
259,306
(2)
Pegasus Global Enterprise Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.75%
5/29/2025
75,601
75,601
75,601
(2)
587,202
554,419
Trading Companies & Distributors
Penn Detroit Diesel Allison, LLC
Term Loan
SOFR
+
6.25%
(M)
11.71%
12/14/2027
32,913
32,913
32,913
(2)
32,913
32,913
Total Investments, December 31, 2023
$
5,266,968
$
5,129,130
(1) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to LIBOR, SOFR, or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q), or monthly (M). For each such loan, the interest rate provided was the rate in effect as of December 31, 2023.
(2) Loan includes interest rate floor feature.
(3) The investment was on non-accrual status as of December 31, 2023.
In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must determine if any of its portfolio companies is considered a “significant subsidiary.” Pursuant to the definition of “significant subsidiary” applicable to investment companies set forth in Rule 1-02(w) of Regulation S-X, a portfolio company will meet the definition of “significant subsidiary” if either the investment test or the income test is triggered. Rule 3-09 of Regulation S-X requires the Company to include separate audited financial statements of any unconsolidated majority-owned subsidiary (portfolio company in which the Company owns greater than 50% of the unconsolidated subsidiary) in the Company's annual report on Form 10-K if one of the following conditions are met: (i) if the portfolio investment’s fair value exceeds 20% of the Company’s total investments at fair value (the investment test); or (ii) either (A) if the income from the portfolio investment exceeds 80% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries (the income test) or (B) if the income from the portfolio investment exceeds 20% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries and have a fair value exceeding 5% of the Company’s total investment fair value (the alternate income test). If the Company has an unconsolidated majority-owned subsidiary and does not satisfy any Rule 3-09 significant subsidiary conditions during a quarter end, the Company must include a summarized income statement within the notes to the quarterly financial statements.
Rule 4-08(g) of Regulation S-X requires the Company to include summarized financial information of any unconsolidated controlled subsidiary (portfolio company in which the Company owns greater than 25% of the voting securities of the unconsolidated subsidiary or otherwise controls the subsidiary) in the Company's annual report on Form 10-K if one of the following conditions are met: (i) if the portfolio investment’s fair value exceeds 10% of the Company’s total investments fair value (the investment test); or (ii) either (A) if the income from the portfolio investment exceeds 80% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries (the income test) or (B) if the income from the portfolio investment income exceeds 10% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries and have a fair value exceeding 5% of the Company’s total investment fair value (the alternate income test).
After performing the investment analysis and income analysis for the year ended December 31, 2024, the Company determined that the fair value of the SDLP represented greater than 20% of the Company's total investments (at fair value) and also generated more than 20% of the Company’s total income. Accordingly, the audited financial statements of SDLP are attached as an exhibit to this Annual Report on Form 10-K.
Results of Operations
Set forth below is a comparison of our results of operations for the years ended December 31, 2024, and 2023. For a comparison of our results of operations for the years ended December 31, 2023 and 2022, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on March 25, 2024.
For the year ended December 31,
Total investment income
$
96,337
$
82,549
Total expenses (including excise tax expense)
45,807
39,910
Net investment income
50,530
42,639
Net realized gain (loss)
(4,996
)
(289
)
Net change in unrealized appreciation (depreciation)
(6,434
)
(108
)
Net increase in net assets resulting from operations
$
39,100
$
42,242
Net investment income per share - basic and diluted
$
1.22
$
1.03
Net increase in net assets resulting from operations per share - basic and diluted
$
0.94
$
1.02
Net increase (decrease) in net assets resulting from operations can vary from period to period as a result of various factors, including the level of new investment commitments, expenses, the recognition of realized gains and losses, and changes in unrealized appreciation and depreciation on the investment portfolio.
Investment Income
We expect our portfolio to continue to grow as we raise and deploy capital through our private offering and our investment income to grow commensurately. The shifting environment in base interest rates may affect our investment income over the long term. Increases in interest rates, however, may adversely affect our existing borrowers.
Investment income increased to $96.3 million for the year ended December 31, 2024, from $82.5 million for the comparable period in the prior year, primarily due to increased investment activity driven by an increase in our deployed capital and an increase in interest income from our portfolio investments and, to a lesser extent, fee income.
Operating Expenses
Expenses for the years ended December 31, 2024 and 2023 were as follows (dollars in thousands):
For the year ended December 31,
Base management fees
$
5,712
$
5,081
Income-based incentive fees
5,586
6,035
Professional fees
2,335
2,295
Administrator expenses
1,157
1,188
Interest expenses
28,495
21,187
Credit facility fees
1,483
2,676
Directors’ fees and expenses
Organizational expenses
Insurance expenses
Other general and administrative
Excise tax expense
-
Total expenses
$
45,807
$
39,910
Total expenses increased to $45.8 million for the year ended December 31, 2024 from $39.9 million for the year ended December 31, 2023.
Management and Incentive Fees
The increase in management and incentive fees for the year ended December 31, 2024 from the prior year was primarily driven by our increasing invested balance.
Interest Expenses and Credit Facility Fees
Interest expenses and credit facility fees increased to $30.0 million for the year ended December 31, 2024 from $23.9 million for the year ended December 31, 2023. The increase was primarily attributable to increased expenses related to the issuance of the Notes (as defined below) on December 21, 2023, the completion of our term debt securitization, as well as the increased borrowings under our credit facilities.
Net Realized Gains/Losses
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.
For the year ended December 31, 2024, we had a realized loss of $(5.1) million due to the extinguishments of the CIBC Facility and the JPM Facility. We also had a realized gain on investments of $0.1 million, due to an escrow payment from a previously realized investment offset by the wind down of two interest rate swaps during the year.
For the year ended December 31, 2023, we had $(0.3) million of realized losses, due to the disposition of one of our portfolio companies.
Net Change in Unrealized Appreciation/Depreciation
For the year ended December 31, 2024, we had $(6.4) million of unrealized depreciation on portfolio investments and derivatives, which was due to the decrease in fair value of our investment in the Subordinated Certificates, partially offset by an increase in fair value of the rest of the portfolio during the year.
For the year ended December 31, 2023, we had $(0.1) million of unrealized depreciation on investments and derivatives due to overall unfavorable market spread adjustments on the portfolio during the year.
Net Increase in Net Assets Resulting from Operations
For the year ended December 31, 2024, the net increase in net assets resulting from operations was $39.1 million or $0.94 per share. For the year ended December 31, 2023, the net increase in net assets resulting from operations was $42.2 million and $1.02 per share.
Financial Condition, Liquidity and Capital Resources
We expect to generate cash primarily from (i) the net proceeds from drawdowns of our capital commitments to purchase shares of our common stock pursuant to our private offering of our shares (the "Offering"), (ii) cash flows from our operations, (iii) proceeds from net borrowings from the SMBC Facility and CLO debt issuances (as described below), and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings under the SMBC Facility and issuances of senior securities. Our primary use of cash will be for (i) investments in portfolio companies in accordance with our investment objective and investment strategies and to comply with certain portfolio diversification requirements, (ii) providing capital to the SDLP through the Subordinated Certificates, (iii) the cost of operations (including paying the Adviser), (iv) debt service and other financing costs of any borrowings, (v) any cash distributions to the holders of our common stock, and (vi) general working capital purposes. We will also pay operating expenses, including advisory and administrative fees and expenses, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of the Offering.
Equity
We are authorized to issue 500,000,000 shares of common stock at $0.01 par value per share.
On March 29, 2022, in connection with our seed audit, we issued 100 shares of common stock for $10.00 to Varagon, which were subsequently redeemed on June 2, 2022 in connection with the Merger.
As of December 31, 2024, we had received capital commitments totaling $488.2 million ($73.5 million remaining undrawn), of which $7.2 million ($1.2 remaining undrawn) is from Varagon and current officers and directors of the Company. On June 2, 2022, we held our Initial Closing and entered into Subscription Agreements with a number of investors providing for the private placement of our shares of common stock.
The following table summarizes the total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements from inception through December 31, 2024 (dollars in thousands, except per share data):
Capital Drawdown Notice Date
Date of Issuance
Number of
Shares Issued
Aggregate
Offering Price
Issuance Price per Share
May 20, 2022
June 2, 2022
36,130,510
$
361,305
$
10.00
June 27, 2022
July 12, 2022
2,994,012
$
30,000
$
10.02
August 23, 2022
September 7, 2022
2,362,205
$
24,000
$
10.16
Distributions and Dividend Reinvestments
Distributions to common shareholders are recorded on the ex-dividend date. We have elected, and intend to qualify annually, to be treated as a RIC for U.S. federal income tax purposes under the Code. The Company will be required to distribute dividends each tax year as a RIC to its shareholders of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to be eligible for tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a distribution all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board and is based on management’s estimate of the Company’s annual taxable income. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such net realized capital gains for investment.
With respect to distributions, we have adopted an “opt out” distribution reinvestment plan (“DRIP”) for common shareholders. As a result, in the event of a declared distribution, each shareholder that has not “opted out” of the DRIP will have their dividends or distributions automatically reinvested in additional shares of our common stock rather than receiving cash distributions. Shareholders who receive distributions in the form of shares of common stock will be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions.
The following table reflects the distributions per share that the Company has declared, including shares issued under the DRIP, on its common stock from inception through December 31, 2024 (dollars in thousands):
Distribution
Date Declared
Record Date
Payment Dates
Amount per Share
Cash Distribution
DRIP Shares Issued
DRIP Shares Value
Quarterly
December 12, 2022
December 15, 2022
December 21, 2022
$
0.2635
$
10,892
3,915
$
Quarterly
December 19, 2022
December 23, 2022
January 27, 2023
0.2405
9,941
3,665
Quarterly
March 23, 2023
March 27, 2023
March 31, 2023
0.2222
9,185
3,619
Quarterly
May 10, 2023
July 1, 2023
July 15, 2023
0.2246
9,284
3,780
Quarterly
August 8, 2023
October 2, 2023
October 16, 2023
0.2271
9,387
3,825
Quarterly
November 7, 2023
December 27, 2023
January 17, 2024
0.2397
9,908
4,089
Special
December 18, 2023
December 27, 2023
January 17, 2024
0.1205
4,981
2,056
Quarterly
March 20, 2024
March 29, 2024
April 10, 2024
0.2371
9,809
3,461
Special
March 20, 2024
March 29, 2024
April 10, 2024
0.0333
1,378
Quarterly
May 9, 2024
June 28, 2024
July 17, 2024
0.2371
9,809
3,533
Special
May 9, 2024
June 28, 2024
July 17, 2024
0.0662
2,739
Quarterly
August 6, 2024
September 30, 2024
October 17, 2024
0.2397
9,916
3,699
Special
August 6, 2024
September 30, 2024
October 17, 2024
0.0638
2,639
Quarterly
November 6, 2024
December 31, 2024
January 17, 2025
0.2392
9,911
2,282
Special
November 6, 2024
December 31, 2024
January 17, 2025
0.0675
2,797
Total
$
112,576
41,025
$
Income Taxes
The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code. As a RIC, the Company generally will not be subject to U.S. federal income tax on any ordinary income or capital gains that it timely distributes to its shareholders as dividends. To qualify as a RIC, the Company must meet certain minimum distribution, source-of-income, and asset diversification requirements. The minimum distribution requirements applicable to the RIC require the Company to distribute at least 90% of its investment company taxable income, as defined by the Code, each year.
The Company is subject to a nondeductible 4% U.S. federal excise tax on its undistributed income, unless it timely distributes (or is deemed to have timely distributed) an amount equal to the sum of (1) 98% of ordinary income for each calendar year, (2) 98.2% of the amount by which capital gains exceeds capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31 of the calendar year, and (3) certain un-distributed amounts from the previous years on which we paid no U.S. federal income tax. While the Company intends to distribute any income and capital gains to avoid imposition of this 4% U.S. federal excise tax, it may not be successful in avoiding entirely the imposition of this tax. In that case, the Company will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirement.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as tax expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. As of December 31, 2024, the Company did not have any uncertain tax positions that met the recognition or measurement criteria, nor did the Company have any unrecognized tax benefits.
Our accounting policy on income taxes is critical because if we are unable to maintain our tax treatment as a RIC, we would be required to record a provision for U.S. federal income taxes, which may be significant to our financial results.
Federal Income Taxes
The Company is subject to the Code, U.S. federal income tax regulations, and other administrative guidance pertaining to U.S. federal income tax filing requirements. The Company is expected to have minimal or no income subject to tax and therefore no provision has been included for taxes due. The Company has elected, and intends to qualify annually, as a RIC under Subchapter M of the Code. As a result, the Company generally does not expect to be subject to U.S. federal income taxes.
The Company has not recorded a liability for any uncertain tax positions pursuant to the provisions of ASC 740 as of December 31, 2024.
In the normal course of business, the Company is subject to examination by federal and certain state and local tax regulators. The Company adopted a tax year-end of December 31.
For U.S federal income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital gains, or a combination thereof.
Credit Facilities
JPM Facility
On June 2, 2022, the Company's wholly owned subsidiary, VCCF, entered into the Loan and Security Agreement (as amended on January 26, 2023 and November 20, 2023, the “Loan and Security Agreement” and the revolving credit facility thereunder, the “JPM Facility”) with JPMorgan Chase Bank, National Association, as administrative agent (“JPMorgan”).
The JPM Facility permitted VCCF to borrow up to $300 million, subject to certain leverage and borrowing base restrictions, and could have increased up to $600 million with the consent of the lenders. The reinvestment period and termination date of the JPM Facility’s reinvestment period was June 2, 2025 and June 2, 2027, respectively.
The JPM Facility bore interest at an annual rate of: (i) with respect to interest based reference rate other than a term SOFR, the reference rate plus a margin equal to 2.375% per annum; provided that, in the case of advances denominated in British Pounds, the margin was 2.494% per annum (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equaled to 2.475% per annum and (iii) with respect to interest based on a Base Rate, the Base Rate plus a margin equaled to 2.475% per annum. JPMorgan determined the reference rate. The Company paid a fee of 0.50% per annum on the average daily committed but unused amounts under the JPM Facility during its ramp-up period (June 2, 2022 up to but not including March 2, 2023), and, beginning March 3, 2023 through its termination (as described below), paid a fee of 0.75% on annum.
On January 26, 2023, the Company entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). The First Amendment, among other things: (i) reduced the borrowings available under the JPM Facility from up to $500 million to up to $300 million, subject to certain leverage and borrowing base restrictions; and (ii) reduced the commitment increase, subject to lender consent, from up to $800 million to up to $600 million. The reduction was accounted for as a debt modification to a line-of-credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to an acceleration of debt financing costs in the amount of $1.4 million and was recorded on the consolidated statements of operations as a component of "Credit facility fees."
On November 20, 2023, the Company entered into the Second Amendment to the Loan and Security Agreement (the "Second Amendment"). The Second Amendment, among other things: (i) permitted the inclusion of revolving loans as collateral to the JPM Facility; (ii) decreased the minimum funding amount under the Loan and Agreement from 85% to 75% of the financing commitment which commenced on November 21, 2023; and (iii) increased the percentage of Collateral Principal Amount (as defined in the Second Amendment) that may consist of portfolio investments the obligors of which have a leverage ratio equal to or greater than 7.0x from 0.0% to 10.0%.
On November 26, 2024, the Company terminated in full (i) the JPM Facility, and (ii) the security interest over the collateral granted by VCCF to the collateral agent pursuant to the Loan and Security Agreement and the other loan documents relating to the JPM Facility. The JPM Facility terminated upon the satisfaction of all obligations and liabilities of the Company to secured parties thereunder, including, without limitation, payments of principal and interest, other fees, breakage costs and other amounts owing to the secured parties. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $4.2 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
At December 31, 2023, the carrying amount of the Company's borrowings under the JPM Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the JPM Facility would be deemed to be Level 3 investments.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the JPM Facility for the year ended December 31, 2024 and 2023 (dollars in thousands):
For the year ended December 31,
2024(1)
JPM Facility interest
$
17,729
$
19,427
JPM Facility unused fees
Amortization of debt issuance costs
1,918
Total interest and financing expenses related to the JPM Facility
$
18,517
$
21,719
Weighted average outstanding debt balance of the JPM Facility
$
251,339
$
254,857
Weighted average interest rate of the JPM Facility(2)
7.8
%
7.6
%
(1) On November 26, 2024, the Company repaid all amounts outstanding under the JPM Facility, including outstanding borrowings and accrued interest, and terminated the JPM Facility.
(2) Figures for the year ended December 31, 2024 are annualized.
CIBC Facility
On January 31, 2023, the Company entered into a Senior Secured Revolving Credit Agreement (the “CIBC Credit Agreement” and the senior secured credit facility thereunder, the “CIBC Facility”) among the Company, as borrower, the lenders party thereto from time to time, the issuing banks party thereto from time to time, and CIBC Bank USA ("CIBC"), as administrative agent and as sole lead arranger. The CIBC Facility was guaranteed by VCCEH, and could have been guaranteed by certain domestic subsidiaries of the Company that would have been formed or acquired by the Company in the future (collectively, the “Guarantors”). Proceeds of the CIBC Facility were used for general corporate purposes, including the funding of portfolio investments. The initial maximum principal amount of the CIBC Facility was $75 million, subject to availability under the borrowing base, which was based on the Company’s and Guarantor’s portfolio investments and other outstanding indebtedness. The CIBC Facility was secured by a perfected first-priority interest in substantially all of the portfolio investments held by the Company and each Guarantor, subject to certain exceptions. The CIBC Facility's commitment termination date was January 31, 2026 and had a final maturity date of January 31, 2028.
The CIBC Facility bore interest from January 1, 2023 to January 31, 2026 (the "Availability Period") at an annual rate of: (i) with respect to interest based on the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1% and (c) zero (the "ABR"), the ABR plus a margin equal to 1.500% per annum; and (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equal to 2.500% per annum and after the Availability Period at an annual rate of: (i) with respect to interest based on the ABR, the ABR plus a margin equal to 1.750% per annum; and (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equal to 2.750% per annum. CIBC, as the administrative agent determines the reference rate. The Company paid a fee of 0.375% per annum on the average daily committed but unused amounts under the CIBC Facility during the first nine months of the CIBC Facility (January 31, 2023 up to but not including October 31, 2023), and thereafter, 0.375% if the average daily used amount of the commitment exceeds 25% of the total commitment or otherwise, 0.50%.
On August 9, 2024, the Company terminated in full (i) the CIBC Credit Agreement and the CIBC Facility, and (ii) the security interest over the collateral granted to CIBC as the lender pursuant to the CIBC Credit Agreement and the other loan documents relating to the CIBC Facility. The CIBC Facility terminated upon the satisfaction of all obligations and liabilities of the Company to CIBC as the lender thereunder, including, without limitation, payments of principal and interest, other fees, breakage costs and other amounts owing to CIBC. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.8 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
At December 31, 2023, the carrying amount of the Company's borrowings under the CIBC Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the CIBC Facility would be deemed to be Level 3 investments
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the CIBC Facility for the year ended December 31, 2024 and 2023 (dollars in thousands):
For the year ended December 31,
2024(1)
CIBC Facility interest
$
1,715
$
1,647
CIBC Facility unused fees
Amortization of debt issuance costs
Total interest and financing expenses related to the CIBC Facility
$
1,956
$
2,027
Weighted average outstanding debt balance of the CIBC Facility
$
35,170
$
21,184
Weighted average interest rate of the CIBC Facility(2)
8.0
%
7.8
%
(1) On August 9, 2024, the Company repaid all amounts outstanding under the CIBC Facility, including outstanding borrowings and accrued interest, and terminated the CIBC Facility.
(2) Figures for the years ended December 31, 2024 and December 31, .2023 are annualized.
SMBC Facility
On August 9, 2024, the Company entered into a Senior Secured Revolving Credit Agreement (the “SMBC Credit Agreement” and the senior secured credit facility thereunder, the “SMBC Facility”) by and among the Company, as borrower, the lenders party thereto from
time to time, the issuing banks party thereto from time to time, and Sumitomo Mitsui Banking Corporation, as administrative agent, sole book runner and lead arranger.
The SMBC Facility is guaranteed by VCCEH, a wholly owned subsidiary of the Company, and will be guaranteed by certain subsidiary guarantors. Proceeds of the SMBC Facility may be used for general corporate purposes, including the funding of portfolio investments.
The initial maximum principal amount of the SMBC Facility was $170 million, subject to availability under the borrowing base, which is based on the Company’s and subsidiary guarantors’ portfolio investments and other outstanding indebtedness. Maximum capacity under the SMBC Facility may be increased to $400 million through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The SMBC Facility is secured by a perfected first-priority interest in substantially all of the portfolio investments held by the Company and each subsidiary guarantor, subject to certain exceptions.
The availability period under the SMBC Facility will terminate on August 9, 2028 (the “SMBC Commitment Termination Date”) and the SMBC Facility will mature on August 9, 2029 (the “SMBC Maturity Date”). During the period from the SMBC Commitment Termination Date to the SMBC Maturity Date, the Company will be obligated to make mandatory prepayments under the SMBC Credit Agreement out of the proceeds of certain asset sales and other recovery events, equity and debt issuances and other returns of capital and extraordinary receipts.
The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the SMBC Facility will bear interest at either term SOFR plus a 1.125% or 1.000% margin, or the alternate base rate plus a 2.125% or 2.000% margin depending on the ratio of the borrowing base compared to the outstanding debt of the SMBC Facility. The Company may elect either the term SOFR or the alternate base rate at the time of drawdown, and loans may be converted from one rate to another at any time at the Company’s option, subject to certain conditions. The Company also will pay a fee of 0.375% on average daily undrawn amounts under the SMBC Facility.
The SMBC Credit Agreement includes customary covenants, including certain limitations on the incurrence by the Company of additional indebtedness and on the Company’s ability to make distributions to its shareholders, or redeem, repurchase or retire shares of stock, upon the occurrence of certain events and certain financial covenants related to asset coverage and liquidity and other maintenance covenants, as well as customary events of default.
On August 28, 2024, the Company closed an additional $25 million of commitments under the accordion feature of the SMBC Credit Agreement, increasing the maximum principal amount available under the SMBC Facility to $195 million.
At December 31, 2024, the carrying amount of the Company's borrowings under the SMBC Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of our borrowings under the SMBC Facility would be deemed to be Level 3 investments.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the SMBC Facility for the year ended December 31, 2024 and 2023 (dollars in thousands):
For the year ended December 31,
SMBC Facility interest
$
1,814
$
-
SMBC Facility unused fees
-
Amortization of debt issuance costs
-
Total interest and financing expenses related to the SMBC Facility
$
2,149
$
-
Weighted average outstanding debt balance of the SMBC Facility
$
62,794
$
-
Weighted average interest rate of the SMBC Facility(1)
7.3
%
-
(1) Figures for the year ended December 31, 2024 are annualized.
VCC CLO 1, LLC
On November 26, 2024 (the “Closing Date”), the Company completed its $493.77 million term debt securitization (the “2024 Debt Securitization”), also known as a collateralized loan obligation, in connection with which a subsidiary of the Company issued the Debt (as defined below). The 2024 Debt Securitization is subject to the Company’s’ overall asset coverage requirement.
The debt offered in the 2024 Debt Securitization was issued and incurred by VCC CLO, an indirect, wholly-owned and consolidated subsidiary of the Company, and consists of (i) Class A-1 Senior Secured Floating Rate Notes, Class A-2 Senior Secured Floating Rate Loans, Class B Senior Secured Floating Rate Notes, Class B Senior Secured Floating Rate Loans and the Class C Mezzanine Secured
Deferrable Floating Rate Notes (collectively, the “Secured Debt”), and (ii) the subordinated notes (the “Subordinated Notes” and, together with the Secured Debt, the “Debt”), the terms of which are summarized in the table below (dollars in thousands):
Class
Par Size ($)
Ratings (S&P)
Ratings (Fitch)
Coupon
Class A-1 Notes
$
280,000
AAA(sf)
AAA(sf)
SOFR + 1.71%
Class A-2 Loans
30,000
AAA(sf)
N/A
SOFR + 1.85%
Class B Notes
7,000
AA (sf)
N/A
SOFR + 2.15%
Class B Loans
23,000
AA (sf)
N/A
SOFR + 2.15%
Class C Notes
37,500
A (sf)
N/A
SOFR + 2.65%
Subordinated Notes
116,270
N/A
N/A
N/A
VCC CLO Depositor, a direct, wholly owned subsidiary of the Company, retained all of the Subordinated Notes issued in the 2024 Debt Securitization and eliminated in consolidation.
The 2024 Debt Securitization is backed by a diversified portfolio of middle-market commercial loans and participation interests therein, which is managed by the Company pursuant to a collateral management agreement entered into with VCC CLO on the Closing Date (the “Collateral Management Agreement”). The Company has agreed to irrevocably waive all collateral management fees payable to it so long as it is the collateral manager under the Collateral Management Agreement. The Debt is scheduled to mature on October 20, 2036; however, the Debt may be redeemed by VCC CLO, at the written direction of (i) a majority of the Subordinated Notes with the consent of the Company or (ii) the Company, in each case, on any business day on or after November 26, 2026.
As part of the 2024 Debt Securitization, the Company, VCC CLO Depositor and VCC CLO entered into a loan sale and contribution agreement on the Closing Date (the “Sale Agreement”), pursuant to which the Company sold, transferred, assigned, contributed or otherwise conveyed to VCC CLO Depositor and VCC CLO Depositor subsequently sold, transferred, assigned, contributed or otherwise conveyed to VCC CLO the loans and participations therein securing the 2024 Debt Securitization for the purchase price and other consideration set forth in the Sale Agreement. Following this transfer, VCC CLO, and not VCC CLO Depositor or the Company, holds all of the ownership interest in such loans and participations therein. The Company made customary representations, warranties and covenants in the Sale Agreement.
The Secured Debt is a secured obligation of VCC CLO, the Subordinated Notes are the unsecured obligations of VCC CLO, and the indenture and security agreement governing the Debt includes customary covenants and events of default. The Debt has not been, and will not be, registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities or “blue sky” laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission or an applicable exemption from registration.
At December 31, 2024, the carrying amount of the Secured Debt of VCC CLO approximated its fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Secured Debt of VCC CLO would be deemed to be Level 3 investments.
The following table summarizes the interest expenses and amortization of financing costs incurred on VCC CLO for the years ended December 31, 2024 and 2023 (dollars in thousands):
For the year ended December 31,
VCC CLO interest
$
2,386
$
-
Amortization of debt issuance costs
-
Total interest and financing expenses related to VCC CLO
$
2,408
$
-
Weighted average outstanding debt balance of VCC CLO
$
377,500
$
-
Weighted average interest rate of VCC CLO(1)
6.4
%
-
(1) Figures for the year ended December 31, 2024 are annualized.
Unsecured Notes
On December 21, 2023, the Company entered into a Master Note Purchase Agreement (the “Note Purchase Agreement”) governing the issuance of $25,000,000 in aggregate principal amount of Series A Senior Notes, Tranche A, due December 21, 2026, with a fixed interest rate of 8.10% per year (the “2026 Notes”), and $25,000,000 in aggregate principal amount of Series A Senior Notes, Tranche
B, due December 21, 2028, with a fixed interest rate of 8.20% per year (the “2028 Notes” and, together with the 2026 Notes, the “Notes”), to qualified institutional investors in a private offering exempt from the registration requirements of the 1933 Act. The Notes are guaranteed by VCCEH, a wholly owned subsidiary of the Company.
Interest on the Notes are payable semi-annually on June 21 and December 21 each year. The 2026 Notes and the 2028 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to September 21, 2026 and September 21, 2028, respectively, at par plus accrued interest to the redemption date and a make-whole premium, and thereafter at par plus accrued interest to the redemption date. In addition, the Company is obligated to offer to prepay the Notes at par plus accrued and unpaid interest up to, but excluding, the date of prepayment, if certain change in control events occur. The Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On February 2, 2024, in connection with each of the 2026 Notes and the 2028 Notes, the Company entered into an interest rate swap
agreement for a total notional amount of $25,000,000 and $25,000,000 that matures on December 21, 2026 and December 21, 2028,
respectively. Under the interest rate swap agreement for the 2026 Notes and the 2028 Notes, the Company receives a fixed interest rate of 8.10% and 8.20% and pays a floating interest rate of SOFR + 4.226% and SOFR + 4.595%, respectively. The Company designated these interest rate swaps, the 2026 Notes, and the 2028 Notes as a qualifying fair value hedge accounting relationship. For more information, see “Note 5. Derivative Instruments” in our consolidated audited financial statements included in this Annual Report on Form 10-K.
At December 31, 2024, and December 31, 2023 the carrying amount of the Notes approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Notes would be deemed to be Level 3 investments.
The following table summarizes the interest expenses and amortization of financing costs incurred on the Notes for the year ended December 31, 2024 and 2023 (dollars in thousands):
For the year ended December 31,
2026 Notes interest
$
2,024
$
2028 Notes interest
2,052
Amortization of debt issuance costs
Effect of interest rate swap
-
Total
$
4,948
$
Weighted average stated interest rate, net of effect of interest rate swaps (annualized)
9.3
%
8.2
%
Weighted average outstanding balance
50,000
1,507
(1) Figures for the year ended December 31, 2023 are annualized.
Contractual Obligations
The following table shows the contractual maturities of our debt obligations as of December 31, 2024 (dollars in thousands):
Payments Due by Period
Contractual Obligations
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than
5 Years
SMBC Facility
50,000
-
-
50,000
-
2026 Notes
25,000
-
25,000
-
-
2028 Notes
25,000
-
-
25,000
-
VCC CLO
377,500
-
-
-
377,500
Total debt obligations
$
477,500
$
-
$
25,000
$
75,000
$
377,500
Related-Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
•the Investment Advisory Agreement;
•the Administration Agreement;
•the Expense Reimbursement Agreement;
•the Fronting Letter Agreement; and
•the Placement Agent Agreements.
For more information on the above agreements, see "Note 7. Related Party Transactions" in our consolidated audited financial statements in this Annual Report on Form 10-K.
On December 22, 2022, the SEC granted an exemptive order (collectively, the “Order”) that permits us to participate in negotiated co-investment transactions with certain other funds and accounts managed and controlled by Varagon or an affiliate, subject to the satisfaction of certain conditions. Pursuant to the Order, the Company is permitted to co-invest with its affiliates if a "required majority" (as defined in Section 57(o) of the 1940 Act) of the Board's independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to the Company and its shareholders and do not involve overreaching in respect of the Company or its shareholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company's shareholders and is consistent with its then-current investment objective and strategies. Neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them.
Off-Balance Sheet Arrangements
Portfolio Company Commitments
As of December 31, 2024 and December 31, 2023, we had commitments under loan and financing agreements to fund up to $112.5 million to 53 portfolio companies and $22.7 million to 29 portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and revolvers, and an analysis of their fair value is included in the Consolidated Schedule of Investments. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as of December 31, 2024 and December 31, 2023 are shown in the table below (dollars in thousands):
Issuer
As of December 31, 2024
As of December 31, 2023
3G Intermediate, Inc.
1,333
-
3G Intermediate, Inc.
-
Accupac, LLC
1,304
ACP Oak Buyer, Inc.
-
ACP Vault Acquisition, Inc.
1,036
-
ACP Vault Acquisition, Inc.
1,943
-
ADPD Holdings, LLC
-
ADPD Holdings, LLC
ADPD Holdings, LLC
ADPD Holdings, LLC
-
Advanced Web Technologies Holding Company
-
Advanced Web Technologies Holding Company
-
Alert SRC Newco LLC
2,013
-
Alert SRC Newco LLC
-
Apex Dental Partners, LLC
-
Apex Dental Partners, LLC
2,172
-
Basin Innovation Group, LLC
1,773
-
Basin Innovation Group, LLC
1,266
-
Bebright MSO, LLC
-
Bebright MSO, LLC
1,237
-
Boulder Scientific Company, LLC
-
BPCP NSA Intermedco, Inc.
1,409
-
BPCP NSA Intermedco, Inc.
-
BRG Acquisition Co., LLC
Castleworks Home Services Company
Concord III, L.L.C.,
Distinct Holdings, Inc.
1,590
-
Easy Ice, LLC
1,352
-
Easy Ice, LLC
1,500
-
Easy Ice, LLC
-
Eventus Buyer, LLC
1,730
-
Eventus Buyer, LLC
-
Express Wash Acquisition Company, LLC
Eye Health America, LLC
Eye Health America, LLC
1,092
FS Squared Holding Corp.
-
FS Squared Holding Corp.
-
FS Squared Holding Corp.
-
Gen4 Dental Partners OPCO, LLC
-
Gen4 Dental Partners OPCO, LLC
2,927
-
Graffiti Buyer, Inc.
1,213
Hissho Parent, LLC
-
HLSG Intermediate, LLC
-
1,655
Horizon Freight Holdings, Inc.
1,543
-
Horizon Freight Holdings, Inc.
1,543
-
Horizon Freight Holdings, Inc.
-
HTI Intermediate, LLC
-
HTI Intermediate, LLC
-
Hub Pen Company, LLC
-
JTM Foods LLC
KL Bronco Acquisition, Inc.
KL Bronco Acquisition, Inc.
1,250
1,786
KL Charlie Acquisition Company
-
Krayden Holdings, Inc.
1,251
-
Krayden Holdings, Inc.
Krayden Holdings, Inc.
Krayden Holdings, Inc.
Leiters, Inc.
Lightspeed Buyer, Inc.
-
Lightspeed Buyer, Inc.
8,843
-
M&D Midco, Inc.
3,503
M&D Midco, Inc.
1,763
MDI Buyer, Inc.
Municipal Emergency Services, Inc.
2,472
-
MWD Management, LLC
North Haven Stallone Buyer, LLC
-
OIS Management Services, LLC
2,563
-
OIS Management Services, LLC
Oliver Packaging, LLC
Online Labels Group, LLC
Online Labels Group, LLC
Online Labels Group, LLC
Pediatric Home Respiratory Services, LLC
2,250
-
Pediatric Home Respiratory Services, LLC
1,050
-
POY Holdings, LLC
-
1,211
QM Buyer, Inc.
2,306
-
QM Buyer, Inc.
1,153
-
RFI Buyer, Inc.
RWA Wealth Partners, LLC
6,511
RWA Wealth Partners, LLC
1,944
Senior Direct Lending Program, LLC
17,005
8,557
SGA Dental Partners Opco, LLC
1,491
1,394
SI Holdings, Inc.
-
Techmer BB Bidco, LLC
Titan Group Holdco, LLC
-
Titan Group Holdco, LLC
-
Titan Group Holdco, LLC
-
Turbo Buyer, Inc.
-
UHY Advisors, Inc.
1,753
-
UHY Advisors, Inc.
6,623
-
United Musculoskeletal Partners Acquisition Holdings, LLC
-
US Health Partners Management, LLC
-
US Health Partners Management, LLC
-
USN Opco, LLC
USSC Holding Corp.
-
Zavation Medical Products, LLC
-
Total Unfunded Commitments
$
112,456
$
22,714
Also included within commitments, as of December 31, 2024, were commitments to issue up to $0.1 million in letter of credit through a financial intermediary on behalf of certain portfolio companies. As of December 31, 2024, the Company had not issued any letters of credit. If the Company were to issue any letters of credit, it would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated statements of assets and liabilities. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.
Valuation of Portfolio Securities.
Investments are valued at the end of each calendar quarter. Most of our investments may be in loans that do not have readily available market quotations. Assets that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by the Board. In connection with that determination, portfolio company valuations will be prepared using sources, preliminary valuations obtained from independent valuation firms depending on the availability of information on our assets and the type of asset being valued, all in accordance with our valuation policy. The participation of the Adviser in the valuation process could result in a conflict of interest because the Adviser’s management fee is based in part on our gross assets.
Because fair values, and particularly fair values of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time, and are often based to a large extent on estimates, comparisons and qualitative evaluations of private information, our determinations of fair value may differ materially from the values that would have been determined if a ready market for these securities existed. This could make it more difficult for our shareholders to value accurately our portfolio investments and could lead to undervaluation or overvaluation of our interests. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility.
NAV as of a particular date may be materially greater than or less than the value that would be realized if assets were to be liquidated as of such date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in our NAV. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in NAV.
For more information regarding the fair value hierarchies, our framework for determining fair value and the composition of our portfolio, see "Note 2. Significant Accounting Policies” in our consolidated audited financial statements in this Annual Report on Form 10-K.
Revenue Recognition
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
Investment Income
Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company records amortized or accreted discounts or premiums as interest income using the effective interest method and is adjusted only for material amendments or prepayments. Dividend income, which represents dividends from equity investments and distributions from subsidiaries, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.
Interest income from investments in the Subordinated Certificates of SDLP is recorded based on an estimate of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC Topic 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from these investments, including the expected residual payments, and the effective yield is determined and updated periodically. Any difference between the cash distribution received and the amount calculated pursuant to the effective interest method is recorded as an adjustment to the cost basis of such investments.
PIK Interest
The Company may, from time to time, hold loans in its portfolio that contain a payment-in-kind ("PIK") interest provision. PIK interest, computed at the contractual rate specified in each loan agreement, is periodically added to the principal balance of the loan, rather than
being paid to the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment.
PIK interest, which is a non-cash source of income at the time of recognition, is included in the Company’s taxable income, and therefore affects the amount the Company would be required to distribute to its shareholders to maintain its tax treatment as a RIC for U.S. federal income tax purposes, even though the Company had not yet collected the cash. For the years ended December 31, 2024 and December 31, 2023, the Company earned PIK interest of $2.3 million and $0.5 million, respectively, which is reflected on the accompanying consolidated statements of operations as part of interest income.
Fee Income
Origination fees received are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized origination fees are recorded as investment income. The Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, covenant waiver fees and loan amendment fees, and are recorded as investment income when earned. Some of the fees earned by the Company may be PIK fee income. For the year ended December 31, 2024, the Company did not earn any PIK fee income. For the year ended December 31, 2023, the Company earned $7,524 of PIK fee income.
Non-accrual loans
A loan can be left on accrual status during the period the Company is pursuing repayment of the loan. Management reviews all loans that become 90 days or more past due on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans are recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid, and, in management’s judgment, payments are likely to remain current. There were no loans on non-accrual as of December 31, 2024 and December 31, 2023.
Recent Developments
Dividend Declaration
On March 13, 2025, the Board declared a dividend of $0.2400 per share and a special dividend of $0.0185 per share, both payable on April 17, 2025 to shareholders of record as of the close of business on March 31, 2025.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including the valuation of our investment portfolio and changes in interest rates. The prices of securities held by us may decline in response to certain events, including those directly involving the companies in which we invest; conditions affecting the general economy, including inflationary pressures; overall market changes, including an increase in market volatility and interest rate volatility; geopolitical conditions; legislative reform; and general political, social or economic instability. Generally, a rise in the general level of interest rates, like the current elevated interest rate environment, can be expected to lead to higher interest rates applicable to any variable rate investments we may hold and lead to declines in the value of any fixed rate investments we may hold. However, for variable rate investments that have an interest rate floor, our interest income will not decrease below a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the upper level breakpoint of the pre-incentive fee net investment income incentive fee, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to the Adviser with respect to our increased pre-incentive fee net investment income. Conversely, a decline in the general level of interest rates can be expected to lead to lower interest rates applicable to any variable rate investments we may hold and to increases in the value of any fixed rate investments we may hold. Such a decrease would make it more difficult for us to meet or exceed the hurdle rate applicable to the upper level breakpoint of the pre-incentive fee net investment income incentive fee, and may result in a substantial decrease in our net investment income and to the amount of incentive fees payable to the Adviser with respect to our decreased pre-incentive fee net investment income.
In addition, we borrow funds in order to make additional investments. Our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we will be subject to risks relating to changes in market interest rates. In periods of elevated interest rates, when we or any future subsidiaries have debt outstanding or financing arrangements in effect, our interest expense will increase, which could reduce our net investment income, particularly to the extent we hold fixed rate investments.
We expect that our long-term investments will be financed primarily with equity and debt. In connection with each of the 2026 Notes and the 2028 Notes, we entered into an interest rate swap agreement in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
We invest primarily in illiquid debt of private companies. Most of our investments will not have a readily available market quotation, and we value these investments at fair value as determined in good faith by our Board, based on, among other things, the input of the Adviser, our Audit Committee and independent third-party valuation firm(s) engaged at the direction of the Board, and in accordance with our valuation policy. There is no single technique for determining fair value. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If, in the future, we are required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Valuation Risk
We plan to invest primarily in senior secured loans but may also selectively invest in second lien and subordinated or mezzanine loans of, and equity and equity-related securities in, U.S. middle market companies. Most of our investments will not have a readily available market quotation, and we will value these investments at fair value as determined in good faith by the Board in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Interest Rate Risk
We are subject to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing internals between our assets and liabilities and the effect that interest rates may have on our cash flows. Because we intend to fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
Following a period of elevated interest rates to address inflation concerns, in the third quarter of 2024, the Federal Reserve cut rates for the first time since March 2020 and, most recently, cut rates in the fourth quarter of 2024. The Federal Reserve has indicated that there may be additional rate cuts in the future; however, future reductions to benchmark rates are not certain. In an elevated interest rate environment, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio. It is possible that the Federal Reserve's tightening cycle could force the United States into a recession. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in base rates, such as SOFR, are not offset by corresponding increases in the spread over such base rate that we earn on any portfolio investments, a decrease in our operating expenses, or a decrease in the interest rate associated with our borrowings. Furthermore, in a lower interest rate environment, we could face a situation where our outstanding debt obligations carry higher coupon payments than newly issued debt, resulting in an increase in relative borrowing costs unless we are able to refinance at more favorable terms.
As of December 31, 2024, all income producing investments in our portfolio and the outstanding borrowings under the SMBC Facility was at floating rates indexed to SOFR. In addition, the Notes bear interest at fixed rates but have swapped from a fixed rate to a floating rate through interest rate swaps.
The following table shows the estimated annualized impact on net investment income based on hypothetical base rate changes in interest rates on our loan portfolio and outstanding debt as of December 31, 2024, assuming there are no changes in our investment and borrowing structure (dollars in thousands).
Interest
Interest
Net
Basis Point Change
Income
Expense (1)
Investment Income
Up 300 basis points
$
23,800
$
14,300
$
9,500
Up 200 basis points
15,800
9,600
6,200
Up 100 basis points
7,900
4,800
3,100
Down 100 basis points
(7,900
)
(4,800
)
(3,100
)
Down 200 basis points
(15,800
)
(9,600
)
(6,200
)
Down 300 basis points
(23,800
)
(14,300
)
(9,500
)
(1) Includes the impact to interest expenses related to the interest rate swaps.
Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments that could affect our net income. Accordingly, we cannot assure you that actual results would not differ materially from the analysis above.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: [34])
Report of Independent Registered Public Accounting Firm (PCAOB ID: [42])
Financial Statements:
Consolidated Statements of Assets and Liabilities as of December 31, 2024 and 2023
Consolidated Statements of Operations for the years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Changes in Net Assets for the years ending December 31, 2024, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
Consolidated Schedules of Investments as of December 31, 2024 and 2023
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Varagon Capital Corporation
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying consolidated statement of assets and liabilities of Varagon Capital Corporation and subsidiaries (the "Company"), including the consolidated schedule of investments, as of December 31, 2024, the related consolidated statements of operations, changes in net assets, cash flows, and the consolidated financial highlights (in Note 12) for the year then ended, and the related notes (collectively, referred to as the "financial statements and financial highlights"). In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations, its changes in net assets, its cash flows, and its financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements and financial highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2024, by correspondence with the custodian, loan agents, and borrowers; when replies were not received, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
March 21, 2025
We have served as the Company's auditor since 2024.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Varagon Capital Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities of Varagon Capital Corporation (the Company), including the consolidated schedule of investments, as of December 31, 2023, the related consolidated statements of operations, changes in net assets, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023, and the results of its operations, changes in its net assets, and its cash flows for each of the two years in the period ended December 31, 2023 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 2023, by correspondence with the custodian and directly with designees of the portfolio companies or debt agents; when replies were not received from the designees of the portfolio companies or debt agents, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 2022 to 2024.
Dallas, Texas
March 25, 2024
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(dollar amounts in thousands, except share and per share data)
As of
As of
ASSETS
December 31, 2024
December 31, 2023
Investments, at fair value
Non-controlled/non-affiliated, at fair value (amortized cost of $639,235 and $510,142, respectively)
$
631,963
$
501,552
Controlled investments, at fair value (amortized cost of $183,982 and $188,471, respectively)
172,152
184,485
Total investments, at fair value (amortized cost of $823,217 and $698,613, respectively)
804,115
686,037
Cash
69,606
19,976
Interest receivable
11,530
11,263
Deferred financing costs
1,619
2,649
Prepaid expenses
Other assets
-
Total assets
$
887,754
$
720,362
LIABILITIES
Revolving credit facility payable (Note 6)
$
50,000
$
241,670
Notes payable (net of debt issuance costs of $2,870, and $362, respectively) (Note 6)
424,009
49,638
Shareholder distributions payable
12,736
14,950
Derivative contracts payable, at fair value
-
Interest and credit facility fees payable
2,794
5,002
Base management fees payable (Note 7)
1,513
1,286
Income incentive fees payable (Note 7)
2,207
Administrator expenses payable
Directors' fees and expenses payable (Note 9)
Due to affiliates
Accounts payable and accrued expenses
1,099
1,140
Other liabilities
-
Total liabilities
494,464
317,212
Commitments and contingencies (Note 8)
NET ASSETS
Common stock, $0.01 par value; 500,000,000 shares authorized; 41,524,826 shares issued and outstanding at December 31, 2024, and 500,000,000 shares authorized; 41,505,531 shares issued and outstanding at December 31, 2023
Paid-in capital in excess of par value
415,176
414,985
Total accumulated earnings (loss)
(22,301
)
(12,250
)
Total net assets
$
393,290
$
403,150
NET ASSETS PER SHARE
$
9.47
$
9.71
See accompanying notes to consolidated financial statements.
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except share and per share data)
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except share and per share data)
For the year ended December 31,
Investment income:
From non-controlled/non-affiliated investments:
Interest income
$
68,026
$
55,932
$
25,020
Fee income
Total investment income from non-controlled/non-affiliated investments
68,625
56,616
25,352
From controlled investments:
Interest income
27,712
25,933
12,877
Total investment income from controlled investments
27,712
25,933
12,877
Total investment income
96,337
82,549
38,229
Expenses:
Base management fees (Note 7)
$
5,712
$
5,081
$
2,818
Income incentive fees (Note 7)
5,586
6,035
1,329
Professional fees
2,335
2,295
1,254
Administrator expenses
1,157
1,188
Interest expenses (Note 6)
28,495
21,187
8,191
Credit facility fees (Note 6)
1,483
2,676
1,146
Directors’ fees and expenses (Note 9)
Organizational expenses
Insurance expenses
Other general and administrative expenses
Total expenses before taxes
45,807
39,908
16,366
Net investment income before taxes
50,530
42,641
21,863
Excise tax expense
-
Net investment income (loss)
50,530
42,639
21,801
Realized and unrealized gain (loss):
Net realized gain (loss) on investments:
Non-controlled/non-affiliated investments
(289
)
-
Net realized gain (loss) on investments
(289
)
-
Net realized gain (loss) on derivatives
(116
)
-
-
Net realized gain (loss) on extinguishment of debt
(5,059
)
-
-
Net realized gain (loss)
(4,996
)
(289
)
-
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/non-affiliated investments
1,318
(8,919
)
Controlled investments
(7,843
)
(346
)
(3,640
)
Net change in unrealized appreciation (depreciation) on investments
(6,525
)
(17
)
(12,559
)
Net change in unrealized appreciation (depreciation) on derivatives
(91
)
-
Net change in unrealized appreciation (depreciation)
(6,434
)
(108
)
(12,559
)
Net realized and unrealized gains (losses)
(11,430
)
(397
)
(12,559
)
Net increase (decrease) in net assets resulting from operations
$
39,100
$
42,242
$
9,242
Per Common Share Information:
Weighted average shares outstanding (basic and diluted)
41,517,324
41,499,392
39,848,927
Net investment income per share (basic and diluted)(1)
$
1.22
$
1.03
$
0.55
Earnings per share (basic and diluted)(1)
$
0.94
$
1.02
$
0.23
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except share and per share data)
(1) Per share data was derived by using the weighted average shares outstanding from the June 2, 2022 (commencement of investment operations) through December 31, 2022 and does not include the 100 shares issued in connection with the Company's seed audit on March 29, 2022 that were subsequently redeemed on June 2, 2022 in connection with the merger of Varagon Fund I, L.P. with and into the Company, with the Company as the surviving entity in the merger.
See accompanying notes to consolidated financial statements.
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(dollar amounts in thousands, except share data)
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(dollar amounts in thousands, except share data)
Common Stock
Paid in Capital in
Accumulated
Total
Shares
Par Amount (1)
Excess of Par (1)
earnings (loss)
Net Assets
Balance at December 31, 2021
-
$
-
$
-
$
-
$
-
Increase (decrease) in net assets resulting from operations:
Net investment income (loss)
-
-
-
21,801
21,801
Net change in unrealized appreciation (depreciation) on
investments
-
-
-
(12,559
)
(12,559
)
Capital transactions:
Issuance of common stock
41,486,827
414,890
-
415,305
Issuance of common shares pursuant to distribution reinvestment plan(1)
3,915
-
(1)
-
Redemption of common stock
(100
)
-
(1)
-
(1)
-
-
Distributions to shareholders
-
-
-
(20,910
)
(20,910
)
Tax reclassification of net assets
-
-
(62
)
-
Total increase (decrease) for the year ended December 31, 2022
41,490,642
414,868
(11,606
)
403,677
Balance at December 31, 2022
41,490,642
$
$
414,868
$
(11,606
)
$
403,677
Balance at December 31, 2022
41,490,642
$
$
414,868
$
(11,606
)
$
403,677
Increase (decrease) in net assets resulting from operations:
Net investment income (loss)
-
-
-
42,639
42,639
Net realized gain (loss) on investments
-
-
-
(289
)
(289
)
Net change in unrealized appreciation (depreciation) on
investments
-
-
-
(17
)
(17
)
Net change in unrealized appreciation (depreciation) on
derivatives
(91
)
(91
)
Capital transactions:
Issuance of common shares pursuant to distribution reinvestment plan(1)
14,889
-
-
Distributions to shareholders
-
-
-
(42,916
)
(42,916
)
Tax reclassification of net assets
-
-
(30
)
-
Total increase (decrease) for the year ended December 31, 2023
14,889
-
(644
)
(527
)
Balance at December 31, 2023
41,505,531
$
$
414,985
$
(12,250
)
$
403,150
Balance at December 31, 2023
41,505,531
$
$
414,985
$
(12,250
)
$
403,150
Increase (decrease) in net assets resulting from operations:
Net investment income (loss)
-
-
-
50,530
50,530
Net realized gain (loss) on investments
-
-
-
Net realized gain (loss) on derivatives
-
-
-
(116
)
(116
)
Net realized gain (loss) on extinguishment of debt
-
-
-
(5,059
)
(5,059
)
Net change in unrealized appreciation (depreciation) on
investments
-
-
-
(6,525
)
(6,525
)
Net change in unrealized appreciation (depreciation) on
derivatives
-
-
-
Capital transactions:
Issuance of common shares pursuant to distribution reinvestment plan
19,295
-
-
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(dollar amounts in thousands, except share data)
Distributions to shareholders
-
-
-
(49,151
)
(49,151
)
Tax reclassification of net assets
-
-
-
-
-
Total increase (decrease) for the year ended December 31, 2024
19,295
-
(10,051
)
(9,860
)
Balance at December 31, 2024
41,524,826
$
$
415,176
$
(22,301
)
$
393,290
(1) Par Amount and Paid in Capital in Excess of Par were both less than $1,000 for the periods shown above.
See accompanying notes to consolidated financial statements.
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
For the year ended December 31,
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations
$
39,100
$
42,242
$
9,242
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by (used in) operating activities:
Purchases of investments
(333,030
)
(89,894
)
(587,666
)
Payment-in-kind and other adjustments to cost
(1,671
)
(265
)
Repayments of investments
213,529
70,951
52,772
Net realized (gain) loss
(179
)
-
Net realized (gain) loss on derivatives
-
-
Net realized (gain) loss on extinguishment of debt
5,059
-
-
Net payment of settlement of derivatives
(116
)
-
-
Net change in unrealized (appreciation) depreciation on investments
6,525
12,559
Net change in unrealized (appreciation) depreciation on derivatives
(91
)
-
Net unrealized (appreciation) depreciation on interest rate swap attributed to unsecured notes
(621
)
-
-
Net amortization (accretion) on investments
(3,253
)
(1,838
)
(1,401
)
Amortization of deferred financing costs
2,120
Changes in operating assets:
Interest receivable
(267
)
(1,992
)
(9,271
)
Prepaid expenses
(468
)
(694
)
Other assets
(83
)
Changes in operating liabilities:
Interest and credit facility fees payable
(2,208
)
4,367
Base management fees payable
1,264
Income incentive fees payable
(2,001
)
1,734
Administrator expenses payable
(8
)
Directors' fees and expenses payable (Note 9)
(1
)
(2
)
Other liabilities
-
-
Due to affiliates
(118
)
Accounts payable and accrued expenses
(41
)
Net cash provided by (used in) operating activities
(77,640
)
25,746
(516,319
)
Cash flows from financing activities:
Proceeds from issuance of common stock(1)
-
-
273,170
Redemption of common stock(2)
-
-
-
Borrowings on debts
680,050
124,614
290,500
Repayments of debts
(494,220
)
(111,444
)
(12,000
)
Financing costs paid
(7,386
)
(1,559
)
(4,043
)
Dividends paid
(51,174
)
(37,797
)
(10,892
)
Net cash provided by (used in) financing activities
127,270
(26,186
)
536,735
Net increase (decrease) in cash
49,630
(440
)
20,416
Cash, beginning of period
19,976
20,416
-
Cash, end of period
$
69,606
$
19,976
$
20,416
Supplemental cash information:
Cash paid during the period for interest
$
31,309
$
21,108
$
4,499
Cash paid during the period for taxes
$
-
$
$
-
Supplemental non cash information:
Varagon Capital Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
Non-cash purchase of investments
$
-
$
-
$
142,135
Distributions reinvested
$
$
$
(1) Not inclusive of non-cash purchase of investment during the year ended December 31, 2022.
(2) Proceeds from the redemption of common stock for the year ended December 31, 2022 were less than $1,000.
See accompanying notes to consolidated financial statements.
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Company # +
Type of Investment
Reference Rate
and Spread
Interest
Rate *
Acquisition Date
Maturity
Shares / Units
Principal
Amortized
Cost (++)
Fair
Value
Percentage of
Net Assets ^
Footnotes
Non-Controlled/Non-Affiliated Investments:
Senior Secured First Lien Loans
Aerospace & Defense
AIM Acquisition, LLC
Term Loan
SOFR
+
4.75%
(S)
9.28%
6/2/2022
12/2/2027
$
11,000
$
10,903
$
11,000
(1)(6)
SI Holdings, Inc.
Revolver
N/A
8/28/2024
12/31/2027
-
(5
)
-
(2)(6)(9)
SI Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
10.18%
12/8/2023
12/31/2027
(1)(6)
SI Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
10.18%
11/26/2024
12/31/2027
1,660
1,646
1,660
(1)(6)
Trident Maritime Systems, Inc.
Term Loan
SOFR
+
3.5%(2.0% PIK)
(Q)
10.20%
10/19/2023
2/26/2027
(6)(9)
13,853
13,954
3.55
%
Air Freight & Logistics
Horizon Freight Holdings, Inc.
Revolver
SOFR
+
5.00%
(Q)
9.48%
8/22/2024
8/22/2030
$
$
$
(6)(9)(10)
Horizon Freight Holdings, Inc.
Revolver
SOFR
+
5.00%
(Q)
9.33%
8/22/2024
8/22/2030
(6)(9)(10)
Horizon Freight Holdings, Inc.
Delayed Draw Term Loan
N/A
8/22/2024
8/22/2030
-
(11
)
(23
)
(2)(6)(9)
Horizon Freight Holdings, Inc.
Delayed Draw Term Loan
N/A
8/22/2024
8/22/2030
-
(11
)
(23
)
(2)(6)(9)
Horizon Freight Holdings, Inc.
Term Loan
SOFR
+
5.00%
(Q)
9.33%
8/22/2024
8/22/2030
6,541
6,447
6,443
(1)(6)
6,682
6,653
1.69
%
Automobile Components
AAMP Global Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
10.18%
6/2/2022
11/5/2025
$
14,588
$
14,537
$
14,332
(1)(6)(9)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.5%(2.75% PIK)
(Q)
9.91%
6/2/2022
8/31/2028
2,612
2,587
1,985
(6)(9)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.5%(2.75% PIK)
(Q)
9.91%
6/2/2022
8/31/2028
2,274
2,253
1,728
(6)(9)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.5%(2.75% PIK)
(Q)
9.91%
6/2/2022
8/31/2028
(6)(9)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.5%(2.75% PIK)
(Q)
9.91%
6/2/2022
8/31/2028
1,089
1,078
(6)(9)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.5%(2.75% PIK)
(Q)
9.91%
6/2/2022
8/31/2028
(6)(9)
M&D MidCo, Inc.
Revolver
N/A
8/31/2022
8/31/2028
-
(18
)
(31
)
(2)(6)(9)
M&D MidCo, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.74%
8/31/2022
8/31/2028
(6)(9)
M&D MidCo, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.66%
8/31/2022
8/31/2028
(6)(9)
M&D MidCo, Inc.
Delayed Draw Term Loan
N/A
12/17/2024
8/31/2028
-
(17
)
(61
)
(2)(6)(9)
M&D MidCo, Inc.
Term Loan
SOFR
+
5.00%
(Q)
9.66%
8/31/2022
8/31/2028
(6)(9)
M&D MidCo, Inc.
Term Loan
SOFR
+
5.00%
(Q)
9.48%
12/17/2024
8/31/2028
4,963
4,913
4,876
(6)(9)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.50%
(Q)
10.24%
6/2/2022
11/16/2027
10,851
10,791
10,254
(1)(6)
USSC Holding Corp.
Revolver
N/A
7/23/2024
6/21/2030
-
(7
)
(8
)
(2)(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
USSC Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.76%
7/23/2024
6/21/2030
(6)(9)
USSC Holding Corp.
Term Loan
SOFR
+
5.25%
(Q)
9.58%
7/23/2024
6/21/2030
2,693
2,655
2,653
(1)(6)
39,969
37,698
9.59
%
Beverages
Cold Spring Brewing Company
Term Loan
SOFR
+
4.75%
(M)
9.23%
12/23/2024
12/10/2030
$
10,984
$
10,875
$
10,874
(6)(9)
10,875
10,874
2.76
%
Chemicals
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.75%
(M)
9.49%
6/2/2022
12/28/2025
$
5,725
$
5,707
$
5,639
(1)(6)
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.23%
6/2/2022
12/28/2025
(1)(6)
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.23%
6/2/2022
12/28/2025
(1)(6)
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.23%
6/2/2022
12/28/2025
(1)(6)
MDI Buyer, Inc.
Revolver
SOFR
+
5.50%
(Q)
10.27%
8/5/2022
7/25/2028
(6)(9)
MDI Buyer, Inc.
Revolver
PRIME
+
4.50%
(Q)
12.00%
8/5/2022
7/25/2028
(6)(9)
MDI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.01%
8/5/2022
7/25/2028
2,351
2,316
2,351
(1)(6)
MDI Buyer, Inc.
Term Loan
SOFR
+
5.50%
(Q)
10.01%
8/5/2022
7/25/2028
6,515
6,420
6,515
(1)(6)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
9.60%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
9.62%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
9.77%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
9.73%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
9.78%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Revolver
PRIME
+
4.25%
(S)
11.75%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(S)
9.61%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.80%
9/1/2022
9/1/2028
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.77%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.73%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.79%
9/1/2022
9/1/2028
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.78%
9/1/2022
9/1/2028
-
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
9.74%
9/1/2022
9/1/2028
-
-
-
(6)(8)(9)
16,339
16,396
4.17
%
Commercial Services & Supplies
3G Intermediate, Inc.
Revolver
N/A
9/30/2024
9/30/2030
$
-
$
(13
)
$
(7
)
(2)(6)(9)
3G Intermediate, Inc.
Delayed Draw Term Loan
N/A
9/30/2024
9/30/2030
-
(26
)
(13
)
(2)(6)(9)
3G Intermediate, Inc.
Term Loan
SOFR
+
5.50%
(Q)
9.83%
9/30/2024
9/30/2030
3,325
3,261
3,292
(1)(6)
Advanced Web Technologies Holding Company
Revolver
N/A
9/30/2024
12/17/2027
(2)(6)(9)
Advanced Web Technologies Holding Company
Delayed Draw Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
7/2/2024
12/17/2027
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Advanced Web Technologies Holding Company
Delayed Draw Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
10/18/2022
12/17/2027
(1)(6)
Advanced Web Technologies Holding Company
Delayed Draw Term Loan
N/A
7/2/2024
12/17/2027
-
(13
)
-
(2)(6)(9)
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
7/2/2024
12/17/2027
1,098
1,088
1,098
(1)(6)
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
10/18/2022
12/17/2027
(1)(6)
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
6/2/2023
12/17/2027
(1)(6)
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
5.75% (2.25% PIK)
(Q)
10.56%
7/2/2024
12/17/2027
(1)(6)
HLSG Intermediate, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(M)
10.72%
10/6/2023
3/31/2028
2,932
2,882
2,932
(1)(6)
HLSG Intermediate, LLC
Term Loan
SOFR
+
6.25%
(M)
10.72%
10/6/2023
3/31/2028
5,839
5,737
5,839
(1)(6)
LAV Gear Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
10.98%
3/30/2023
10/31/2025
(1)(6)
LAV Gear Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
10.93%
1/10/2023
10/31/2025
2,463
2,463
2,389
(1)(6)
Liquid Environmental Solutions Corporation
Delayed Draw Term Loan
SOFR
+
5.00%
(M)
9.69%
6/2/2022
5/29/2026
2,182
2,169
2,128
(6)(9)
Liquid Environmental Solutions Corporation
Delayed Draw Term Loan
SOFR
+
5.00%
(M)
9.69%
6/2/2022
5/29/2026
2,836
2,820
2,766
(1)(6)
Liquid Environmental Solutions Corporation
Term Loan
SOFR
+
5.00%
(M)
9.69%
6/2/2022
5/31/2026
(6)(9)
Liquid Environmental Solutions Corporation
Term Loan
SOFR
+
5.00%
(M)
9.69%
6/2/2022
5/31/2026
(1)(6)
Online Labels Group, LLC
Revolver
N/A
12/19/2023
12/19/2029
-
-
-
(2)(6)(8)(9)
Online Labels Group, LLC
Delayed Draw Term Loan
N/A
12/19/2023
12/19/2029
-
-
-
(2)(6)(8)(9)
Online Labels Group, LLC
Delayed Draw Term Loan
N/A
12/19/2023
12/19/2029
-
-
-
(2)(6)(8)(9)
Online Labels Group, LLC
Term Loan
SOFR
+
5.25%
(Q)
9.58%
12/19/2023
12/19/2029
(6)(9)
RFI Buyer, Inc.
Revolver
SOFR
+
4.75%
(Q)
9.37%
8/5/2022
8/5/2028
(6)(9)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.48%
8/5/2022
8/5/2028
(6)(9)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.28%
8/5/2022
8/5/2028
(6)(9)
RFI Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.28%
8/5/2022
8/5/2028
(6)(9)
RFI Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.25%
12/2/2024
8/5/2028
2,922
2,879
2,922
(6)(9)
Titan Group Holdco, LLC
Revolver
N/A
8/22/2024
8/13/2029
-
(8
)
-
(2)(6)(9)(11)
Titan Group Holdco, LLC
Delayed Draw Term Loan
N/A
8/22/2024
8/13/2029
-
(4
)
-
(2)(6)(9)
Titan Group Holdco, LLC
Delayed Draw Term Loan
N/A
8/22/2024
8/13/2029
-
(4
)
-
(2)(6)(9)
Titan Group Holdco, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.33%
8/22/2024
8/13/2029
2,554
2,517
2,554
(1)(6)
VRC Companies, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.35%
6/2/2022
6/29/2027
(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
VRC Companies, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.35%
6/2/2022
6/29/2027
10,972
10,888
10,862
(1)(6)
39,611
39,747
10.11
%
Construction & Engineering
HTI Intermediate, LLC
Revolver
SOFR
+
5.00%
(Q)
9.44%
3/1/2024
3/1/2030
$
$
$
(6)(9)
HTI Intermediate, LLC
Delayed Draw Term Loan
N/A
3/1/2024
3/1/2030
-
(5
)
(5
)
(2)(6)(9)
HTI Intermediate, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.47%
3/1/2024
3/1/2030
1,276
1,253
1,263
(6)(9)
Royal Holdco Corporation
Term Loan
SOFR
+
5.75%
(Q)
10.54%
3/8/2023
12/30/2027
(6)(9)
1,939
1,962
0.50
%
Consumer Staples Distribution & Retail
FS Squared Holding Corp.
Revolver
SOFR
+
4.75%
(Q)
9.11%
12/23/2024
12/23/2030
(6)(9)(10)
FS Squared Holding Corp.
Delayed Draw Term Loan
N/A
12/23/2024
12/23/2030
-
(2
)
(4
)
(2)(6)(9)
FS Squared Holding Corp.
Delayed Draw Term Loan
N/A
12/23/2024
12/23/2030
-
(1
)
(2
)
(2)(6)(9)
FS Squared Holding Corp.
Term Loan
SOFR
+
4.75%
(Q)
9.11%
12/23/2024
12/23/2030
(6)(9)
KeyImpact Holdings, Inc.
Term Loan
SOFR
+
6.50%
(Q)
11.09%
1/31/2024
1/31/2029
10,854
10,621
10,854
(1)(6)(9)
11,040
11,270
2.87
%
Containers & Packaging
Comar Holding Company, LLC
Delayed Draw Term Loan
SOFR
+
2.00% (4.75% PIK)
(Q)
11.23%
6/2/2022
6/18/2026
$
3,184
$
3,184
$
2,921
(1)(6)(9)
Comar Holding Company, LLC
Delayed Draw Term Loan
SOFR
+
2.00% (4.75% PIK)
(Q)
11.23%
6/2/2022
6/18/2026
2,526
2,499
2,318
(1)(6)(9)
Comar Holding Company, LLC
Term Loan
SOFR
+
2.00% (4.75% PIK)
(Q)
11.23%
6/2/2022
6/18/2026
(1)(6)(9)
Comar Holding Company, LLC
Term Loan
SOFR
+
2.00% (4.75% PIK)
(Q)
11.23%
6/2/2022
6/18/2026
9,264
9,129
8,499
(1)(6)(9)
Oliver Packaging, LLC
Revolver
SOFR
+
5.00% (.50% PIK)
(Q)
9.98%
7/6/2022
7/6/2028
(6)(9)(10)
Oliver Packaging, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.48%
7/6/2022
7/6/2028
3,940
3,893
3,891
(6)(9)
Oliver Packaging, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.48%
8/30/2024
7/6/2028
(6)(9)
19,799
18,703
4.76
%
Distributors
Graffiti Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.12%
4/29/2024
8/10/2027
$
$
$
(6)(9)
Graffiti Buyer, Inc.
Term Loan
SOFR
+
5.50%
(Q)
10.19%
4/29/2024
8/10/2027
1,724
1,703
1,689
(1)(6)
Hub Pen Company, LLC
Revolver
N/A
9/30/2024
12/31/2027
-
(12
)
(11
)
(2)(6)(9)(10)
Hub Pen Company, LLC
Term Loan
SOFR
+
5.25%
(M)
9.90%
9/30/2024
12/31/2027
6,278
6,161
6,168
(1)(6)
Polk Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
9.71%
6/2/2022
3/31/2025
(6)(9)
Polk Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
5.25% (2.25% PIK)
(M)
11.96%
6/2/2022
3/31/2025
(1)(6)
Polk Acquisition Corp.
Term Loan
SOFR
+
5.25%
(M)
9.71%
6/2/2022
3/31/2025
5,087
5,086
5,087
(6)(9)
Polk Acquisition Corp.
Term Loan
SOFR
+
5.25% (2.25% PIK)
(M)
11.96%
6/2/2022
3/31/2025
5,876
5,875
5,876
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
POY Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.24%
11/22/2023
11/16/2027
(1)(6)
POY Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
9.98%
11/22/2023
11/16/2027
(1)(6)
POY Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
9.98%
11/22/2023
11/16/2027
5,037
4,949
5,037
(1)(6)
United Scope LLC
Term Loan
SOFR
+
5.00%
(Q)
9.74%
6/2/2022
12/1/2025
10,867
10,851
10,106
(1)(6)(9)
36,554
35,889
9.13
%
Diversified Consumer Services
ADPD Holdings LLC
Revolver
SOFR
+
6.00%
(S)
11.03%
8/16/2022
8/16/2028
$
$
$
(6)(9)
ADPD Holdings LLC
Revolver
SOFR
+
6.00%
(S)
10.70%
8/16/2022
8/16/2028
(6)(9)
ADPD Holdings LLC
Revolver
SOFR
+
6.00%
(S)
11.39%
8/16/2022
8/16/2028
(6)(9)
ADPD Holdings LLC
Delayed Draw Term Loan
N/A
8/16/2022
8/16/2028
-
-
(1
)
(2)(6)(9)
ADPD Holdings LLC
Delayed Draw Term Loan
N/A
8/16/2022
8/16/2028
-
-
(1
)
(2)(6)(9)
ADPD Holdings LLC
Term Loan
SOFR
+
6.00%
(S)
11.03%
8/16/2022
8/16/2028
(6)(9)
Castleworks Home Services Company
Revolver
PRIME
+
4.5% (7.5% PIK)
(Q)
19.50%
6/29/2022
6/29/2028
(6)(9)
Castleworks Home Services Company
Term Loan
PRIME
+
4.5% (7.5% PIK)
(Q)
19.50%
6/29/2022
6/29/2028
6,581
6,509
4,805
(6)(9)
Express Wash Acquisition Company, LLC
Revolver
SOFR
+
6.50%
(Q)
11.35%
7/14/2022
7/14/2028
(6)(9)
Express Wash Acquisition Company, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
11.35%
7/14/2022
7/14/2028
1,118
1,104
1,031
(1)(6)(9)
Express Wash Acquisition Company, LLC
Term Loan
SOFR
+
6.50%
(Q)
11.35%
7/14/2022
7/14/2028
5,272
5,214
4,864
(1)(6)(9)
TheKey, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.53%
6/2/2022
3/30/2027
(1)(6)(9)
TheKey, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.53%
6/2/2022
3/30/2027
5,419
5,405
5,189
(1)(6)(9)
TheKey, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.53%
6/2/2022
3/30/2027
1,716
1,711
1,642
(1)(6)(9)
TheKey, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.53%
6/2/2022
3/30/2027
(1)(6)(9)
22,203
19,508
4.96
%
Diversified Financial Services
RWA Wealth Partners, LLC
Revolver
N/A
8/31/2022
11/15/2030
$
-
$
(19
)
$
(19
)
(2)(6)(9)
RWA Wealth Partners, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.19%
8/31/2022
11/15/2030
(6)(9)
RWA Wealth Partners, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.10%
8/31/2022
11/15/2030
(6)(9)
RWA Wealth Partners, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.27%
8/31/2022
11/15/2030
8,611
8,526
8,525
(1)(6)
8,905
8,870
2.26
%
Diversified Telecommunication Services
MBS Holdings, Inc.
Term Loan
SOFR
+
6.25%
(S)
11.09%
11/29/2023
4/16/2027
$
$
$
(6)(9)
0.08
%
Electronic Equipment, Instruments & Components
Alert SRC Newco LLC
Revolver
N/A
12/11/2024
12/11/2030
$
-
$
(9
)
$
(5
)
(2)(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Alert SRC Newco LLC
Delayed Draw Term Loan
N/A
12/11/2024
12/11/2030
-
(15
)
(15
)
(2)(6)(9)
Alert SRC Newco LLC
Term Loan
SOFR
+
5.00%
(M)
9.45%
12/11/2024
12/11/2030
6,241
6,148
6,194
(6)(9)
BC Group Holdings, Inc.
Term Loan
SOFR
+
5.00%
(Q)
9.33%
6/2/2022
12/21/2026
7,289
7,289
7,289
(1)(6)
13,413
13,463
3.42
%
Energy Equipment & Services
Energy Labs Holdings Corp.
Delayed Draw Term Loan
SOFR
+
5.00%
(M)
9.46%
6/2/2022
4/7/2028
$
$
$
(1)(6)
Energy Labs Holdings Corp.
Term Loan
SOFR
+
5.00%
(M)
9.46%
6/2/2022
4/7/2028
7,604
7,533
7,604
(1)(6)
8,253
8,327
2.12
%
Food Products
Hissho Parent, LLC
Revolver
N/A
8/8/2024
5/18/2029
$
-
$
(6
)
$
-
(2)(6)(9)
Hissho Parent, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.27%
8/8/2024
5/18/2029
3,483
3,451
3,483
(1)(6)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.06%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.03%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
9.99%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
9.92%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
9.92%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
9.89%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Revolver
PRIME
+
4.25%
(M)
11.75%
9/28/2022
5/14/2027
(6)(9)
JTM Foods LLC
Term Loan
SOFR
+
5.25%
(Q)
9.73%
9/28/2022
5/14/2027
(6)(9)
KNPC Holdco, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.99%
6/2/2022
10/22/2029
8,000
7,925
7,920
(1)(6)
VG Target Holdings, LLC
Term Loan
SOFR
+
5.50% (3.50% PIK)
(Q)
13.85%
6/2/2022
8/2/2027
6,057
5,992
5,209
(6)(9)
17,458
16,709
4.25
%
Ground Transportation
A&R Logistics Holdings, Inc.
Term Loan
SOFR
+
2.5% (4.25% PIK)
(Q)
11.49%
6/2/2022
8/3/2026
$
4,972
$
4,964
$
4,723
(6)(9)
A&R Logistics Holdings, Inc.
Term Loan
SOFR
+
2.5% (4.25% PIK)
(Q)
11.49%
6/2/2022
8/3/2026
(6)(9)
A&R Logistics Holdings, Inc.
Term Loan
SOFR
+
2.5% (4.25% PIK)
(Q)
11.49%
10/4/2024
8/3/2026
(6)(9)
Beacon Mobility Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(M)
10.79%
6/2/2022
12/31/2025
1,926
1,916
1,926
(1)(6)
Beacon Mobility Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(M)
10.79%
6/2/2022
12/31/2025
8,722
8,676
8,722
(1)(6)
16,692
16,455
4.18
%
Health Care Equipment & Supplies
ACP Oak Buyer, Inc.
Revolver
N/A
12/27/2024
8/29/2026
$
-
$
(8
)
$
-
(2)(6)(9)
ACP Oak Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.23%
6/2/2022
8/29/2026
5,831
5,806
5,831
(1)(6)
ACP Oak Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.23%
3/19/2024
8/29/2026
(1)(6)
ACP Oak Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.23%
12/27/2024
8/29/2026
3,321
3,271
3,321
(6)(9)
BioCare Medical, LLC
Term Loan
SOFR
+
7.00%
(M)
11.44%
11/18/2022
12/9/2027
1,303
1,277
1,303
(6)(9)
EPTAM Plastics, Ltd.
Delayed Draw Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/6/2025
1,285
1,281
1,265
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/6/2025
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/6/2025
2,980
2,971
2,935
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/6/2025
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
6.00%
(Q)
10.50%
9/16/2022
12/6/2025
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
ORG USME Buyer, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.49%
6/21/2022
11/24/2026
7,313
7,241
7,130
(1)(6)
Pediatric Home Respiratory Services, LLC
Revolver
SOFR
+
5.50%
(S)
9.78%
12/23/2024
12/23/2030
(6)(9)
Pediatric Home Respiratory Services, LLC
Delayed Draw Term Loan
N/A
6/2/2022
12/23/2030
-
(11
)
(11
)
(2)(6)(9)
Pediatric Home Respiratory Services, LLC
Term Loan
SOFR
+
5.50%
(S)
9.78%
6/2/2022
12/23/2030
11,500
11,396
11,443
(6)(9)
SunMed Group Holdings, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.26%
11/22/2024
6/16/2028
1,762
1,750
1,749
(6)(9)
Zavation Medical Products, LLC
Revolver
SOFR
+
5.50%
(Q)
9.95%
7/22/2024
6/30/2028
(6)(9)
Zavation Medical Products, LLC
Revolver
SOFR
+
5.50%
(Q)
9.93%
7/22/2024
6/30/2028
(6)(9)
Zavation Medical Products, LLC
Revolver
SOFR
+
5.50%
(Q)
9.93%
7/22/2024
6/30/2028
(6)(9)
Zavation Medical Products, LLC
Term Loan
SOFR
+
5.50%
(Q)
9.93%
6/2/2022
6/30/2028
4,861
4,832
4,825
(1)(6)
Zavation Medical Products, LLC
Term Loan
SOFR
+
5.50%
(Q)
9.95%
7/22/2024
6/30/2028
1,276
1,259
1,267
(1)(6)
Zavation Medical Products, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.23%
7/22/2024
6/30/2028
2,410
2,371
2,392
(1)(6)
45,141
45,165
11.48
%
Health Care Providers & Services
ACP Vault Acquisition, Inc.
Revolver
SOFR
+
5.25%
(M)
9.61%
9/3/2024
9/3/2029
$
$
$
(6)(9)
ACP Vault Acquisition, Inc.
Delayed Draw Term Loan
N/A
9/3/2024
9/3/2029
-
(18
)
(39
)
(2)(6)(9)
ACP Vault Acquisition, Inc.
Term Loan
SOFR
+
5.25%
(M)
9.61%
9/3/2024
9/3/2029
11,305
11,090
11,079
(1)(6)(9)
Apex Dental Partners, LLC
Revolver
N/A
10/29/2024
10/29/2030
-
(7
)
(2
)
(2)(6)(9)
Apex Dental Partners, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.77%
10/29/2024
10/29/2030
(6)(9)
Apex Dental Partners, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.77%
10/29/2024
10/29/2030
(6)(9)
Apex Dental Partners, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.72%
10/29/2024
10/29/2030
(6)(9)
Apex Dental Partners, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.64%
10/29/2024
10/29/2030
(6)(9)
Apex Dental Partners, LLC
Term Loan
SOFR
+
5.25%
(Q)
9.85%
10/29/2024
10/29/2030
7,213
7,143
7,195
(1)(6)
Bebright MSO, LLC
Revolver
N/A
6/3/2024
6/3/2030
-
(22
)
-
(2)(6)(9)
Bebright MSO, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.34%
6/3/2024
6/3/2030
3,332
3,268
3,332
(6)(9)
Bebright MSO, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.14%
6/3/2024
6/3/2030
(6)(9)
Bebright MSO, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.08%
6/3/2024
6/3/2030
(6)(9)
Bebright MSO, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.26%
6/3/2024
6/3/2030
6,155
6,041
6,154
(1)(6)
Eventus Buyer, LLC
Revolver
SOFR
+
5.50%
(M)
10.03%
11/1/2024
11/1/2030
(6)(9)
Eventus Buyer, LLC
Delayed Draw Term Loan
N/A
11/1/2024
11/1/2030
-
(13
)
(26
)
(2)(6)(9)
Eventus Buyer, LLC
Term Loan
SOFR
+
5.50%
(M)
9.86%
11/1/2024
11/1/2030
6,401
6,308
6,304
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Eye Health America, LLC
Revolver
N/A
7/26/2022
7/26/2028
-
(7
)
-
(2)(6)(9)
Eye Health America, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.17%
7/26/2022
7/26/2028
(6)(9)
Eye Health America, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.00%
7/26/2022
7/26/2028
1,860
1,838
1,860
(6)(9)
Eye Health America, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.00%
7/26/2022
7/26/2028
4,106
4,059
4,105
(1)(6)
Gen4 Dental Partners OPCO, LLC
Revolver
N/A
5/13/2024
5/13/2030
-
(10
)
(7
)
(2)(6)(9)
Gen4 Dental Partners OPCO, LLC
Delayed Draw Term Loan
N/A
5/13/2024
5/13/2030
-
(26
)
(37
)
(2)(6)(9)
Gen4 Dental Partners OPCO, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.56%
5/13/2024
5/13/2030
8,738
8,577
8,629
(1)(6)
Heartland Veterinary Partners LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.47%
6/2/2022
12/10/2026
1,295
1,292
1,295
(1)(6)(9)
Heartland Veterinary Partners LLC
Term Loan
SOFR
+
4.75%
(Q)
9.47%
6/2/2022
12/10/2026
9,347
9,317
9,347
(1)(6)(9)
MWD Management, LLC
Revolver
SOFR
+
5.00%
(Q)
9.43%
6/15/2022
6/15/2027
(6)(9)
MWD Management, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.43%
6/15/2022
6/15/2027
1,960
1,949
1,960
(1)(6)
MWD Management, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.43%
6/15/2022
6/15/2027
2,444
2,417
2,444
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.25%
6/2/2022
3/14/2025
1,485
1,485
1,485
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.16%
6/2/2022
3/14/2025
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.47%
6/2/2022
3/14/2025
(1)(6)
NJEye LLC
Term Loan
SOFR
+
4.75%
(Q)
10.25%
6/2/2022
3/14/2025
6,956
6,956
6,956
(1)(6)
OIS Management Services, LLC
Revolver
N/A
11/16/2022
11/16/2028
-
(11
)
-
(2)(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.08%
6/2/2022
11/16/2028
1,896
1,856
1,896
(1)(6)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.30%
8/21/2024
11/16/2028
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.27%
8/21/2024
11/16/2028
1,062
1,047
1,062
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.07%
8/21/2024
11/16/2028
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
9.08%
8/21/2024
11/16/2028
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
N/A
8/21/2024
11/16/2028
-
-
-
(2)(6)(9)
OIS Management Services, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.08%
11/16/2022
11/16/2028
4,913
4,808
4,912
(1)(6)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
10.59%
6/2/2022
3/31/2026
3,327
3,327
2,936
(6)(9)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
10.59%
6/2/2022
3/31/2026
4,002
4,002
3,531
(6)(9)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
10.59%
6/2/2022
3/31/2026
4,873
4,873
4,301
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.58%
7/17/2024
7/17/2029
(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.25%
7/17/2024
7/17/2029
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.25%
7/17/2024
7/17/2029
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.24%
7/17/2024
7/17/2029
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
9.94%
7/17/2024
7/17/2029
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
9.95%
7/17/2024
7/17/2029
(6)(9)
SGA Dental Partners Opco, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.01%
7/17/2024
7/17/2029
13,659
13,399
13,522
(1)(6)(9)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.38%
7/15/2022
7/15/2028
(1)(6)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.32%
7/15/2022
7/15/2028
(1)(6)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.25%
7/15/2022
7/15/2028
(1)(6)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.09%
7/15/2022
7/15/2028
(1)(6)
United Musculoskeletal Partners Acquisition Holdings, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.40%
7/15/2022
7/15/2028
4,888
4,888
4,876
(1)(6)
US Health Partners Management, LLC
Revolver
N/A
1/12/2024
1/11/2030
-
-
-
(2)(6)(8)(9)
US Health Partners Management, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.32%
1/12/2024
1/11/2030
(6)(9)
US Health Partners Management, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.33%
1/12/2024
1/11/2030
(6)(9)
US Health Partners Management, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.33%
1/12/2024
1/11/2030
(6)(9)
USN Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
9.98%
6/9/2022
12/21/2026
1,176
1,169
1,176
(1)(6)
USN Opco, LLC
Delayed Draw Term Loan
N/A
11/15/2024
12/21/2026
-
(5
)
-
(2)(6)(9)
USN Opco, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.23%
3/26/2024
12/21/2026
2,441
2,404
2,441
(1)(6)
USN Opco, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.27%
11/15/2024
12/21/2026
(6)(9)
123,209
122,611
31.18
%
Health Care Technology
BRG Acquisition Co., LLC
Revolver
N/A
7/26/2022
7/26/2028
$
-
$
(7
)
$
(9
)
(2)(6)(9)
BRG Acquisition Co., LLC
Term Loan
SOFR
+
5.50%
(Q)
9.98%
7/26/2022
7/26/2028
3,372
3,328
3,322
(1)(6)
BRG Acquisition Co., LLC
Term Loan
SOFR
+
5.50%
(Q)
9.98%
7/26/2022
7/26/2028
3,372
3,328
3,322
(1)(6)
BRG Acquisition Co., LLC
Term Loan
SOFR
+
6.00%
(Q)
10.33%
12/27/2023
7/26/2028
2,970
2,921
2,970
(1)(6)
Lightspeed Buyer, Inc.
Revolver
N/A
12/2/2024
2/3/2027
-
(3
)
-
(2)(6)(9)
Lightspeed Buyer, Inc.
Delayed Draw Term Loan
N/A
12/2/2024
2/3/2027
-
(85
)
-
(2)(6)(9)
Lightspeed Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.08%
12/2/2024
2/3/2027
3,355
3,323
3,355
(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Q-Centrix Holdings LLC
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
9.11%
6/2/2022
6/1/2026
4,786
4,782
4,786
(1)(6)
Q-Centrix Holdings LLC
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
9.11%
6/2/2022
6/1/2026
(1)(6)
Q-Centrix Holdings LLC
Term Loan
SOFR
+
4.50%
(Q)
9.11%
6/2/2022
6/1/2026
3,825
3,824
3,825
(1)(6)
22,352
22,512
5.72
%
Hotels, Restaurants & Leisure
Taymax Group, L.P.
Term Loan
SOFR
+
6.00%
(M)
10.46%
12/13/2022
7/31/2026
$
4,888
$
4,777
$
4,888
(1)(6)
4,777
4,888
1.24
%
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
11/9/2027
$
9,314
$
9,286
$
9,220
(1)(6)
9,286
9,220
2.34
%
Insurance
Turbo Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
10.48%
6/2/2022
12/2/2025
$
1,288
$
1,282
$
1,243
(1)(6)
Turbo Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
10.48%
6/2/2022
12/2/2025
(1)(6)
Turbo Buyer, Inc.
Term Loan
SOFR
+
6.00%
(Q)
10.48%
6/2/2022
12/2/2025
1,222
1,216
1,179
(1)(6)
Turbo Buyer, Inc.
Term Loan
SOFR
+
6.00%
(Q)
10.48%
6/2/2022
12/2/2025
6,950
6,914
6,707
(1)(6)
9,904
9,608
2.44
%
IT Services
Alta Buyer, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.33%
8/24/2022
12/21/2027
$
9,873
$
9,812
$
9,873
(1)(6)
Alta Buyer, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.33%
8/13/2024
12/21/2027
(1)(6)
Concord III, L.L.C.
Revolver
SOFR
+
6.25%
(M)
10.61%
12/20/2023
12/20/2028
(6)(9)
Concord III, L.L.C.
Term Loan
SOFR
+
6.25%
(M)
10.61%
12/20/2023
12/20/2028
4,344
4,260
4,330
(1)(6)
Distinct Holdings, Inc.
Revolver
N/A
7/18/2024
7/18/2029
-
(20
)
(24
)
(2)(6)(9)
Distinct Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
10.08%
7/18/2024
7/18/2029
11,951
11,756
11,771
(1)(6)(9)
TriMech Acquisition Corp.
Term Loan
SOFR
+
4.75%
(Q)
9.08%
6/2/2022
3/10/2028
8,445
8,368
8,445
(1)(6)
35,062
35,292
8.97
%
Life Sciences Tools & Services
KL Charlie Acquisition Company
Revolver
N/A
9/5/2023
12/30/2026
$
-
$
(1
)
$
(1
)
(2)(6)(9)
KL Charlie Acquisition Company
Delayed Draw Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/30/2026
(1)(6)
KL Charlie Acquisition Company
Delayed Draw Term Loan
SOFR
+
5.50%
(M)
9.96%
6/2/2022
12/30/2026
2,597
2,572
2,571
(1)(6)
KL Charlie Acquisition Company
Delayed Draw Term Loan
SOFR
+
5.50%
(M)
9.96%
3/17/2023
12/30/2026
(1)(6)
KL Charlie Acquisition Company
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/26/2024
12/30/2026
(1)(6)
KL Charlie Acquisition Company
Term Loan
SOFR
+
5.50%
(M)
9.96%
3/17/2023
12/30/2026
(1)(6)
Molecular Designs, LLC
Term Loan
SOFR
+
4.50%
(M)
8.95%
9/9/2024
10/4/2027
2,264
2,223
2,252
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.43%
6/2/2022
10/29/2027
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.73%
6/2/2022
10/29/2027
5,727
5,717
5,656
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.43%
6/2/2022
10/29/2027
2,834
2,829
2,799
(1)(6)
15,259
15,181
3.86
%
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Personal Care Products
Accupac, LLC
Revolver
N/A
12/31/2024
12/31/2029
$
-
$
(26
)
$
(13
)
(2)(6)(9)
Accupac, LLC
Term Loan
SOFR
+
7.00%
(Q)
11.33%
6/2/2022
12/31/2029
8,696
8,522
8,609
(6)(9)
BPC Holding III Corp.
Term Loan
SOFR
+
5.25%
(Q)
9.60%
6/2/2022
7/28/2026
5,478
5,478
5,409
(1)(6)
KL Bronco Acquisition, Inc.
Revolver
SOFR
+
5.25%
(Q)
9.94%
6/30/2022
6/30/2028
(6)(9)
KL Bronco Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.70%
6/30/2022
6/30/2028
(6)(9)
KL Bronco Acquisition, Inc.
Term Loan
SOFR
+
5.25%
(Q)
9.94%
6/30/2022
6/30/2028
3,840
3,790
3,802
(1)(6)
18,505
18,545
4.72
%
Pharmaceuticals
Advantage HCS LLC
Term Loan
SOFR
+
5.25%
(Q)
9.77%
11/8/2023
11/8/2029
$
12,469
$
12,148
$
12,469
(1)(6)(9)
Leiters, Inc.
Revolver
PRIME
+
5.00%
(Q)
12.50%
9/29/2023
6/29/2028
(6)(9)
Leiters, Inc.
Term Loan
SOFR
+
6.00%
(Q)
10.61%
9/29/2023
6/29/2028
(6)(9)
12,689
12,981
3.30
%
Professional Services
Basin Innovation Group, LLC
Revolver
N/A
12/6/2024
12/6/2030
$
-
$
(19
)
$
(9
)
(2)(6)(9)
Basin Innovation Group, LLC
Delayed Draw Term Loan
N/A
12/6/2024
12/6/2030
-
(13
)
(13
)
(2)(6)(9)
Basin Innovation Group, LLC
Term Loan
SOFR
+
5.00%
(Q)
9.51%
12/6/2024
12/6/2030
11,700
11,526
11,612
(6)(9)
UHY Advisors, Inc.
Revolver
+
0.50%
(Q)
0.50%
11/22/2024
11/21/2031
-
(17
)
(18
)
(2)(6)(9)
UHY Advisors, Inc.
Delayed Draw Term Loan
+
0.75%
(Q)
0.75%
11/22/2024
11/21/2031
-
(33
)
(66
)
(2)(6)(9)
UHY Advisors, Inc.
Term Loan
SOFR
+
4.75%
(Q)
9.26%
11/22/2024
11/21/2031
6,623
6,558
6,557
(1)(6)
18,002
18,063
4.59
%
Software
Project Leopard Holdings, Inc.
Term Loan
SOFR
+
5.25%
(Q)
9.94%
8/12/2022
7/20/2029
$
$
$
(6)(9)
QM Buyer, Inc.
Revolver
N/A
12/6/2024
12/6/2030
-
(17
)
(9
)
(2)(6)(9)
QM Buyer, Inc.
Delayed Draw Term Loan
N/A
12/6/2024
12/6/2030
-
(17
)
(17
)
(2)(6)(9)
QM Buyer, Inc.
Term Loan
SOFR
+
5.00%
(Q)
9.44%
12/6/2024
12/6/2030
6,919
6,816
6,867
(6)(9)
TCP Hawker Intermediate LLC
Term Loan
SOFR
+
5.00%
(Q)
9.33%
11/26/2024
8/30/2029
10,719
10,707
10,719
(1)(6)
17,582
17,647
4.49
%
Textiles, Apparel & Luxury Goods
BPCP NSA Intermedco, Inc.
Revolver
N/A
5/17/2024
5/17/2030
$
-
$
(13
)
$
-
(2)(6)(9)
BPCP NSA Intermedco, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.12%
5/17/2024
5/17/2030
(6)(9)
BPCP NSA Intermedco, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.09%
5/17/2024
5/17/2030
(6)(9)
BPCP NSA Intermedco, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.11%
5/17/2024
5/17/2030
(6)(9)
BPCP NSA Intermedco, Inc.
Term Loan
SOFR
+
4.75%
(M)
9.11%
5/17/2024
5/17/2030
6,520
6,430
6,520
(1)(6)
7,274
7,396
1.88
%
Trading Companies & Distributors
Easy Ice, LLC
Revolver
N/A
10/30/2024
10/30/2030
$
-
$
(11
)
$
(11
)
(2)(6)(9)
Easy Ice, LLC
Delayed Draw Term Loan
N/A
6/21/2024
12/31/2025
-
(11
)
(20
)
(2)(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Easy Ice, LLC
Delayed Draw Term Loan
N/A
10/30/2024
10/30/2030
-
(11
)
(23
)
(2)(6)(9)
Easy Ice, LLC
Term Loan
SOFR
+
5.25%
(Q)
9.99%
10/30/2024
10/30/2030
6,738
6,640
6,637
(1)(6)
Krayden Holdings, Inc.
Revolver
N/A
3/1/2023
3/1/2029
-
(12
)
(2
)
(2)(6)(9)
Krayden Holdings, Inc.
Delayed Draw Term Loan
N/A
3/1/2023
3/1/2029
-
(9
)
(1
)
(2)(6)(9)
Krayden Holdings, Inc.
Delayed Draw Term Loan
N/A
3/1/2023
3/1/2029
-
(9
)
(1
)
(2)(6)(9)
Krayden Holdings, Inc.
Delayed Draw Term Loan
N/A
8/30/2024
3/1/2029
-
(6
)
(3
)
(2)(6)(9)
Krayden Holdings, Inc.
Term Loan
SOFR
+
4.75%
(M)
9.11%
3/1/2023
3/1/2029
2,034
1,985
2,029
(1)(6)
Krayden Holdings, Inc.
Term Loan
SOFR
+
4.75%
(M)
9.11%
8/30/2024
3/1/2029
1,248
1,236
1,245
(1)(6)
Municipal Emergency Services, Inc.
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.48%
9/24/2024
10/1/2027
1,301
1,259
1,301
(6)(9)
11,051
11,151
2.84
%
Transportation Infrastructure
G2 Secure Staff, L.L.C.
Term Loan
SOFR
+
5.50%
(Q)
10.24%
7/2/2025
$
$
$
(6)(9)
0.12
%
Total Senior Secured First Lien Loans
634,455
627,526
159.56
%
Equity
Automobile Components
M&D Parent Holdings, LLC
Class B Units
500,000
(3)(9)
0.15
%
Chemicals
MDI Aggregator LP
Common Units
8,046
(3)(9)
Techmer BB Aggregator, LP
Limited Partnership Units
(3)(9)
1,155
0.25
%
Commercial Services & Supplies
RFI Group Holdings, L.P.
Class A Units
3,000
(3)(9)
Chimney Rock 3G Co-Invest
Equity Co-Invest
1,250
(3)(9)
0.13
%
Construction & Engineering
HT Investors, LLC
A1 Units
3,333
(3)(9)
0.08
%
Containers & Packaging
Oliver Investors, LP
Class A Units
6,080
(3)(9)
0.12
%
Diversified Consumer Services
FS NU Investors, LP
Class A Units
5,257
(3)(9)
0.06
%
Health Care Technology
BRG Group Holdings, LLC
Class A Units
626,441
(3)(9)
0.18
%
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
Personal Care Products
KLC Fund 1-C1 LP
Limited Partnership Units
605,769
(3)(9)
0.15
%
Total Equity
4,780
4,437
1.13
%
Subtotal Non-Controlled/Non-Affiliated Investments
639,235
631,963
160.69
%
Controlled Investments:
(+)
Investment Funds and Vehicles
Senior Direct Lending Program, LLC
Limited Partnership Units
SOFR
+
8.00%
(Q)
Current Yield: 13.50%
12/31/36
187,122
183,982
172,152
(2)(4)(5)
$
183,982
$
172,152
43.77
%
Subtotal Controlled Investments
$
183,982
$
172,152
43.77
%
Total Investments, December 31, 2024
$
823,217
$
804,115
204.46
%
Derivative Instruments
Description
Hedging Item
Company Receives
Company Pays
Counterparty
Maturity Date
Notional Amount
Fair Value
Upfront Payments / Receipts
Unrealized Appreciation / (Depreciation)
Footnotes
Interest rate swap
2026 Notes
8.10
%
USD-SOFR-Compound + 4.202%
CIBC Bank USA
12/21/2026
$
25,000
$
$
-
$
(7)
Interest rate swap
2028 Notes
8.20
%
USD-SOFR-Compound + 4.550%
CIBC Bank USA
12/21/2028
25,000
-
(7)
Total
$
50,000
$
$
-
$
# Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (See "Note 4. Fair Value Measurements").
+ All of the issuers of the investments held by the Company are domiciled in the United States. Certain investments also have international operations.
* Variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to the Secured Overnight Financing Rate (“SOFR”) or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q) or monthly (M). For each such loan, the Company has provided the interest rate in effect as of December 31, 2024.
^ Percentage is based on net assets of $393,290 as of December 31, 2024.
(+) Controlled Investments are defined by the Investment Company Act of 1940 Act, as amended (the "1940 Act"), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(++) Negative cost, if applicable, results from unamortized fees on unfunded commitments, which are capitalized to the investment cost. The negative fair value, if applicable, results from the fair valuation of the unfunded commitment.
(1) The Company's investment or a portion thereof is held by VCC CLO 1, LLC, which serves as collateral for the 2024 Debt Securitization (See "Note 6. Borrowings").
(2) The investment has an unfunded commitment as of December 31, 2024 (See "Note 8. Commitments"). Fair value includes an analysis of the unfunded commitment.
(3) Security is non-income producing.
(4) The investment is not considered a "qualifying asset" under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. As of December 31, 2024, total qualifying assets at fair value represented 80.3% of the Company's total assets calculated in accordance with the 1940 Act.
(5) In addition to the interest earned based on the stated contractual interest rate of this security, the certificates entitle the holders thereof to receive a portion of the excess cash flow from the SDLP’s loan portfolio, after expenses, which may result in a return to the Company greater than the contractual stated interest rate.
(6) Loan includes interest rate floor feature.
(7) This investment is valued using observable inputs using a Level 2 measurement in the ASC 820 fair value hierarchy as of December 31, 2024 (See "Note 4. Fair Value Measurements").
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2024
(dollar amounts in thousands, except Shares/Units)
(8) Par Amount, Amortized Cost, and Fair Value are less than $1,000.
(9) The investment or a portion thereof held by the Company or VCC Equity Holdings, LLC, a wholly owned subsidiary of the Company, is pledged as collateral under the SMBC Facility (See "Note 6. Borrowings").
(10) As of December 31, 2024, in addition to the amounts funded by the Company under this first lien senior secured revolving loan, there were also letters of credit issued and outstanding through a financial intermediary under the loan. See Note 8. Commitments for further information on letters of credit commitments related to certain portfolio companies.
(11) As of December 31, 2024, no amounts were funded by the Company under this first lien senior secured revolving loan; however, there were letters of credit issued and outstanding through a financial intermediary under the loan. See Note 8, Commitments for further information on letters of credit commitments related to certain portfolio companies.
See accompanying notes to consolidated financial statements.
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
Company # +
Type of Investment
Reference Rate
and Spread
Interest
Rate *
Maturity
Shares / Units
Principal
Amortized
Cost (++)
Fair
Value
Percentage of
Net Assets ^
Footnotes
Non-Controlled/Non-Affiliated Investments:
Senior Secured First Lien Loans
Aerospace & Defense
AIM Acquisition, LLC
Term Loan
SOFR
+
5.00%
(S)
10.49%
12/02/25
$
11,000
$
10,819
$
10,780
(1)(6)
Air Comm Corporation LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.45%
07/01/27
3,543
3,523
3,410
(1)(6)
Air Comm Corporation LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.45%
07/01/27
1,133
1,127
1,091
(1)(6)
Air Comm Corporation LLC
Term Loan
SOFR
+
5.00%
(Q)
10.45%
07/01/27
1,657
1,648
1,595
(1)(6)
Precinmac (US) Holdings Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.46%
08/31/27
7,254
7,183
7,109
(1)(6)
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.54%
08/31/27
3,553
3,518
3,482
(1)(6)
Trident Maritime Systems, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
02/26/27
(6)(9)
28,706
28,341
7.03
%
Auto Components
AAMP Global Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
10.95%
11/05/25
14,738
14,633
14,516
(1)(6)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.50%
(Q)
10.05% (2.75% PIK)
08/31/28
2,205
2,179
1,846
(6)(9)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.50%
(Q)
10.05% (2.75% PIK)
08/31/28
(6)(9)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.50%
(Q)
10.05% (2.75% PIK)
08/31/28
(6)(9)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.50%
(Q)
10.04% (2.75% PIK)
08/31/28
1,059
1,046
(6)(9)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
2.50%
(Q)
10.05% (2.75% PIK)
08/31/28
2,532
2,502
2,120
(6)(9)
M&D Midco, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.04%
08/31/28
(6)(9)
M&D Midco, Inc.
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.04%
08/31/28
(2)(6)(9)
M&D Midco, Inc.
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.01%
08/31/28
(2)(6)(9)
M&D Midco, Inc.
Revolver
PRIME
+
4.50%
(Q)
13.00%
08/31/28
(2)(6)(9)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
11/16/27
3,585
3,558
3,316
(1)(6)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
11/16/27
3,164
3,141
2,927
(1)(6)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
11/16/27
1,500
1,489
1,387
(1)(6)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
11/16/27
1,646
1,634
1,523
(1)(6)
Race Winning Brands, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
11/16/27
1,027
1,019
(1)(6)
USSC Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.75%
09/28/27
(6)(9)
USSC Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.79%
09/28/27
(6)(9)
USSC Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.78%
09/28/27
(6)(9)
USSC Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.77%
09/28/27
(6)(9)
USSC Acquisition Corp.
Term Loan
SOFR
+
6.25%
(Q)
11.75%
09/28/27
7,043
7,004
6,955
(1)(6)
38,894
37,078
9.19
%
Capital Markets
Adviser Investments, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.15%
08/31/28
(2)(6)(9)
Adviser Investments, LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.10%
08/31/28
(2)(6)(9)
Adviser Investments, LLC
Term Loan
SOFR
+
4.75%
(Q)
10.14%
08/31/28
(6)(9)
Adviser Investments, LLC
Revolver
N/A
08/31/28
-
-
-
(2)(6)(9)
0.01
%
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
Chemicals
Boulder Scientific Company, LLC
Delayed Draw Term Loan
N/A
12/28/25
-
(1
)
(19
)
(2)(6)(9)
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.50%
(Q)
10.01%
12/28/25
(6)(9)
Boulder Scientific Company, LLC
Term Loan
SOFR
+
4.50%
(Q)
10.04%
12/28/25
5,798
5,760
5,624
(6)(9)
MDI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.63%
07/25/28
(6)(9)
MDI Buyer, Inc.
Revolver
SOFR
+
6.00%
(Q)
11.63%
07/25/28
(2)(6)(9)
MDI Buyer, Inc.
Revolver
SOFR
+
6.00%
(Q)
11.62%
07/25/28
(2)(6)(9)
MDI Buyer, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.60%
07/25/28
(1)(6)
SI Holdings, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.45%
12/31/27
(1)(6)
Techmer BB Bidco, LLC
Delayed Draw Term Loan
N/A
09/01/28
-
-
(1
)
(2)(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.74%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.85%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.82%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.72%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.74%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.72%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.53%
09/01/28
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.53%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Revolver
SOFR
+
5.25%
(S)
10.53%
09/01/28
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Revolver
PRIME
+
4.25%
(M)
12.75%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.80%
09/01/28
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.73%
09/01/28
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.79%
09/01/28
-
-
-
(6)(8)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.79%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.73%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.73%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.77%
09/01/28
(6)(9)
Techmer BB Bidco, LLC
Term Loan
SOFR
+
5.25%
(S)
10.83%
09/01/28
(6)(9)
6,991
6,832
1.69
%
Commercial Services & Supplies
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
6.50%
(Q)
12.01%
12/17/26
(6)(9)
Advanced Web Technologies Holding Company
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.01%
12/17/26
(6)(9)
Advanced Web Technologies Holding Company
Term Loan
SOFR
+
6.75%
(Q)
12.26%
12/17/26
(6)(9)
Castleworks Home Services Company
Revolver
SOFR
+
5.50%
(M)
12.95% (2.00% PIK)
06/29/28
(2)(6)(9)
Castleworks Home Services Company
Revolver
SOFR
+
5.50%
(M)
12.96% (2.00% PIK)
06/29/28
(2)(6)(9)
Castleworks Home Services Company
Revolver
SOFR
+
5.50%
(M)
12.96% (2.00% PIK)
06/29/28
(2)(6)(9)
Castleworks Home Services Company
Term Loan
SOFR
+
5.50%
(M)
12.96% (2.00% PIK)
06/29/28
5,653
5,564
4,663
(6)(9)
LAV Gear Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
11.79%
10/31/24
(6)(9)
LAV Gear Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
11.78%
10/31/24
2,481
2,445
2,481
(1)(6)
Liquid Environmental Solutions Corporation
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.24%
05/31/26
5,070
5,022
4,918
(1)(6)
Liquid Environmental Solutions Corporation
Term Loan
SOFR
+
4.75%
(Q)
10.24%
05/31/26
(1)(6)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.24%
08/05/28
(6)(9)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.23%
08/05/28
(6)(9)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.23%
08/05/28
(6)(9)
RFI Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(Q)
10.25%
08/05/28
(6)(9)
RFI Buyer, Inc.
Revolver
N/A
08/05/28
-
-
-
(2)(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
RFI Buyer, Inc.
Term Loan
SOFR
+
4.75%
(Q)
10.23%
08/05/28
(6)(9)
VRC Companies, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.14%
06/29/27
11,725
11,606
11,549
(1)(6)
26,623
25,481
6.32
%
Construction & Engineering
Royal Holdco Corporation
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/30/26
(1)(6)
0.17
%
Containers & Packaging
Comar Holding Company, LLC
Delayed Draw Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
(6)(9)
Comar Holding Company, LLC
Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
2,925
2,812
2,684
(6)(9)
Comar Holding Company, LLC
Delayed Draw Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
1,830
1,778
1,679
(1)(6)
Comar Holding Company, LLC
Delayed Draw Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
3,035
3,031
2,784
(1)(6)
Comar Holding Company, LLC
Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
(1)(6)
Comar Holding Company, LLC
Term Loan
SOFR
+
2.00%
(Q)
12.13% (4.75% PIK)
06/18/26
5,905
5,678
5,418
(1)(6)
Oliver Packaging, LLC
Revolver
SOFR
+
5.00%
(Q)
10.54%
07/06/28
(2)(6)(9)
Oliver Packaging, LLC
Term Loan
SOFR
+
5.00%
(Q)
10.50%
07/06/28
3,974
3,919
3,874
(1)(6)
Online Labels Group, LLC
Revolver
N/A
12/19/29
-
-
-
(2)(6)(9)
Online Labels Group, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.61%
12/19/29
(6)(9)
Online Labels Group, LLC
Delayed Draw Term Loan
N/A
12/19/29
-
-
-
(2)(6)(9)
Online Labels Group, LLC
Delayed Draw Term Loan
N/A
12/19/29
-
-
-
(2)(6)(9)
18,458
17,624
4.37
%
Distributors
Polk Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
(1)(6)
Polk Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
(1)(6)
Polk Acquisition Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
(1)(6)
Polk Acquisition Corp.
Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
10,137
10,097
10,086
(1)(6)
Polk Acquisition Corp.
Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
(1)(6)
Polk Acquisition Corp.
Term Loan
SOFR
+
5.25%
(M)
12.96% (2.25% PIK)
12/20/24
(1)(6)
POY Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/16/27
5,086
4,986
5,061
(6)(9)
POY Holdings, LLC
Delayed Draw Term Loan
N/A
11/16/27
-
(9
)
(6
)
(2)(6)(9)
United Scope LLC
Term Loan
SOFR
+
5.00%
(Q)
10.50%
12/01/25
10,866
10,836
9,671
(6)(9)
26,990
25,892
6.42
%
Diversified Consumer Services
ADPD Holdings, LLC
Term Loan
SOFR
+
6.00%
(S)
11.68%
08/16/28
(6)(9)
ADPD Holdings, LLC
Revolver
SOFR
+
6.00%
(S)
11.68%
08/16/28
(2)(6)(9)
ADPD Holdings, LLC
Delayed Draw Term Loan
N/A
08/16/28
-
-
(1
)
(2)(6)(9)
ADPD Holdings, LLC
Delayed Draw Term Loan
N/A
08/16/28
-
-
(2
)
(2)(6)(9)
Any Hour LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.23%
07/21/27
7,396
7,285
7,304
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
Express Wash Acquisition Company, LLC
Revolver
SOFR
+
6.50%
(Q)
12.16%
07/14/28
(2)(6)(9)
Express Wash Acquisition Company, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.16%
07/14/28
1,129
1,111
1,087
(1)(6)
Express Wash Acquisition Company, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.16%
07/14/28
5,272
5,195
5,075
(1)(6)
HLSG Intermediate, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(M)
11.97%
03/31/28
(2)(6)(9)
HLSG Intermediate, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(M)
11.97%
03/31/28
(2)(6)(9)
HLSG Intermediate, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.11%
03/31/28
5,898
5,771
5,854
(6)(9)
North Haven Stallone Buyer, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.15%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Revolver
SOFR
+
5.50%
(Q)
11.14%
05/24/27
(2)(6)(9)
North Haven Stallone Buyer, LLC
Revolver
PRIME
+
4.50%
(Q)
13.00%
05/24/27
(2)(6)(9)
North Haven Stallone Buyer, LLC
Revolver
SOFR
+
5.50%
(Q)
11.12%
05/24/27
(2)(6)(9)
North Haven Stallone Buyer, LLC
Revolver
SOFR
+
5.50%
(Q)
11.13%
05/24/27
(2)(6)(9)
North Haven Stallone Buyer, LLC
Revolver
SOFR
+
5.50%
(Q)
11.14%
05/24/27
(2)(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.41%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.17%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.14%
05/24/27
-
-
-
(6)(8)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.42%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.33%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.14%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.14%
05/24/27
(6)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.14%
05/24/27
-
-
-
(6)(8)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
11.38%
05/24/27
-
-
-
(6)(8)(9)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.90%
05/24/27
(1)(6)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.89%
05/24/27
1,546
1,535
1,527
(1)(6)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.89%
05/24/27
(1)(6)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.89%
05/24/27
(1)(6)
North Haven Stallone Buyer, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.90%
05/24/27
1,400
1,389
1,382
(1)(6)
North Haven Stallone Buyer, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.89%
05/24/27
1,106
1,098
1,092
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
11.95%
10/30/25
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
11.98%
10/30/25
5,786
5,766
5,699
(1)(6)
North Haven USHC Acquisition, Inc.
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
11.95%
10/30/25
2,863
2,853
2,820
(1)(6)
36,719
36,574
9.07
%
Diversified Telecommunication Services
MBS Holdings, Inc.
Term Loan
SOFR
+
6.25%
(M)
11.71%
04/16/27
(6)(9)
0.08
%
Electronic Equipment, Instruments & Components
BC Group Holdings, Inc.
Term Loan
SOFR
+
5.00%
(Q)
10.45%
12/23/24
(6)(9)
BC Group Holdings, Inc.
Term Loan
SOFR
+
5.00%
(Q)
10.45%
12/23/24
6,565
6,564
6,516
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
Wildcat Buyerco, Inc.
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.10%
02/26/27
(6)(9)
Wildcat Buyerco, Inc.
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.10%
02/26/27
1,899
1,899
1,894
(1)(6)
Wildcat Buyerco, Inc.
Term Loan
SOFR
+
5.75%
(Q)
11.10%
02/26/27
(1)(6)
Wildcat Buyerco, Inc.
Term Loan
SOFR
+
5.75%
(Q)
11.10%
02/26/27
3,590
3,590
3,581
(1)(6)
13,579
13,510
3.35
%
Energy Equipment & Services
Energy Labs Holdings Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.73%
04/07/28
(6)(9)
Energy Labs Holdings Corp.
Term Loan
SOFR
+
5.25%
(M)
10.71%
04/07/28
7,682
7,593
7,663
(1)(6)
8,320
8,392
2.08
%
Food & Staples Retailing
KeyImpact Holdings, Inc.
Term Loan
SOFR
+
4.75%
(Q)
10.23%
06/21/26
2,876
2,862
2,869
(1)(6)
2,862
2,869
0.71
%
Food Products
Del Real, LLC
Term Loan
SOFR
+
6.75%
(Q)
13.25% (1.00% PIK)
03/28/28
3,507
3,461
3,507
(1)(6)
JTM Foods LLC
Term Loan
SOFR
+
5.25%
(Q)
10.75%
05/14/27
(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.81%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.81%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.78%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.78%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.78%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.79%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
SOFR
+
5.25%
(Q)
10.77%
05/14/27
(2)(6)(9)
JTM Foods LLC
Revolver
PRIME
+
4.25%
(Q)
12.75%
05/14/27
(2)(6)(9)
KNPC Holdco, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
10/22/29
8,082
7,989
7,900
(1)(6)
VG Target Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.14%
08/02/27
5,930
5,844
5,397
(6)(9)
17,389
16,899
4.19
%
Health Care Equipment & Supplies
ACP Oak Buyer, Inc.
Term Loan
SOFR
+
5.25%
(M)
10.71%
08/29/25
5,892
5,837
5,819
(1)(6)
Biocare Medical, LLC
Term Loan
SOFR
+
7.00%
(Q)
12.47%
12/09/27
1,485
1,448
1,485
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
6.00%
(Q)
11.53%
12/06/25
(6)(9)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
10.96%
12/06/25
3,011
2,993
2,966
(1)(6)
EPTAM Plastics, Ltd.
Delayed Draw Term Loan
SOFR
+
5.50%
(M)
10.96%
12/06/25
1,298
1,290
1,278
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
10.96%
12/06/25
(1)(6)
EPTAM Plastics, Ltd.
Term Loan
SOFR
+
5.50%
(M)
10.96%
12/06/25
(1)(6)
Zavation Medical Products, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.45%
06/30/28
4,912
4,876
4,814
(6)(9)
17,053
16,965
4.21
%
Health Care Providers & Services
Advantage HCS LLC
Term Loan
SOFR
+
6.25%
(Q)
11.62%
11/08/29
12,500
12,131
12,125
(1)(6)
Eye Health America, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.60%
07/26/28
1,590
1,560
1,577
(2)(6)(9)
Eye Health America, LLC
Revolver
SOFR
+
5.25%
(Q)
10.60%
07/26/28
(2)(6)(9)
Eye Health America, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.60%
07/26/28
4,148
4,090
4,127
(1)(6)
Fingerpaint Marketing, Inc.
Delayed Draw Term Loan
SOFR
+
6.75%
(Q)
12.20%
12/30/26
(6)(9)
Fingerpaint Marketing, Inc.
Term Loan
SOFR
+
6.75%
(Q)
12.20%
12/30/26
(6)(9)
Fingerpaint Marketing, Inc.
Revolver
PRIME
+
5.25%
(Q)
13.75%
12/30/26
(2)(6)(9)
Fingerpaint Marketing, Inc.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.70%
12/30/26
(6)(9)
Fingerpaint Marketing, Inc.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.70%
12/30/26
2,624
2,587
2,552
(1)(6)
Fingerpaint Marketing, Inc.
Term Loan
SOFR
+
6.25%
(Q)
11.70%
12/30/26
(1)(6)
Heartland Veterinary Partners, LLC
Delayed Draw Term Loan
SOFR
+
5.06%
(M)
10.51%
12/10/26
1,312
1,304
1,298
(1)
Heartland Veterinary Partners, LLC
Term Loan
SOFR
+
5.06%
(M)
10.51%
12/10/26
9,461
9,406
9,366
(1)
MWD Management, LLC
Revolver
SOFR
+
5.00%
(Q)
10.45%
06/15/27
(2)(6)(9)
MWD Management, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.45%
06/15/27
1,980
1,966
1,950
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
MWD Management, LLC
Term Loan
SOFR
+
5.00%
(Q)
10.45%
06/15/27
2,469
2,433
2,432
(1)(6)
NJEye LLC
Term Loan
SOFR
+
4.75%
(S)
10.39%
03/14/25
7,029
7,029
7,012
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(S)
10.39%
03/14/25
1,508
1,508
1,504
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(S)
10.42%
03/14/25
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(S)
10.40%
03/14/25
(1)(6)
NJEye LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(S)
10.46%
03/14/25
(1)(6)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.22%
11/16/28
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.23%
11/16/28
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.20%
11/16/28
(6)(9)
OIS Management Services, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.20%
11/16/28
(6)(9)
OIS Management Services, LLC
Revolver
N/A
11/16/28
-
(14
)
(1
)
(2)(6)(9)
OIS Management Services, LLC
Term Loan
SOFR
+
5.75%
(Q)
11.20%
11/16/28
4,963
4,836
4,950
(1)(6)
ORG USME Buyer, LLC
Term Loan
SOFR
+
5.75%
(Q)
11.29%
11/24/26
7,388
7,283
6,907
(1)(6)
Pediatric Home Respiratory Services, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/04/25
(6)(9)
Pediatric Home Respiratory Services, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(M)
11.71%
12/04/25
2,095
2,087
2,080
(6)(9)
Pediatric Home Respiratory Services, LLC
Delayed Draw Term Loan
PRIME
+
5.25%
(M)
13.75%
12/04/25
(6)(9)
Pediatric Home Respiratory Services, LLC
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/04/25
4,554
4,523
4,486
(6)(9)
Prelude Fertility, Inc.
Delayed Draw Term Loan
SOFR
+
7.00%
(S)
12.69%
12/31/24
2,089
2,045
2,068
(1)(6)
Prelude Fertility, Inc.
Term Loan
SOFR
+
7.00%
(S)
12.69%
12/31/24
7,756
7,676
7,678
(1)(6)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.61%
01/02/25
3,583
3,561
3,502
(1)(6)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.61%
01/02/25
4,363
4,336
4,265
(1)(6)
Premier Imaging, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.61%
01/02/25
2,979
2,960
2,912
(1)(6)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.68%
12/30/26
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.64%
12/30/26
3,087
3,045
3,064
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.65%
12/30/26
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.61%
12/30/26
3,512
3,464
3,485
(6)(9)
SGA Dental Partners Opco, LLC
Delayed Draw Term Loan
N/A
12/30/26
-
(33
)
(10
)
(2)(6)(9)
SGA Dental Partners Opco, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.61%
12/30/26
(6)(9)
TheKey, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.48%
03/30/27
(1)(6)
TheKey, LLC
Term Loan
SOFR
+
5.00%
(Q)
10.48%
03/30/27
1,733
1,727
1,668
(1)(6)
TheKey, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.48%
03/30/27
5,475
5,455
5,269
(1)(6)
TheKey, LLC
Term Loan
SOFR
+
5.00%
(Q)
10.48%
03/30/27
(1)(6)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.16%
07/15/28
(2)(6)(9)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.13%
07/15/28
(2)(6)(9)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.13%
07/15/28
(2)(6)(9)
United Musculoskeletal Partners Acquisition Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.12%
07/15/28
(2)(6)(9)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
United Musculoskeletal Partners Acquisition Holdings, LLC
Term Loan
SOFR
+
5.75%
(Q)
11.15%
07/15/28
4,938
4,938
4,901
(1)(6)
USN Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.28%
12/21/26
(6)(9)
USN Opco, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
11.25%
12/21/26
1,163
1,153
1,154
(6)(9)
113,201
112,463
27.89
%
Health Care Technology
BRG Acquisition Co., LLC
Revolver
N/A
07/26/28
-
(9
)
(2
)
(2)(6)(9)
BRG Acquisition Co., LLC
Term Loan
SOFR
+
6.00%
(Q)
11.50%
07/26/28
3,000
2,940
2,993
(1)(6)
BRG Acquisition Co., LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
07/26/28
6,814
6,705
6,797
(1)(6)
Net Health Acquisition Corp.
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/21/25
(1)(6)
Net Health Acquisition Corp.
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/21/25
1,464
1,463
1,445
(1)(6)
Net Health Acquisition Corp.
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/21/25
9,161
9,161
9,046
(1)(6)
Q-Centrix, LLC
Term Loan
SOFR
+
4.50%
(Q)
9.99%
05/30/25
1,057
1,055
1,050
(6)(9)
Q-Centrix, LLC
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
9.99%
05/30/25
4,836
4,824
4,799
(6)(9)
26,316
26,303
6.52
%
Hotels, Restaurants & Leisure
Taymax Group, L.P.
Term Loan
SOFR
+
6.00%
(Q)
11.50%
07/31/25
4,938
4,804
4,938
(1)(6)
4,804
4,938
1.22
%
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/09/27
9,389
9,353
9,177
(1)(6)
9,353
9,177
2.28
%
Insurance
Integrity Marketing Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
6.05%
(Q)
11.54%
08/27/26
10,806
10,806
10,671
(1)(6)
Turbo Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/02/25
(2)(6)(9)
Turbo Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/02/25
(2)(6)(9)
Turbo Buyer, Inc.
Delayed Draw Term Loan
N/A
12/02/25
-
-
-
(2)(6)(9)
Turbo Buyer, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/02/25
1,235
1,222
1,219
(1)(6)
Turbo Buyer, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/02/25
1,302
1,289
1,286
(1)(6)
Turbo Buyer, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/02/25
7,023
6,952
6,936
(1)(6)
20,752
20,597
5.11
%
IT Services
Alta Buyer, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.50%
12/21/27
(6)(9)
TriMech Acquisition Corp.
Term Loan
SOFR
+
4.75%
(Q)
10.25%
03/10/28
8,532
8,435
8,404
(1)(6)
8,531
8,502
2.11
%
Personal Products
Accupac, LLC
Delayed Draw Term Loan
N/A
01/16/26
-
-
(18
)
(2)(6)(9)
Accupac, LLC
Term Loan
SOFR
+
6.00%
(Q)
11.52%
01/16/26
10,804
10,804
10,452
(1)(6)
Barnet Products LLC
Term Loan
SOFR
+
5.25%
(S)
10.82%
07/28/26
3,315
3,315
3,232
(6)(9)
Barnet Products LLC
Term Loan
SOFR
+
5.25%
(S)
10.82%
07/28/26
2,379
2,379
2,320
(6)(9)
KL Bronco Acquisition, Inc.
Delayed Draw Term Loan
N/A
06/30/28
-
(14
)
(165
)
(2)(6)(9)
KL Bronco Acquisition, Inc.
Revolver
SOFR
+
5.75%
(Q)
11.23%
06/30/28
(2)(6)(9)
KL Bronco Acquisition, Inc.
Term Loan
SOFR
+
5.75%
(Q)
11.23%
06/30/28
3,879
3,818
3,521
(1)(6)
20,755
19,740
4.89
%
Pharmaceuticals
Leiters, Inc.
Revolver
N/A
06/29/28
-
(7
)
(1
)
(2)(6)(9)
Leiters, Inc.
Term Loan
SOFR
+
6.00%
(S)
11.46%
06/29/28
(6)(9)
Leiters, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.57%
06/29/28
(6)(9)
0.12
%
Professional Services
The Chartis Group, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.04%
05/01/25
(6)(9)
The Chartis Group, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
10.53%
05/01/25
(1)(6)
The Chartis Group, LLC
Term Loan
SOFR
+
5.00%
(Q)
10.52%
05/01/25
10,803
10,725
10,722
(1)(6)
11,547
11,543
2.86
%
Road & Rail
A&R Logistics Holdings, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.54%
05/03/25
4,971
4,947
4,871
(1)(6)
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
A&R Logistics Holdings, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.54%
05/03/25
(1)(6)
Beacon Mobility Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.74%
05/22/24
8,839
8,807
8,684
(1)(6)
Beacon Mobility Corp.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.74%
05/22/24
1,951
1,943
1,916
(1)(6)
16,629
16,389
4.06
%
Software
Concord III, L.L.C.,
Term Loan
SOFR
+
6.25%
(Q)
11.62%
12/20/28
3,734
3,650
3,692
(6)(9)
Concord III, L.L.C.,
Revolver
N/A
12/20/28
-
(5
)
(2
)
(2)(6)(9)
Pegasus Global Enterprise Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.75%
05/29/25
(1)(6)
Pegasus Global Enterprise Holdings, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.75%
05/29/25
5,540
5,539
5,484
(1)(6)
Project Leopard Holdings, Inc.
Term Loan
SOFR
+
5.25%
(Q)
10.73%
07/20/29
(6)(7)(9)
TimeClock Plus, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.00%
08/28/26
4,341
4,334
4,330
(1)(6)
TimeClock Plus, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
08/28/26
6,463
6,452
6,447
(1)(6)
20,415
20,389
5.06
%
Trading Companies & Distributors
Easy Ice, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
11.78% (1.00% PIK)
12/31/25
6,007
5,998
6,007
(1)(6)
Easy Ice, LLC
Term Loan
SOFR
+
5.25%
(Q)
11.78% (1.00% PIK)
12/31/25
1,345
1,343
1,345
(1)(6)
Krayden Holdings, Inc.
Delayed Draw Term Loan
N/A
03/01/29
-
(10
)
-
(2)(6)(9)
Krayden Holdings, Inc.
Delayed Draw Term Loan
N/A
03/01/29
-
(10
)
-
(2)(6)(9)
Krayden Holdings, Inc.
Revolver
N/A
03/01/29
-
(10
)
-
(2)(6)(9)
Krayden Holdings, Inc.
Term Loan
SOFR
+
5.75%
(Q)
11.20%
03/01/29
2,055
1,999
2,055
(6)(9)
9,310
9,407
2.33
%
Transportation Infrastructure
G2 Secure Staff, L.L.C.
Term Loan
SOFR
+
5.50%
(Q)
11.03%
07/02/25
(6)(9)
0.12
%
Total Senior Secured First Lien Loans
506,153
497,911
123.46
%
Equity
Auto Components
M&D Parent Holdings, LLC
Class B Units
5,000
(3)(9)
0.15
%
Chemicals
MDI Aggregator LP
Common Units
8,046
(3)(9)
Techmer BB Aggregator, LP
Limited Partnership Units
(3)(9)
1,138
1,055
0.26
%
Commercial Services & Supplies
RFI Group Holdings, L.P.
Class A Units
3,000
(3)(9)
0.08
%
Containers & Packaging
Oliver Investors, LP
Class A Units
5,500
(3)(9)
0.12
%
Diversified Consumer Services
FS NU Investors, LP
Class A Units
5,000
(3)(9)
0.08
%
Health Care Technology
BRG Group Holdings, LLC
Class A Units
500,000
(3)(9)
0.12
%
Personal Products
KLC Fund 1-C1 LP
Limited Partnership Units
500,000
(3)(9)
0.10
%
Varagon Capital Corporation
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2023
(dollar amounts in thousands, except Shares/Units)
Total Equity
3,989
3,641
0.91
%
Subtotal Non-Controlled/Non-Affiliated Investments
510,142
501,552
124.37
%
Controlled Investments:
(+)
Investment Funds and Vehicles
Senior Direct Lending Program, LLC
Limited Partnership Units
SOFR
+
8.00%
(Q)
Current Yield: 14.25%
12/31/36
189,701
188,471
184,485
(2)(4)(5)
$
188,471
$
184,485
45.75
%
Subtotal Controlled Investments
$
188,471
$
184,485
45.75
%
Total Investments, December 31, 2023
$
698,613
$
686,037
170.12
%
Derivative Instruments
Description
Company Receives
Company Pays
Counterparty
Maturity Date
Notional Amount
Fair Value
Upfront Payments / Receipts
Unrealized Appreciation / (Depreciation)
Footnotes
Interest rate swap
8.10
%
USD-SOFR-Compound + 4.202%
CIBC Bank USA
12/21/2026
$
25,000
$
(20
)
$
-
$
(20
)
(7)
Interest rate swap
8.20
%
USD-SOFR-Compound + 4.550%
CIBC Bank USA
12/21/2028
25,000
(71
)
-
(71
)
(7)
Total
$
50,000
$
(91
)
$
-
$
(91
)
# Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (See "Note 4. Fair Value Measurements").
+ All of the issuers of the investments held by the Company are domiciled in the United States. Certain investments also have international operations.
* Variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to the Secured Overnight Financing Rate (“SOFR”) or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q) or monthly (M). For each such loan, the Company has provided the interest rate in effect as of December 31, 2023.
^ Percentage is based on net assets of $403,150 as of December 31, 2023.
(+) Controlled Investments are defined by the Investment Company Act of 1940 Act, as amended (the "1940 Act"), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(++) Negative cost, if applicable, results from unamortized fees on unfunded commitments, which are capitalized to the investment cost. The negative fair value, if applicable, results from the fair valuation of the unfunded commitment.
(1) The Company's investment or a portion thereof is pledged as collateral under the JPM Facility (See "Note 6. Borrowings").
(2) The investment has an unfunded commitment as of December 31, 2023 (See "Note 8. Commitments"). Fair value includes an analysis of the unfunded commitment.
(3) Security is non-income producing.
(4) The investment is not considered a "qualifying asset" under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. As of December 31, 2023, total qualifying assets at fair value represented 74.0% of the Company's total assets calculated in accordance with the 1940 Act.
(5) In addition to the interest earned based on the stated contractual interest rate of this security, the certificates entitle the holders thereof to receive a portion of the excess cash flow from the SDLP’s loan portfolio, after expenses, which may result in a return to the Company greater than the contractual stated interest rate.
(6) Loan includes interest rate floor feature.
(7) This investment represents a Level 2 security in the ASC 820 fair value hierarchy as of December 31, 2023 (See "Note 4. Fair Value Measurements").
(8) Par Amount, Amortized Cost, and Fair Value are less than $1,000.
(9) The Company's investment or a portion thereof is pledged as collateral under the CIBC Facility (See "Note 6. Borrowings").
See accompanying notes to consolidated financial statements.
VARAGON CAPITAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 2024
Note 1. Organization
Varagon Capital Corporation (the “Company”) was formed on July 31, 2019 as a corporation under the laws of Maryland. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, the Company elected, and intends to qualify annually, to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s fiscal year end is December 31.
VCC Advisors, LLC (the “Adviser”) serves as the Company’s investment adviser. The Adviser is registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and is a subsidiary of Varagon Capital Partners, L.P. (“Varagon”), which is also registered with the SEC as an investment adviser under the Advisers Act. Subject to the overall supervision of the Company’s board of directors (the “Board”), the Adviser manages the day-to-day operation of, and provides investment advisory and management services to, the Company.
The Company’s investment objective is to generate current income with a focus on capital preservation and, to a lesser extent, capital appreciation by investing primarily in directly originated leveraged loans to U.S. middle market companies.
The Company intends to achieve its investment objective by investing primarily in senior secured loans to performing middle market companies controlled by private equity sponsors. The Company focuses on loans to middle market companies that have sustainable competitive advantages, experienced management teams, solid financial performance, stable and recurring cash flow and strong enterprise value. The Company expects that such companies and their sponsors will require financing from the Company for growth, acquisitions, recapitalizations, refinancings or leveraged buyouts, among other things. The Company generally intends to directly originate its investments as a lead lender to allow for deeper diligence, greater control over terms and structure, and superior economics.
VCC Equity Holdings, LLC (“VCCEH”), VCC Funding, LLC (“VCCF”), Varagon SDLP, LLC (“VSDLP”), and VCC CLO 1 Depositor, LLC ("VCC CLO Depositor") are wholly owned subsidiaries of the Company and are consolidated in the Company’s consolidated financial statements from June 2, 2022, the commencement of investment operations, or the date of their respective formation, in accordance with the Company’s consolidation policy. VCCEH is taxed as a corporation for U.S. federal income tax purposes and was formed to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The assets held by VCCEH guarantee the borrowings outstanding under the SMBC Facility (as defined below) (See "Note 6. Borrowings"). VCCF, a bankruptcy remote special purpose entity, whose assets were pledged as collateral supporting the amounts outstanding under the JPM Facility before its termination on November 26, 2024 (See Note 6. Borrowings"), held no collateral assets as of December 31, 2024. VSDLP holds the Company’s interest in the SDLP (as defined below). VCC CLO Depositor, which in turn wholly owns VCC CLO 1, LLC ("VCC CLO"), was formed for the purpose of issuing a term debt securitization.
Formation Transactions
On March 29, 2022, in connection with its seed audit, the Company issued 100 shares of the Company's common stock for $10.00 to Varagon, which were subsequently redeemed on June 2, 2022, in connection with the Merger (as described below). On June 2, 2022, Varagon Fund I, L.P., a Delaware limited partnership and a private fund exempt from registration pursuant to Section 3(c)(7) of the 1940 Act (“VF1”), merged with and into the Company (the “Merger”), with the Company continuing as the surviving entity. As a result of the Merger, the Company acquired all of VF1’s assets and liabilities (the “Existing Portfolio”), including all of VF1’s interests in the joint venture, Senior Direct Lending Program (“SDLP”), in exchange for shares of the Company’s common stock. Accordingly, the Company received $40.9 million in cash and $145.2 million in investments at fair value, which consisted of a non-cash purchase of a $142.1 million investment and $3.1 million of total accumulated earnings. In addition, $191.3 million of VF1 investor commitments were converted into capital commitments to the Company (of which, $185.5 million was funded). In addition, the Company issued 18.6 million of shares of common stock at $10.00 per share to the limited partners of VF1 in exchange for the assets and liabilities of VF1. Additionally, on June 2, 2022, the Company received $296.9 million of capital commitments (of which, $175.2 million was funded) (the “Initial Closing”) and the Company issued 17.5 million shares of common stock at $10.00 per share to new investors. The Company also became the sole member of its wholly owned subsidiaries VCCF and VSDLP. On June 2, 2022, immediately prior to its election to be regulated as a BDC, the Company purchased a portfolio of existing loans for $449.4 million (the “Warehoused Portfolio” and together
with the Existing Portfolio, the “Initial Portfolio”) from certain affiliates of the Adviser using proceeds from the Initial Closing and borrowings under the JPM Facility (as described below) pursuant to loan sale and purchase agreements. In connection with the purchase of the Initial Portfolio, the Board reviewed and approved the fair value of the Initial Portfolio based on the Adviser’s internal analysis and input from third-party valuation firms.
Varagon Transaction with Man Group plc
On July 5, 2023, Varagon entered into an Agreement and Plan of Merger (the “Merger Agreement”) with affiliates of Man Group plc (“Man Group”), pursuant to which a newly formed indirect subsidiary of Man Group merged with and into Varagon, with Varagon surviving the merger as an indirect subsidiary of Man Group (the “Transaction”). The Transaction closed on September 6, 2023. As a result, following the Transaction, Man Group owns a majority interest in Varagon and Varagon management continues to own, directly or indirectly, a minority interest in Varagon. Although the ownership of Varagon changed as a result of the Transaction, there were no material changes to the investment advisory or administrative services performed by the Adviser or Varagon in its capacity as the Company’s administrator.
Note 2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to Regulation S-X and include the accounts of the Company and its consolidated subsidiaries. As an investment company, the Company applies the accounting and reporting guidance in Accounting Standards Codification (“ASC”) Topic 946, Financial Services - Investment Companies (“ASC 946”) issued by the Financial Accounting Standards Board (“FASB”). The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition as of and for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash
Cash consists of deposits held at a custodian bank and, at times, may exceed the insured limits under applicable law. As of December 31, 2024, the Company held approximately $69.6 million in cash. As of December 31, 2023, the Company held approximately $20.0 million in cash.
Organizational and Offering Expenses
Organizational and offering expenses consist of all costs and expenses, whether incurred before, on or after the date of the private placement memorandum relating to the Company’s private offering of shares of common stock (the “Offering”), pertaining to the organization and establishment of the Company (including any subsidiaries of the Company and the transactions contemplated by the Merger and the acquisition of the Initial Portfolio), including, without limitation, any related third-party legal, tax and accounting advisory fees and expenses, capital raising expenses, including printing expenses and other similar costs, fees and expenses, and regulatory, compliance, and administrative filings, and other organizational and offering expenses, but excluding the fees of any placement agent engaged on behalf of the Company.
The Adviser elected to incur the organizational and offering expenses associated with the Company (See "Note 7. Related Party Transactions”) for the period from July 31, 2019 through March 29, 2022. Such organizational and offering expenses are not reimbursable by the Company. For the period from July 31, 2019 through December 31, 2019, the Adviser incurred $46,384 of organizational and offering expenses. For the year ended December 31, 2020, the Adviser incurred $11,805 of organization costs. For the year ended December 31, 2021, the Adviser incurred $0.1 million of organizational and offering expenses. For the period of January 1, 2022 through March 29, 2022, the Adviser incurred $0.4 million of organizational and offering expenses.
For the year ended December 31, 2024, the Company incurred and expensed $0.2 million of organizational expenses. For the years ended December 31, 2023 and 2022, the Company incurred and expensed $0.4 million, and $0.2 million of organizational expenses, respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
Deferred Financing Costs
Deferred financing costs, incurred in connection with any revolving credit facility or term debt securitization are presented as an asset on the Company’s consolidated statements of assets and liabilities and are deferred and amortized over the life of the respective financing (See "Note 6. Borrowings”).
Indemnifications
In the normal course of its business, the Company may enter into contracts that contain a variety of representations and warranties, which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, management believes the risk of loss to be remote.
Revenue Recognition
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses
previously recognized. The Company reports current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
Investment Income
Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company records amortized or accreted discounts or premiums as interest income using the effective interest method and is adjusted only for material amendments or prepayments. Dividend income, which represents dividends from equity investments and distributions from subsidiaries, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.
Interest income from investments in the Subordinated Certificates (as defined below) of SDLP is recorded based on an estimate of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC Topic 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from these investments, including the expected residual payments, and the effective yield is determined and updated periodically. Any difference between the cash distribution received and the amount calculated pursuant to the effective interest method is recorded as an adjustment to the cost basis of such investments.
PIK Interest
The Company may, from time to time, hold loans in its portfolio that contain a payment-in-kind ("PIK") interest provision. PIK interest, computed at the contractual rate specified in each loan agreement, is periodically added to the principal balance of the loan, rather than being paid to the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment.
PIK interest, which is a non-cash source of income at the time of recognition, is included in the Company’s taxable income, and therefore affects the amount the Company would be required to distribute to its shareholders to maintain its tax treatment as a RIC for U.S. federal income tax purposes, even though the Company would have not yet collected the cash. For the years ended December 31, 2024, 2023 and 2022, the Company earned PIK interest of $2.3 million, $0.5 million and $0.1 million, which is reflected on the accompanying consolidated statements of operations as part of interest income.
Fee Income
Origination fees received are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized origination fees are recorded as investment income. The Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, covenant waiver fees and loan amendment fees, and are recorded as investment income when earned. Some of the fees earned by the Company may be PIK fee income. For the year ended December 31, 2024, the Company did not earn any PIK fee income. For the years ended December 31, 2023 and 2022, the Company earned $7,524 and $0.2 million of PIK fee income, respectively.
Non-accrual loans
A loan can be left on accrual status during the period the Company is pursuing repayment of the loan. Management reviews all loans that become 90 days or more past due on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans are recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid, and, in management’s judgment, payments are likely to remain current. As of December 31, 2024 and December 31, 2023, there were no loans on non-accrual.
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, the Company would be deemed to "control" a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it "controls" as "Controlled Investments." Under the 1940 Act, the Company would be deemed to be an "Affiliated Person" of a portfolio company if it owned between 5% and 25% of the portfolio company's outstanding voting securities or the Company was under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as "Affiliated Investments." Investments which are neither Control Investments nor Affiliated Investments are referred to as "Non-Controlled/Non-Affiliated investments."
Fair Value Measurements
The Company applies fair value accounting to all of its investments in accordance with the 1940 Act and ASC Topic 820, Fair Value Measurements (“ASC 820”), which defines fair value, sets a framework for measuring fair value, and requires certain disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price). Investments are reflected on the consolidated statements of assets and liabilities at fair value, with the changes in unrealized gains and losses resulting from changes in fair value, if any, reflected on the accompanying consolidated statements of operations as a change in unrealized gain (loss) on investments.
In accordance with ASC 820, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs applied to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Investments with readily available market quotations or for which fair value can be measured from quoted prices in active markets will typically have a higher degree of input observability and a lesser degree of judgment applied in determining the fair value. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets and liabilities that the Company can access as of the measurement date. Valuation utilizing Level 1 inputs do not require any degree of judgment. The type of investments generally included in Level 1 are publicly-traded securities.
Level 2 - Valuations based on (i) quoted prices for similar instruments in active markets; (ii) quoted prices for which identical or similar instruments in markets that are not active that are reflective of recent market transactions; or (iii) models in which all significant inputs are observable, either directly or indirectly. The types of investments generally included in Level 2 are restricted securities listed in active markets, corporate bonds, and certain loans.
Level 3 - Valuations based on indicative quotes that do not reflect recent market transactions and models or other valuation techniques in which the inputs are unobservable and significant to the fair value measurement, which includes situations where there is little, if any, market activity for the asset or liability. The inputs used in determination of fair value require significant judgment and estimation. The types of investments generally included in Level 3 are privately held debt and equity securities.
The Company has established policies and procedures to ensure that valuation methodologies for investments that are categorized within all levels of the fair value hierarchy are fair and consistent. Valuations of the investments are reviewed and approved quarterly by the Adviser’s Valuation Committee, which is responsible for establishing the valuation policies and procedures and evaluating the overall fairness and consistent application of those policies. The valuation process may include a review or analysis by an independent, third-party valuation firm. The Adviser then recommends the valuations of the Company’s investments to the Board, which is responsible for determining the fair value of the Company's investments on a quarterly basis. The Company is subject to the valuation policies and procedures of the Adviser.
Any changes to the valuation methodology are reviewed by management and the Board to confirm that the changes are appropriate. As markets change, new products develop and the pricing for products becomes more or less transparent, the Company will continue to refine its valuation methodologies.
Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company's derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Rule 2a-5 under the 1940 Act (the "Rule 2a-5") establishes a regulatory framework for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits boards, subject to board oversight and certain other conditions, to designate certain parties to perform the fair value determinations. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must determine the fair value of a security. Rule 31a-4 under the 1940 Act (“Rule 31a-4”), provides the record keeping requirements associated with fair value determinations. While the Board has not designated the Adviser as the valuation designee, the Company has established policies and procedures in compliance with the applicable requirements of Rule 2a-5 and Rule 31a-4.
Derivative Instruments
The Company follows the guidance in ASC Topic 815, Derivatives and Hedging, when accounting for derivative instruments. The Company designated certain interest rate swaps as hedging instruments in a qualifying fair value hedge accounting relationship and, as a result, the change in fair value of the hedging instruments and hedged items are recorded in interest expense and recognized as components of “Interest and credit facility fees payable” in the Company’s consolidated statements of operations. The change in fair value of the interest rate swaps is offset by a change in the carrying value of the corresponding fixed rate debt. See "Note 5. Derivative Instruments" for more information.
Segment Reporting
In accordance with ASC Topic 280, Segment Reporting ("ASC 280"), the Company is externally managed and has determined that it has a single operating and reporting segment, which derives investment income from its portfolio of investments. As a result, the Company's segment accounting policies are the same as described herein and the Company does not have any intra-segment sales and transfers of assets. See Note 13 "Segment Reporting" for more information.
Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk
The Company has broad discretion in making investments. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as economic conditions in the United States, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.
The value of the Company’s investments in loans may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Company's borrowers, and those for which market yields are observable increase materially.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standard updates (“ASU”) issued by FASB. ASUs not listed were assessed and either determined to be not applicable or expected to have a minimal impact on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Improvement to Reportable Segment Disclosures. ASU 2023-07, which enhances the disclosures required for significant segment expenses that are regularly provided to the CODM. ASU 2024-07, among other things, (i) requires a single segment public entity to provide all of the disclosures as required by ASC 280, (ii) requires a public entity to disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources and (iii) provides the ability for a public entity to elect more than one performance measure. ASU 2023-07 is effective on a retrospective basis for annual periods beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company has adopted ASU 2023-07 effective December 31, 2024 and concluded that the application of this guidance did not have any material impact on its consolidated financial statements. See Note 13 "Segment Reporting" for more information on the effects of the adoption of ASU 2023-07.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The amendments in this update require more disaggregated information on income taxes paid. ASU 2023-09 is effective for years beginning after December 15, 2024. Early adoption is permitted, however the Company has not elected to adopt this provision as of the date of the financial statements contained in this report. The Company is still assessing the impact of the new guidance.
Note 3. Investments
The following table shows the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2024 (dollars in thousands):
As of December 31, 2024
Amortized Cost
Percentage
Fair Value
Percentage
Senior Secured First Lien Loans
$
634,455
77.1
%
$
627,526
78.0
%
Equity
4,780
0.6
4,437
0.6
Subordinated Certificates of the SDLP
183,982
22.3
172,152
21.4
Total Investments
$
823,217
100.0
%
$
804,115
100.0
%
The following table shows the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2023 (dollars in thousands):
As of December 31, 2023
Amortized Cost
Percentage
Fair Value
Percentage
Senior Secured First Lien Loans
$
506,153
72.5
%
$
497,911
72.6
%
Equity
3,989
0.6
3,641
0.5
Subordinated Certificates of the SDLP
188,471
26.9
184,485
26.9
Total Investments
$
698,613
100.0
%
$
686,037
100.0
%
The following table shows the composition of the Company’s portfolio investments by industry grouping at amortized cost and the fair value as of December 31, 2024 (dollars in thousands):
As of December 31, 2024
Amortized Cost
Percentage
Fair Value
Percentage
Investment Funds and Vehicles (1)
$
183,982
22.3
%
$
172,152
21.4
%
Health Care Providers & Services
123,209
15.0
122,611
15.2
Health Care Equipment & Supplies
45,141
5.5
45,165
5.6
Automobile Components
40,469
4.9
38,288
4.8
Commercial Services & Supplies
40,037
4.9
40,263
5.0
Distributors
36,554
4.5
35,889
4.5
IT Services
35,062
4.3
35,292
4.4
Professional Services
18,002
2.2
18,063
2.2
Health Care Technology
22,978
2.8
23,214
2.9
Diversified Consumer Services
22,729
2.8
19,725
2.5
Containers & Packaging
20,407
2.5
19,179
2.4
Personal Care Products
19,112
2.3
19,151
2.4
Software
17,582
2.1
17,647
2.2
Chemicals
17,494
2.1
17,393
2.2
Food Products
17,458
2.1
16,709
2.1
Ground Transportation
16,692
2.0
16,455
2.0
Life Sciences Tools & Services
15,259
1.9
15,181
1.9
Aerospace & Defense
13,853
1.7
13,954
1.7
Electronic Equipment, Instruments & Components
13,413
1.6
13,463
1.7
Pharmaceuticals
12,689
1.5
12,981
1.6
Consumer Staples Distribution & Retail
11,040
1.3
11,270
1.4
Trading Companies & Distributors
11,051
1.3
11,151
1.4
Beverages
10,875
1.3
10,874
1.4
Insurance
9,904
1.2
9,608
1.2
Household Products
9,286
1.1
9,220
1.1
Diversified Financial Services
8,905
1.1
8,870
1.1
Energy Equipment & Services
8,253
1.0
8,327
1.0
Textiles, Apparel & Luxury Goods
7,274
0.9
7,396
0.9
Air Freight & Logistics
6,682
0.8
6,653
0.8
Hotels, Restaurants & Leisure
4,777
0.6
4,888
0.6
Construction & Engineering
2,271
0.3
2,295
0.3
Transportation Infrastructure
0.1
0.1
Diversified Telecommunication Services(2)
0.0
0.0
Total Investments
$
823,217
100.00
%
$
804,115
100.00
%
(1) The following industry is solely comprised of the Subordinated Certificates of the SDLP. The portfolio companies in SDLP represent a diverse set of industry classifications, which are similar to those in which the Company invests directly. See “Senior Direct Lending Program” below.
(2) Represents a percentage that is less than 0.1%.
The following table shows the composition of the Company’s portfolio investments by industry grouping at amortized cost and the fair value as of December 31, 2023 (dollars in thousands):
As of December 31, 2023
Amortized Cost
Percentage
Fair Value
Percentage
Investment Funds and Vehicles (1)
$
188,471
26.9
%
$
184,485
26.9
%
Health Care Providers & Services
113,201
16.2
112,463
16.4
Auto Components
39,394
5.6
37,685
5.5
Diversified Consumer Services
37,219
5.3
36,881
5.4
Aerospace & Defense
28,706
4.1
28,341
4.1
Distributors
26,990
3.9
25,892
3.8
Commercial Services & Supplies
26,923
3.9
25,799
3.8
Health Care Technology
26,816
3.8
26,788
3.9
Personal Products
21,256
3.0
20,133
2.9
Insurance
20,752
3.0
20,597
3.0
Software
20,415
2.9
20,389
3.0
Containers & Packaging
19,008
2.7
18,100
2.6
Food Products
17,389
2.5
16,899
2.5
Health Care Equipment & Supplies
17,053
2.5
16,965
2.5
Road & Rail
16,629
2.4
16,389
2.4
Electronic Equipment, Instruments & Components
13,579
2.0
13,510
2.0
Professional Services
11,547
1.7
11,543
1.7
Household Products
9,353
1.3
9,177
1.3
Trading Companies & Distributors
9,310
1.3
9,407
1.4
IT Services
8,531
1.2
8,502
1.2
Energy Equipment & Services
8,320
1.2
8,392
1.2
Chemicals
8,129
1.2
7,887
1.1
Hotels, Restaurants & Leisure
4,804
0.7
4,938
0.7
Food & Staples Retailing
2,862
0.4
2,869
0.4
Construction & Engineering
0.1
0.1
Transportation Infrastructure
0.1
0.1
Pharmaceuticals
0.1
0.1
Diversified Telecommunication Services(2)
0.0
0.0
Capital Markets(2)
0.0
0.0
Total Investments
$
698,613
100.0
%
$
686,037
100.0
%
(1) The following industry is solely comprised of the Subordinated Certificates of the SDLP. The portfolio companies in SDLP represent a diverse set of industry classifications, which are similar to those in which the Company invests directly. See “Senior Direct Lending Program” below.
(2) Represents a percentage that is less than 0.1%.
Transactions With Controlled/Affiliated Companies
During the year ended December 31, 2024, the Company had an investment in one portfolio company designated as a controlled investment under the 1940 Act. Transactions with the controlled investment were as follows (dollars in thousands):
Controlled Investment
Type of Investment
Fair Value at December 31, 2023
Purchases of Investments
Payment-in-kind and other adjustments to cost
Principal repayments
Unrealized appreciation/
(depreciation)
Realized Gain/(Loss)
Fair Value at December 31, 2024
Income Earned
Senior Direct Lending Program
Subordinated Certificates of the SDLP
$
184,485
$
30,113
$
(1,910
)
$
(32,693
)
$
(7,843
)
$
-
$
172,152
$
27,712
During the year ended December 31, 2023, the Company had an investment in one portfolio company designated as a controlled investment under the 1940 Act. Transactions with the controlled investment were as follows (dollars in thousands):
Controlled Investment
Type of Investment
Fair Value at December 31, 2022
Purchases of Investments
Payment-in-kind and other adjustments to cost
Principal repayments
Unrealized appreciation/
(depreciation)
Realized Gain/(Loss)
Fair Value at December 31, 2023
Income Earned
Senior Direct Lending Program
Subordinated Certificates of the SDLP
$
178,367
$
25,562
$
(1,230
)
$
(17,868
)
$
(346
)
$
-
$
184,485
$
25,933
Senior Direct Lending Program
In 2015, VSDLP, a wholly owned subsidiary of the Company, and Ares Capital Corporation (“ARCC”) formed SDLP, a joint venture established for the purpose of providing senior stretch and unitranche loan financings to middle market borrowers. The Company received, indirectly through its membership interest in VSDLP, limited liability company membership interests and Subordinated Certificates (as defined below), in each case in SDLP, as a result of the Merger. The SDLP finances its investment activity through the issuance of securities (“SDLP Securities”) backed by its loan portfolio, including, in order of seniority, rated senior notes (the “Senior Note”), a rated intermediate funding note (the “IFN”), and capital provided by the Company and ARCC through subordinated certificates (the “Subordinated Certificates”). The Subordinated Certificates are the most junior securities issued by SDLP and collateralize the profits earned or losses incurred across the SDLP loan portfolio. As of December 31, 2024 and December 31, 2023, the Company and ARCC own 12.5% and 87.5%, respectively, of the outstanding Subordinated Certificates.
SDLP is capitalized as transactions are completed and all portfolio decisions and generally all other decisions in respect of SDLP must be approved by an investment committee of SDLP consisting of representatives of the Company (and/or VSDLP) and ARCC (the “SDLP Investment Committee”).
As of December 31, 2024 and December 31, 2023, the Company and ARCC had agreed to make capital available to the SDLP in the aggregate totaling $1.7 billion and $1.7 billion, respectively, of which $206.3 million and $206.3 million, respectively is to be made available from the Company. The Company and ARCC will continue to provide capital to the SDLP in the form of Subordinated Certificates. This capital will only be committed to the SDLP upon approval of transactions by the SDLP Investment Committee as discussed above. As of December 31, 2024 and December 31, 2023, the Company has funded $187.1 million and $189.7 million, respectively, of its commitment to the SDLP and had $19.2 million and $16.6 million in unfunded commitments remaining available to the SDLP, respectively.
The Subordinated Certificates pay a coupon equal to SOFR plus 8.0% and also entitle the holders thereof to receive a portion of the excess cash flow from the loan portfolio, after expenses, which may result in a return to the holders of the Subordinated Certificates that is greater than the stated coupon. The Subordinated Certificates are junior in right of payment to the Senior Notes and IFNs.
The amortized cost and fair value of the Subordinated Certificates held by the Company were $184.0 million and $172.2 million, respectively, as of December 31, 2024, and $188.5 million and $184.5 million, respectively, as of December 31, 2023. The Company’s yield on its investment in the Subordinated Certificates at amortized cost and fair value was 13.5% and 14.4%, respectively, as of December 31, 2024, and 14.3% and 14.6%, respectively, as of December 31, 2023. For the years ended December 31, 2024, 2023 and 2022, the Company earned interest income of $27.7 million, $25.9 million and $12.9 million, respectively, from its investment in the Subordinated Certificates. As of December 31, 2024 and December 31, 2023, $6.3 million and $6.8 million, respectively, was in Interest receivable on the consolidated statements of assets and liabilities.
As of December 31, 2024 and December 31, 2023, the SDLP’s portfolio was comprised entirely of first lien senior secured loans to U.S. middle-market companies and were in industries similar to the companies in the Company’s portfolio. As of December 31, 2024, loans in two portfolio companies were on non-accrual status. As of December 31, 2023, loans in one portfolio company were on non-accrual status. Below is a summary of the SDLP’s portfolio as of December 31, 2024 and December 31, 2023 (dollars in millions):
As of December 31, 2024
As of December 31, 2023
Total first lien senior secured loans(1)
$
4,759
$
5,431
Largest loan to a single borrower(1)
$
$
Total of five largest loans to borrower(1)
$
1,692
$
1,650
Number of borrowers in the SDLP
Commitments to fund delayed draw loans (2)
$
$
(1) At principal amount.
(2) As discussed above, these commitments have been approved by the SDLP Investment Committee
Below is a listing of SDLP’s individual investments as of December 31, 2024 (dollars in thousands):
Company
Type of Investment
Reference Rate and Spread (1)
Interest Rate
Maturity
Par
Amortized Cost
Fair Value
Footnotes
Senior Secured First Lien Loans
Aerospace & Defense
Qnnect, LLC and Connector TopCo, LP
Term Loan
SOFR
+
5.25%
(Q)
10.33%
11/2/2029
$
272,375
$
272,375
$
272,375
(2)
Qnnect, LLC and Connector TopCo, LP
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.33%
11/2/2029
3,146
3,146
3,146
(2)
275,521
275,521
Automobile Components
Arrowhead Holdco Company
Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
174,307
174,307
146,418
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
35,956
35,956
30,203
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
41,293
41,293
34,686
(2)
Arrowhead Holdco Company
Term Loan
SOFR
+
2.50%
(Q)
7.16%
8/31/2028
25,642
25,642
21,539
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.91%
8/31/2028
2,342
2,342
1,967
(2)
North Haven Falcon Buyer, LLC
Term Loan
SOFR
+
8.00%
(Q)
12.51%
5/19/2027
203,274
200,709
132,128
(2)(3)
North Haven Falcon Buyer, LLC
Delayed Draw Term Loan
SOFR
+
8.00%
(Q)
12.33%
5/19/2027
34,034
33,192
22,122
(2)(3)
513,441
389,063
Chemicals
SePRO Holdings, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
7/26/2030
118,315
118,315
115,948
(2)
118,315
115,948
Commercial Services & Supplies
ISQ Hawkeye HoldCo, Inc.
Term Loan
SOFR
+
4.75%
(M)
9.13%
8/20/2031
226,072
226,072
226,072
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
8/20/2031
82,329
82,329
82,329
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.25%
8/20/2031
3,750
3,750
3,750
(2)
Pritchard Industries, LLC
Term Loan
SOFR
+
5.75%
(S)
10.28%
10/13/2027
195,865
195,865
191,948
(2)
Pritchard Industries, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.28%
10/13/2027
46,831
46,831
46,362
(2)
554,847
550,461
Construction & Engineering
Valcourt Holdings II, LLC
Term Loan
SOFR
+
5.75%
(Q)
10.42%
11/21/2029
259,905
259,905
259,905
(2)
Valcourt Holdings II, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(Q)
10.42%
11/21/2029
66,014
66,014
66,014
(2)
325,919
325,919
Consumer Staples Distribution & Retail
FS Squared Holding Corp.
Term Loan
SOFR
+
4.75%
(M)
8.50%
12/23/2030
250,833
250,833
246,444
(2)
250,833
246,444
Electronic Equipment, Instruments & Components
EIS Legacy Holdco, LLC
Term Loan
SOFR
+
4.75%
(Q)
9.30%
11/5/2031
220,500
220,500
218,295
(2)
220,500
218,295
Food Products
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
175,310
175,310
143,754
(2)
Manna Pro Products, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
28,993
28,993
23,775
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
13,827
13,827
11,338
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(S)
10.53%
12/10/2026
46,651
46,651
38,254
(2)
264,781
217,121
Health Care Providers and Services
Center for Autism and Related Disorders, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
7,307
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
132,765
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
19,452
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
4,820
-
-
(2)(3)
NMN Holdings III Corp
Term Loan
SOFR
+
4.50%
(M)
8.86%
7/31/2031
228,934
228,934
226,645
(2)
228,934
226,645
Health Care Technology
Surescripts, LLC
Term Loan
SOFR
+
4.00%
(Q)
8.33%
11/3/2031
112,500
112,500
111,375
(2)
112,500
111,375
Hotels, Restaurants & Leisure
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.74%
6/29/2029
59,700
59,700
59,700
(2)
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
9.81%
6/29/2029
20,798
20,798
20,798
(2)
Triwizard Holdings, Inc.
Term Loan
SOFR
+
5.25%
(Q)
9.58%
6/29/2029
167,450
167,450
167,450
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
43,474
43,474
43,474
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
11,664
11,664
11,664
(2)
Concert Golf Partners Holdco LLC
Term Loan
SOFR
+
4.75%
(M)
9.13%
4/1/2030
231,075
231,075
231,075
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.00%
6/8/2026
50,000
50,000
50,000
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
10.12%
6/8/2026
24,420
24,420
24,420
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
10.50%
6/8/2026
74,168
74,168
74,168
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.00%
(Q)
9.25%
6/8/2026
149,181
149,181
149,181
(2)
HGC Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.16%
6/8/2026
102,375
102,375
102,375
(2)
934,305
934,305
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
300,825
300,825
291,800
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
26,460
26,460
25,666
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(M)
9.96%
11/9/2027
40,044
40,044
38,843
(2)
367,329
356,309
Insurance
THG Acquisition, LLC
Term Loan
SOFR
+
4.75%
(M)
9.11%
10/31/2031
122,656
122,656
121,430
(2)
122,656
121,430
Machinery
Harvey Tool Company, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
9.73%
10/26/2027
34,677
34,677
34,677
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
10/26/2027
220,501
220,501
220,501
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.25%
(M)
9.61%
10/26/2027
12,915
12,915
12,915
(2)
268,093
268,093
Trading Companies & Distributors
Penn Detroit Diesel Allison, LLC
Term Loan
SOFR
+
5.75%
(M)
10.21%
12/14/2027
32,913
32,913
32,913
(2)
32,913
32,913
Total Investments, December 31, 2024
$
4,590,887
$
4,389,842
(1) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to SOFR, or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q), or monthly (M). For each such loan, the interest rate provided was the rate in effect as of December 31, 2024.
(2) Loan includes interest rate floor feature.
(3) The investment was on non-accrual status as of December 31, 2024.
Below is a listing of SDLP’s individual investments as of December 31, 2023 (dollars in thousands):
Company
Type of Investment
Reference Rate and Spread (1)
Interest Rate
Maturity
Par
Amortized Cost
Fair Value
Footnotes
Senior Secured First Lien Loans
Aerospace & Defense
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
$
11,478
$
11,478
$
11,363
(2)
Precinmac (US) Holdings Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
45,911
45,911
45,452
(2)
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.54%
8/31/2027
157,588
157,588
156,012
(2)
Precinmac (US) Holdings Inc.
Term Loan
SOFR
+
6.00%
(M)
11.46%
8/31/2027
41,110
41,110
40,699
(2)
Qnnect, LLC and Connector TopCo, LP
Delayed Draw Term Loan
SOFR
+
7.00%
(Q)
12.38%
11/2/2029
3,179
3,179
3,179
(2)
Qnnect, LLC and Connector TopCo, LP
Term Loan
SOFR
+
7.00%
(Q)
12.38%
11/2/2029
275,175
275,175
275,175
(2)
534,441
531,880
Auto Components
Arrowhead Holdco Company
Term Loan
SOFR
+
4.50%
(Q)
10.04%
8/31/2028
169,531
169,531
152,578
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
34,859
34,859
31,373
(2)
Arrowhead Holdco Company
Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
24,859
24,859
22,374
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
2,270
2,270
2,043
(2)
Arrowhead Holdco Company
Delayed Draw Term Loan
SOFR
+
4.50%
(Q)
10.05%
8/31/2028
40,033
40,033
36,030
(2)
North Haven Falcon Buyer, LLC
Delayed Draw Term Loan
SOFR
+
8.00%
(Q)
13.50%
5/19/2027
32,199
32,199
26,081
(2)
North Haven Falcon Buyer, LLC
Term Loan
SOFR
+
8.00%
(Q)
13.52%
5/19/2027
192,273
192,272
155,741
(2)
496,023
426,220
Commercial Services & Supplies
ISQ Hawkeye HoldCo, Inc.
Term Loan
SOFR
+
6.00%
(M)
11.38%
8/17/2029
228,385
228,385
228,385
(2)
ISQ Hawkeye HoldCo, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.38%
8/17/2029
67,198
67,198
67,198
(2)
Pritchard Industries, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(S)
10.93%
10/13/2027
47,311
47,311
46,365
(2)
Pritchard Industries, LLC
Term Loan
SOFR
+
5.50%
(Q)
10.93%
10/13/2027
197,885
197,885
193,927
(2)
Valcourt Holdings II, LLC
Term Loan
SOFR
+
5.75%
(S)
11.27%
11/21/2029
262,536
262,536
257,286
(2)
Valcourt Holdings II, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(S)
11.27%
11/21/2029
-
-
-
(2)
803,315
793,161
Diversified Consumer Services
Excelligence Learning Corporation
Term Loan
SOFR
+
6.00%
(Q)
11.46%
1/18/2024
145,432
145,429
145,432
(2)
145,429
145,432
Food & Staples Retailing
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
3/28/2025
83,991
83,991
83,991
(2)
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
64,989
64,989
64,989
(2)
FS Squared Holding Corp.
Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
170,089
170,089
170,089
(2)
FS Squared Holding Corp.
Delayed Draw Term Loan
SOFR
+
5.25%
(M)
10.71%
3/28/2025
4,252
4,252
4,252
(2)
323,321
323,321
Food Products
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
13,970
13,970
13,132
(2)
Manna Pro Products, LLC
Delayed Draw Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
29,294
29,294
27,536
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
47,131
47,131
44,303
(2)
Manna Pro Products, LLC
Term Loan
SOFR
+
6.00%
(M)
11.46%
12/10/2026
177,136
177,136
166,508
(2)
267,531
251,479
Health Care Providers and Services
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
4,820
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
19,452
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
132,765
-
-
(2)(3)
Center for Autism and Related Disorders, LLC
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.00%
11/21/2024
7,307
-
-
(2)(3)
-
-
Hotels, Restaurants & Leisure
Triwizard Holdings, Inc.
Term Loan
SOFR
+
6.25%
(Q)
11.72%
6/29/2029
169,150
169,150
169,150
(2)
Triwizard Holdings, Inc.
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.72%
6/29/2029
-
-
-
(2)
Concert Golf Partners Holdco LLC
Term Loan
SOFR
+
5.50%
(Q)
11.25%
4/2/2029
233,445
233,445
233,445
(2)
Concert Golf Partners Holdco LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.25%
4/2/2029
40,012
40,012
40,012
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.03%
6/8/2026
24,670
24,670
24,670
(2)
HGC Holdings, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.04%
6/8/2026
103,425
103,425
103,425
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.08%
6/8/2026
50,000
50,000
50,000
(2)
HGC Holdings, LLC
Delayed Draw Term Loan
SOFR
+
6.25%
(Q)
11.62%
6/8/2026
53,865
53,865
53,865
(2)
674,567
674,567
Household Products
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
303,188
303,188
300,156
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
40,367
40,367
39,963
(2)
Walnut Parent, Inc.
Term Loan
SOFR
+
5.50%
(Q)
11.00%
11/9/2027
26,670
26,670
26,403
(2)
370,225
366,522
Insurance
Benecon Midco II, LLC
Term Loan
SOFR
+
5.25%
(M)
10.71%
12/4/2026
170,188
170,188
170,188
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
24,463
24,463
24,463
(2)
THG Acquisition, LLC
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
14,550
14,550
14,550
(2)
THG Acquisition, LLC
Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
206,190
206,190
206,190
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
58,320
58,320
58,320
(2)
THG Acquisition, LLC
Delayed Draw Term Loan
SOFR
+
5.75%
(M)
11.21%
12/2/2026
22,025
22,025
21,805
(2)
495,736
495,516
Machinery
Harvey Tool Company, LLC
Delayed Draw Term Loan
SOFR
+
5.50%
(Q)
11.03%
10/26/2027
34,940
34,940
34,591
(2)
Harvey Tool Company, LLC
Term Loan
SOFR
+
5.50%
(Q)
11.00%
10/26/2027
221,631
221,631
219,415
(2)
NCWS Intermediate, Inc.
Delayed Draw Term Loan
SOFR
+
6.00%
(Q)
11.53%
12/29/2026
61,696
61,696
61,696
(2)
NCWS Intermediate, Inc.
Term Loan
SOFR
+
6.00%
(Q)
11.53%
12/29/2026
205,398
205,398
205,398
(2)
NCWS Intermediate, Inc.
Delayed Draw Term Loan
SOFR
+
6.50%
(Q)
12.03%
12/29/2026
12,600
12,600
12,600
(2)
536,265
533,700
Software
Emergency Communications Network, LLC
Term Loan
SOFR
+
8.75%
(Q)
14.13%
6/30/2024
252,313
252,295
219,512
(2)
Pegasus Global Enterprise Holdings, LLC
Term Loan
SOFR
+
5.25%
(Q)
10.75%
5/29/2025
259,306
259,306
259,306
(2)
Pegasus Global Enterprise Holdings, LLC
Delayed Draw Term Loan
SOFR
+
5.25%
(Q)
10.75%
5/29/2025
75,601
75,601
75,601
(2)
587,202
554,419
Trading Companies & Distributors
Penn Detroit Diesel Allison, LLC
Term Loan
SOFR
+
6.25%
(M)
11.71%
12/14/2027
32,913
32,913
32,913
(2)
32,913
32,913
Total Investments, December 31, 2023
$
5,266,968
$
5,129,130
(1) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to LIBOR, SOFR, or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q), or monthly (M). For each such loan, the interest rate provided was the rate in effect as of December 31, 2023.
(2) Loan includes interest rate floor feature.
(3) The investment was on non-accrual status as of December 31, 2023.
In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must determine if any of its portfolio companies is considered a “significant subsidiary.” Pursuant to the definition of “significant subsidiary” applicable to investment companies set forth in Rule 1-02(w) of Regulation S-X, a portfolio company will meet the definition of “significant subsidiary” if either the investment test or the income test is triggered. Rule 3-09 of Regulation S-X requires the Company to include separate audited financial statements of any unconsolidated majority-owned subsidiary (portfolio company in which the Company owns greater than 50% of the unconsolidated subsidiary) in the Company's annual report on Form 10-K if one of the following conditions are met: (i) if the portfolio investment’s fair value exceeds 20% of the Company’s total investments at fair value (the investment test); or (ii) either (A) if the income from the portfolio investment exceeds 80% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries (the income test) or (B) if the income from the portfolio investment exceeds 20% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries and have a fair value exceeding 5% of the Company’s total investment fair value (the alternate income test). If the Company has an unconsolidated majority-owned subsidiary and does not satisfy any Rule 3-09 significant subsidiary conditions during a quarter end, the Company must include a summarized income statement within the notes to the quarterly financial statements.
Rule 4-08(g) of Regulation S-X requires the Company to include summarized financial information of any unconsolidated controlled subsidiary (portfolio company in which the Company owns greater than 25% of the voting securities of the unconsolidated subsidiary or otherwise controls the subsidiary) in the Company's annual report on Form 10-K if one of the following conditions are met: (i) if the portfolio investment’s fair value exceeds 10% of the Company’s total investments fair value (the investment test); or (ii) either (A) if the income from the portfolio investment exceeds 80% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries (the income test) or (B) if the income from the portfolio investment income exceeds 10% of the Company’s absolute value of the change in net assets from operations of the Company and its subsidiaries and have a fair value exceeding 5% of the Company’s total investment fair value (the alternate income test).
After performing the investment analysis and income analysis for the year ended December 31, 2024, the Company determined that the fair value of the SDLP represented greater than 20% of the Company's total investments (at fair value) and also generated more than 20% of the Company’s total income. Accordingly, the audited financial statements of SDLP are attached as an exhibit to this Annual Report on Form 10-K.
Note 4. Fair Value Measurements
The following table presents the fair value measurements of the Company's investments, by major class according to the fair value hierarchy, as of December 31, 2024 (dollars in thousands):
As of December 31, 2024
Investments
Level 1
Level 2
Level 3
Total
Senior Secured First Lien Loans
$
-
$
$
627,439
$
627,526
Equity
-
-
4,437
4,437
Subordinated Certificates of the SDLP
-
-
172,152
172,152
Total investments at fair value
$
-
$
$
804,028
$
804,115
Interest rate swaps
-
-
Total interest rate swaps
$
-
$
$
-
$
The following table presents the fair value measurements of the Company's investments, by major class according to the fair value hierarchy, as of December 31, 2023 (dollars in thousands):
As of December 31, 2023
Investments
Level 1
Level 2
Level 3
Total
Senior Secured First Lien Loans
$
-
$
$
497,822
$
497,911
Equity
-
-
3,641
3,641
Subordinated Certificates of the SDLP
-
-
184,485
184,485
Total investments at fair value
$
-
$
$
685,948
$
686,037
Derivative contracts payable, at fair value
-
-
Total Derivative contracts payable, at fair value
$
-
$
$
-
$
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended December 31, 2024 (dollars in thousands):
Senior Secured First Lien Loans
Equity
Subordinated Certificates of the SDLP
Total
Balance as of December 31, 2023
$
497,822
$
3,641
$
184,485
$
685,948
Purchases
302,125
30,113
333,030
Payment-in-kind and other adjustments to cost
3,581
-
(1,910
)
1,671
Principal repayments
(180,836
)
-
(32,693
)
(213,529
)
Net realized gains/(losses)
-
-
Net amortization of premium/discount
3,252
-
-
3,252
Net change unrealized gains/(losses)
1,316
(7,843
)
(6,523
)
Balance as of December 31, 2024
$
627,439
$
4,437
$
172,152
$
804,028
Net change unrealized appreciation/(depreciation) for
investments still held as of December 31, 2024
$
(6,925
)
$
(341
)
$
(11,830
)
$
(19,096
)
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended December 31, 2023 (dollars in thousands):
Senior Secured First Lien Loans
Equity
Subordinated Certificates of the SDLP
Total
Balance as of December 31, 2022
$
483,740
$
2,633
$
178,367
$
664,740
Purchases
64,281
25,562
89,894
Payment-in-kind and other adjustments to cost
-
(1,230
)
(574
)
Principal repayments
(53,083
)
-
(17,868
)
(70,951
)
Net realized gains/(losses)
(289
)
-
-
(289
)
Net amortization of premium/discount
1,838
-
-
1,838
Net change unrealized gains/(losses)
(348
)
(346
)
(15
)
Transfer into Level 3
-
1,305
-
1,305
Balance as of December 31, 2023
$
497,822
$
3,641
$
184,485
$
685,948
Net change unrealized appreciation/(depreciation) for
investments still held as of December 31, 2023
$
(8,237
)
$
(348
)
$
(3,987
)
$
(12,572
)
The Company conducts a review of the fair value hierarchy classifications on a quarterly basis. The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value level to another. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. For the year ended December 31, 2024, the Company had no investments transferred in/out of the Level 3 category. For the year ended December 31, 2023, there were no investments transferred out of Level 3; however, the Company had two equity investments with an aggregate fair value of $1.3 million transfer from being measured at NAV to Level 3 as a result of changes in the observability of significant inputs.
The Company generally employs the Income Based Approach (as described below) to estimate the fair value of its investments. Additionally, the Company may employ the Market Based Approach (as described below) to assess the total enterprise value of the portfolio company or any applicable collateral, in order to evaluate coverage of the Company’s investments.
Income Based Approach: The Company may use a discounted cash flow analysis to estimate the fair value of the investment, specifically the yield method. Projected cash flows represent the relevant investment’s contractual interest, fee and principal payments plus the assumption of full principal recovery at the investment’s expected maturity date. These cash flows are discounted at a rate that is calibrated to the initial transaction and monitored over time to adjust for changes in observed market spreads and yields since the issuance of the investment as well as changes in company specific factors. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value measurement.
Market Based Approach: The Company may estimate the total enterprise value of each portfolio company by utilizing cash flow (typically EBITDA or revenue, or the relevant industry metric) multiples of publicly traded comparable companies and comparable transactions. The Company considers numerous factors when selecting the appropriate companies whose trading multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, and relevant risk factors, as well as size, profitability and growth expectations. The Company may apply an average of various relevant comparable company multiples to the portfolio company’s latest twelve month EBITDA, revenue or other applicable metric to calculate the enterprise value of the portfolio company. The Company may also consider projected multiples in the assessment if applicable.
The following table presents the quantitative information about Level 3 fair value measurements of the Company's investments, as of December 31, 2024 (dollars in thousands):
As of December 31, 2024
Fair Value
Valuation Techniques
Significant Unobservable Inputs
Range of Significant Unobservable Inputs
Weighted Average (1)
Senior Secured First Lien Term Loans
$
509,227
Income Approach (DCF)
Discount Rate
6.9% - 20.4%
9.5%
Senior Secured First Lien Term Loans
102,903
Recent Transaction
Transaction Prices
98.2% - 99.8%
99.1%
Senior Secured First Lien Term Loans
15,309
Recovery
EV/EBITDA
8.6x - 11.4x
10.1x
Equity
2,280
Market Approach
Market Multiple
8.8x -28.5x
14.8x
Equity
Recent Transaction
Transaction Prices
100.0% - 100.0%
100.0%
Equity
2,032
Income Approach (DCF)
Long Term Growth Rate, Discount Rate
7.6% - 12.6%
10.1%
Market Approach
EBITDA Multiple
15.5x - 19.6x
17.1x
Subordinated Certificates of the SDLP
172,152
Income Approach (DCF)
Discount Rate
9.4% - 9.4%
9.4%
Total
$
804,028
(1) Unobservable inputs were weighted by the fair value of the investments.
The following table presents the quantitative information about Level 3 fair value measurements of the Company's investments, as of December 31, 2023 (dollars in thousands):
As of December 31, 2023
Fair Value
Valuation Techniques
Significant Unobservable Inputs
Range of Significant Unobservable Inputs
Weighted Average (1)
Senior Secured First Lien Term Loans
$
476,551
Income Approach (DCF)
Discount Rate
8.4% - 16.5%
10.5%
Senior Secured First Lien Term Loans
21,271
Recent Transaction
Transactions Prices
97.0% - 98.9%
97.7%
Equity
1,735
Income Approach (DCF)
Long Term Growth Rate, Discount Rate
7.5% -10.5%
8.8%
Market Approach
EBITDA Multiple
10.5x - 17.6x
13.5x
Equity
1,101
Market Approach
EBITDA Multiple
11.0x - 20.0x
14.4x
Equity
Recent Transaction
Transactions Price
100.0% - 100.0%
100.0%
Subordinated Certificates of the SDLP
184,485
Income Approach (DCF)
Discount Rate
8.5% -9.5%
9.5%
Total
$
685,948
(1) Unobservable inputs were weighted by the fair value of the investments.
Increases or decreases in any of the above unobservable inputs in isolation would result in a lower or higher fair value measurement for such assets. Significant increases in discount rates in isolation would result in a significantly lower fair value measurement. The significant unobservable input used in the market approach is the comparable company multiple. The multiple is used to estimate the enterprise value of the underlying investment. An increase/decrease in the multiple would result in an increase/decrease, respectively, in the fair value. The significant unobservable inputs used in the income approach are the comparative yield or discount rate. The comparative yield and discount rate are used to discount the estimated future cash flows expected to be received from the underlying investment. An increase/decrease in the comparative yield or discount rate would result in a decrease/increase, respectively, in the fair value.
Note 5. Derivative Instruments
The Company enters into derivative instruments from time to time to help mitigate interest rate risk exposures. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. On February 2, 2024, in connection with each of the 2026 Notes and the 2028 Notes (as defined in "Note 6. Borrowings"), the Company entered into an interest rate swap agreement with CIBC Bank USA ("CIBC"). As of December 31, 2024, the Company had two outstanding interest rates swaps that were designated as hedges in qualifying hedging relationships (as detailed
below). As of December 31, 2023, the Company had two outstanding interest rates swaps that were not designated as hedges in qualifying hedging relationships (as detailed below). The counterparty to all of these interest rate swap contracts was CIBC.
Certain information related to the Company's derivative instruments as of December 31, 2024 is presented in the consolidated statements of assets and liabilities as follows:
As of December 31, 2024
Derivative Instrument
Notional Amount
Maturity Date
Gross Amount of Recognized Assets
Gross Amount of Recognized Liabilities
Consolidated Statements of Assets and Liabilities Location
Interest rate swap
$
25,000
12/21/2026
$
$
-
Other Liabilities
Interest rate swap
25,000
12/21/2028
-
Other Liabilities
Total
$
50,000
$
$
-
Certain information related to the Company's derivative instruments as of December 31, 2023 is presented in the consolidated statements of assets and liabilities as follows:
As of December 31, 2023
Derivative Instrument
Notional Amount
Maturity Date
Gross Amount of Recognized Assets
Gross Amount of Recognized Liabilities
Consolidated Statements of Assets and Liabilities Location
Interest rate swap
$
25,000
12/21/2026
$
-
$
Derivative contracts payable, at fair value
Interest rate swap
25,000
12/21/2028
-
Derivative contracts payable, at fair value
Total
$
50,000
$
-
$
The Company records its derivatives on a net basis in the consolidated statements of assets and liabilities. The Company has a master netting agreement with its derivative counterparty which allows for the right to offset by counterparty. As of December 31, 2024 there have been no offsets.
Net unrealized appreciation (depreciation) on derivative instruments recognized by the Company for the year ended December 31, 2024, 2023, and 2022 is presented in the consolidated statements of operations as follows:
For the year ended December 31,
Derivative Instrument
Consolidated Statements of Operations Location
Interest rate swaps
Net change in unrealized appreciation (depreciation) on derivatives
$
$
(91
)
$
-
Total
$
$
(91
)
$
-
Net realized gain (loss) on derivative instruments recognized by the Company for the year ended December 31, 2024, 2023, and 2022, is presented in the consolidated statements of operations as follows:
For the year ended December 31,
Derivative Instrument
Consolidated Statements of Operations Location
Interest rate swaps
Net realized gain (loss) on derivatives
$
(116
)
$
-
$
-
Total
$
(116
)
$
-
$
-
Each of the interest rate swap agreements contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company also could be declared in default on its derivative obligations. As of December 31, 2024, the termination fair value of derivatives in a net liability position
related to these agreements was $(0.7) million. As of December 31, 2024, the Company had not posted any collateral related to these agreements.
If the Company had breached any of these provisions at December 31, 2024, it could have been required to settle its obligations under the agreements at their termination fair value.
Note 6. Borrowings
The ratio of a BDC’s total assets (less total liabilities other than indebtedness represented by senior securities) to its total indebtedness represented by senior securities plus preferred stock, if any, must be at least 200% or 150%, if certain requirements are met. In connection with the Company’s organization and the Initial Closing, the Board and its initial shareholder authorized the Company to adopt the 150% asset coverage ratio. Additionally, investors both consented to the minimum asset coverage ratio of 150% and agreed not to seek to redeem their shares of common stock in connection therewith, in each case in the subscription agreement. As of December 31, 2024, the Company's asset coverage ratio was 181.63%.
The Company’s outstanding debt as of December 31, 2024 and December 31, 2023 was as follows (dollars in thousands):
As of December 31, 2024
As of December 31, 2023
Aggregate Principal Amount Available
Principal Amount Outstanding
Carrying Value
Fair Value
Aggregate Principal Amount Available
Principal Amount Outstanding
Carrying Value
Fair Value
JPM Facility(1)
$
-
$
-
$
-
$
-
$
300,000
$
233,900
$
233,900
$
233,900
CIBC Facility(2)
-
-
-
-
75,000
7,770
7,770
7,770
SMBC Facility
195,000
50,000
50,000
50,000
-
-
-
-
2026 Notes(3)(4)
25,000
25,000
24,750
25,000
25,000
25,000
25,000
25,000
2028 Notes(3)(4)
25,000
25,000
24,364
25,000
25,000
25,000
25,000
25,000
VCC CLO(3)
377,500
377,500
374,895
377,500
-
-
-
-
Total borrowings outstanding
$
622,500
$
477,500
$
474,009
$
477,500
$
425,000
$
291,670
$
291,670
$
291,670
(1) On November 26, 2024, the Company repaid all amounts outstanding under the JPM Facility, including outstanding borrowings and accrued interest, and terminated the JPM Facility.
(2) On August 9, 2024, the Company repaid all amounts outstanding under the CIBC Facility, including outstanding borrowings and accrued interest, and terminated the CIBC Facility.
(3) Carrying value represents aggregate principal amount outstanding less unamortized debt issuance costs.
(4) The carrying values of the 2026 Notes and the 2028 Notes as of December 31, 2024 are presented inclusive of an incremental $(0.1) million and $(0.5) million, each resulting from a hedge accounting relationship.
Credit Facilities
JPM Facility
On June 2, 2022, the Company's wholly owned subsidiary, VCCF, entered into the Loan and Security Agreement (as amended on January 26, 2023 and November 20, 2023, the "Loan and Security Agreement" and the revolving credit facility thereunder, the "JPM Facility") with JPMorgan Chase Bank, National Association, as administrative agent ("JPMorgan").
The JPM Facility permitted VCCF to borrow up to $300 million, subject to certain leverage and borrowing base restrictions, and could have increased up to $600 million with the consent of the lenders. The reinvestment period and termination date of the JPM Facility was June 2, 2025 and June 2, 2027, respectively.
The JPM Facility bore interest at an annual rate of: (i) with respect to interest based reference rate other than a term SOFR, the reference rate plus a margin equal to 2.375% per annum; provided that, in the case of advances denominated in British Pounds, the margin was 2.494% per annum (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equaled to 2.475% per annum and (iii) with respect to interest based on a Base Rate, the Base Rate plus a margin equaled to 2.475% per annum. JPMorgan determined the reference rate. The Company paid a fee of 0.50% per annum on the average daily committed but unused amounts under the JPM Facility during its ramp-up period (June 2, 2022 up to but not including March 2, 2023), and, beginning March 3, 2023 through its termination (as described below), paid a fee of 0.75% on annum.
On January 26, 2023, the Company entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). The First Amendment, among other things: (i) reduced the borrowings available under the JPM Facility from up to $500 million to up to $300 million, subject to certain leverage and borrowing base restrictions; and (ii) reduced the commitment increase, subject to lender consent, from up to $800 million to up to $600 million. The reduction was accounted for as a debt modification to a line-of-credit or revolving-debt arrangement in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to an acceleration of
debt financing costs in the amount of $1.4 million and was recorded on the consolidated statements of operations as a component of "Credit facility fees."
On November 20, 2023, the Company entered into the Second Amendment to the Loan and Security Agreement (the "Second Amendment"). The Second Amendment, among other things: (i) permitted the inclusion of revolving loans as collateral to the JPM Facility; (ii) decreased the minimum funding amount under the Loan and Agreement from 85% to 75% of the financing commitment which commenced on November 21, 2023; and (iii) increased the percentage of Collateral Principal Amount (as defined in the Second Amendment) that may consist of portfolio investments the obligors of which have a leverage ratio equal to or greater than 7.0x from 0.0% to 10.0%.
On November 26, 2024, the Company terminated in full (i) the JPM Facility, and (ii) the security interest over the collateral granted by VCCF to the collateral agent pursuant to the Loan and Security Agreement and the other loan documents relating to the JPM Facility. The JPM Facility terminated upon the satisfaction of all obligations and liabilities of the Company to secured parties thereunder, including, without limitation, payments of principal and interest, other fees, breakage costs and other amounts owing to the secured parties. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $4.2 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
At December 31, 2023, the carrying amount of the Company's borrowings under the JPM Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the JPM Facility would be deemed to be Level 3 investments.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the JPM Facility for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands):
For the year ended December 31,
2024(1)
JPM Facility interest
$
17,729
$
19,427
$
8,191
JPM Facility unused fees
Amortization of debt issuance costs
1,918
Total interest and financing expenses related to the JPM Facility
$
18,517
$
21,719
$
9,337
Weighted average outstanding debt balance of the JPM Facility
$
251,339
$
254,857
$
272,019
Weighted average interest rate of the JPM Facility(2)
7.8
%
7.6
%
5.2
%
(1) On November 26, 2024, the Company repaid all amounts outstanding under the JPM Facility, including outstanding borrowings and accrued interest, and terminated the JPM Facility.
(2) Figures for years ended December 31, 2024 and December 31, 2022 are annualized.
CIBC Facility
On January 31, 2023, the Company entered into a Senior Secured Revolving Credit Agreement (the “CIBC Credit Agreement” and the senior secured credit facility thereunder, the “CIBC Facility”) among the Company, as borrower, the lenders party thereto from time to time, the issuing banks party thereto from time to time, and CIBC Bank USA ("CIBC"), as administrative agent and as sole lead arranger. The CIBC Facility was guaranteed by VCCEH, and could have been guaranteed by certain domestic subsidiaries of the Company that would have been formed or acquired by the Company in the future (collectively, the “Guarantors”). Proceeds of the CIBC Facility were used for general corporate purposes, including the funding of portfolio investments. The initial maximum principal amount of the CIBC Facility was $75 million, subject to availability under the borrowing base, which was based on the Company’s and Guarantor’s portfolio investments and other outstanding indebtedness. The CIBC Facility was secured by a perfected first-priority interest in substantially all of the portfolio investments held by the Company and each Guarantor, subject to certain exceptions. The CIBC Facility's commitment termination date was January 31, 2026 and had a final maturity date of January 31, 2028.
The CIBC Facility bore interest from January 1, 2023 to January 31, 2026 (the "Availability Period") at an annual rate of: (i) with respect to interest based on the greatest of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1% and (c) zero (the "ABR"), the ABR plus a margin equal to 1.500% per annum; and (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equal to 2.500% per annum and after the Availability Period at an annual rate of: (i) with respect to interest based on the ABR, the ABR plus a margin equal to 1.750% per annum; and (ii) with respect to interest based on a term SOFR, the SOFR plus a margin equal to 2.750% per annum. CIBC, as the administrative agent, determines the reference rate. The Company paid a fee of 0.375% per annum on the average daily committed but unused amounts under the CIBC Facility during the first nine months of the CIBC Facility (January 31, 2023 up to but not including October 31, 2023), and thereafter, 0.375% if the average daily used amount of the commitment exceeds 25% of the total commitment or otherwise, 0.50%.
On August 9, 2024, the Company terminated in full (i) the CIBC Credit Agreement and the CIBC Facility, and (ii) the security interest over the collateral granted to CIBC as the lender pursuant to the CIBC Credit Agreement and the other loan documents relating to the CIBC Facility. The CIBC Facility terminated upon the satisfaction of all obligations and liabilities of the Company to CIBC as the lender thereunder, including, without limitation, payments of principal and interest, other fees, breakage costs and other amounts owing to CIBC. The termination was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.8 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
At December 31, 2023, the carrying amount of the Company's borrowings under the CIBC Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the CIBC Facility would be deemed to be Level 3 investments
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the CIBC Facility for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands):
For the year ended December 31,
2024(1)
CIBC Facility interest
$
1,715
$
1,647
$
-
CIBC Facility unused fees
-
Amortization of debt issuance costs
-
Total interest and financing expenses related to the CIBC Facility
$
1,956
$
2,027
$
-
Weighted average outstanding debt balance of the CIBC Facility
$
35,170
$
21,184
$
-
Weighted average interest rate of the CIBC Facility(2)
8.0
%
7.8
%
-
(1) On August 9, 2024, the Company repaid all amounts outstanding under the CIBC Facility, including outstanding borrowings and accrued interest, and terminated the CIBC Facility.
(2) Figures for years ended December 31, 2024 and December 31, 2023 are annualized.
SMBC Facility
On August 9, 2024, the Company entered into a Senior Secured Revolving Credit Agreement (the “SMBC Credit Agreement” and the senior secured credit facility thereunder, the “SMBC Facility”) by and among the Company, as borrower, the lenders party thereto from time to time, the issuing banks party thereto from time to time, and Sumitomo Mitsui Banking Corporation, as administrative agent, sole book runner and lead arranger.
The SMBC Facility is guaranteed by VCCEH, a wholly owned subsidiary of the Company, and will be guaranteed by certain subsidiary guarantors. Proceeds of the SMBC Facility may be used for general corporate purposes, including the funding of portfolio investments.
The initial maximum principal amount of the SMBC Facility was $170 million, subject to availability under the borrowing base, which is based on the Company’s and subsidiary guarantors’ portfolio investments and other outstanding indebtedness. Maximum capacity under the SMBC Facility may be increased to $400 million through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The SMBC Facility is secured by a perfected first-priority interest in substantially all of the portfolio investments held by the Company and each subsidiary guarantor, subject to certain exceptions.
The availability period under the SMBC Facility will terminate on August 9, 2028 (the “SMBC Commitment Termination Date”) and the SMBC Facility will mature on August 9, 2029 (the “SMBC Maturity Date”). During the period from the SMBC Commitment Termination Date to the SMBC Maturity Date, the Company will be obligated to make mandatory prepayments under the SMBC Credit Agreement out of the proceeds of certain asset sales and other recovery events, equity and debt issuances and other returns of capital and extraordinary receipts.
The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the SMBC Facility will bear interest at either term SOFR plus a 1.125% or 1.000% margin, or the alternate base rate plus a 2.125% or 2.000% margin depending on the ratio of the borrowing base compared to the outstanding debt of the SMBC Facility. The Company may elect either the term SOFR or the alternate base rate at the time of drawdown, and loans may be converted from one rate to another at any time at the Company’s option, subject to certain conditions. The Company also will pay a fee of 0.375% on average daily undrawn amounts under the SMBC Facility.
The SMBC Credit Agreement includes customary covenants, including certain limitations on the incurrence by the Company of additional indebtedness and on the Company’s ability to make distributions to its shareholders, or redeem, repurchase or retire shares of
stock, upon the occurrence of certain events and certain financial covenants related to asset coverage and liquidity and other maintenance covenants, as well as customary events of default.
On August 28, 2024, the Company closed an additional $25 million of commitments under the accordion feature of the SMBC Credit Agreement, increasing the maximum principal amount available under the SMBC Facility to $195 million.
At December 31, 2024, the carrying amount of the Company's borrowings under the SMBC Facility approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the SMBC Facility would be deemed to be Level 3 investments.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the SMBC Facility for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands):
For the year ended December 31,
SMBC Facility interest
$
1,814
$
-
$
-
SMBC Facility unused fees
-
-
Amortization of debt issuance costs
-
-
Total interest and financing expenses related to the SMBC Facility
$
2,149
$
-
$
-
Weighted average outstanding debt balance of the SMBC Facility
$
62,794
$
-
$
-
Weighted average interest rate of the SMBC Facility(1)
7.3
%
-
-
(1) Figures for year ended December 31, 2024 are annualized.
VCC CLO 1, LLC
On November 26, 2024 (the “Closing Date”), the Company completed its $493.77 million term debt securitization (the “2024 Debt Securitization”), also known as a collateralized loan obligation, in connection with which a subsidiary of the Company issued the Debt (as defined below). The 2024 Debt Securitization is subject to the Company’s’ overall asset coverage requirement.
The debt offered in the 2024 Debt Securitization was issued and incurred by VCC CLO, an indirect, wholly-owned and consolidated subsidiary of the Company, and consists of (i) Class A-1 Senior Secured Floating Rate Notes, Class A-2 Senior Secured Floating Rate Loans, Class B Senior Secured Floating Rate Notes, Class B Senior Secured Floating Rate Loans and the Class C Mezzanine Secured Deferrable Floating Rate Notes (collectively, the “Secured Debt”), and (ii) the subordinated notes (the “Subordinated Notes” and, together with the Secured Debt, the “Debt”), the terms of which are summarized in the table below:
Class
Par Size ($)
Ratings (S&P)
Ratings (Fitch)
Coupon
Class A-1 Notes
$
280,000
AAA(sf)
AAA(sf)
SOFR + 1.71%
Class A-2 Loans
30,000
AAA(sf)
N/A
SOFR + 1.85%
Class B Notes
7,000
AA (sf)
N/A
SOFR + 2.15%
Class B Loans
23,000
AA (sf)
N/A
SOFR + 2.15%
Class C Notes
37,500
A (sf)
N/A
SOFR + 2.65%
Subordinated Notes
116,270
N/A
N/A
N/A
VCC CLO Depositor, a direct, wholly owned subsidiary of the Company, retained all of the Subordinated Notes issued in the 2024 Debt Securitization and eliminated in consolidation.
The 2024 Debt Securitization is backed by a diversified portfolio of middle-market commercial loans and participation interests therein, which is managed by the Company pursuant to a collateral management agreement entered into with VCC CLO on the Closing Date (the “Collateral Management Agreement”). The Company has agreed to irrevocably waive all collateral management fees payable to it so long as it is the collateral manager under the Collateral Management Agreement. The Debt is scheduled to mature on October 20, 2036; however, the Debt may be redeemed by VCC CLO, at the written direction of (i) a majority of the Subordinated Notes with the consent of the Company or (ii) the Company, in each case, on any business day on or after November 26, 2026.
As part of the 2024 Debt Securitization, the Company, VCC CLO Depositor and VCC CLO entered into a loan sale and contribution agreement on the Closing Date (the “Sale Agreement”), pursuant to which the Company sold, transferred, assigned, contributed or
otherwise conveyed to VCC CLO Depositor and VCC CLO Depositor subsequently sold, transferred, assigned, contributed or otherwise conveyed to VCC CLO the loans and participations therein securing the 2024 Debt Securitization for the purchase price and other consideration set forth in the Sale Agreement. Following this transfer, VCC CLO, and not VCC CLO Depositor or the Company, holds all of the ownership interest in such loans and participations therein. The Company made customary representations, warranties and covenants in the Sale Agreement.
The Secured Debt is a secured obligation of VCC CLO, the Subordinated Notes are the unsecured obligations of VCC CLO, and the indenture and security agreement governing the Debt includes customary covenants and events of default. The Debt has not been, and will not be, registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities or “blue sky” laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission or an applicable exemption from registration.
At December 31, 2024, the carrying amount of the Secured Debt of VCC CLO approximated its fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Secured Debt of VCC CLO would be deemed to be Level 3 investments.
The following table summarizes the interest expenses and amortization of financing costs incurred on VCC CLO for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
For the year ended December 31,
VCC CLO interest
$
2,386
$
-
$
-
Amortization of debt issuance costs
-
-
Total interest and financing expenses related to VCC CLO
$
2,408
$
-
$
-
Weighted average outstanding debt balance of VCC CLO
$
377,500
$
-
$
-
Weighted average interest rate of VCC CLO(1)
6.4
%
-
-
(1) Figures for year ended December 31, 2024 are annualized.
Unsecured Notes
On December 21, 2023, the Company entered into a Master Note Purchase Agreement (the “Note Purchase Agreement”) governing the issuance of $25,000,000 in aggregate principal amount of Series A Senior Notes, Tranche A, due December 21, 2026, with a fixed interest rate of 8.10% per year (the “2026 Notes”), and $25,000,000 in aggregate principal amount of Series A Senior Notes, Tranche B, due December 21, 2028, with a fixed interest rate of 8.20% per year (the “2028 Notes” and, together with the 2026 Notes, the “Notes”), to qualified institutional investors in a private offering exempt from the registration requirements of the 1933 Act. The Notes are guaranteed by VCCEH, a wholly owned subsidiary of the Company.
Interest on the Notes are payable semi-annually on June 21 and December 21 each year. The 2026 Notes and the 2028 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to September 21, 2026 and September 21, 2028, respectively, at par plus accrued interest to the redemption date and a make-whole premium, and thereafter at par plus accrued interest to the redemption date. In addition, the Company is obligated to offer to prepay the Notes at par plus accrued and unpaid interest up to, but excluding, the date of prepayment, if certain change in control events occur. The Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
On February 2, 2024, in connection with each of the 2026 Notes and the 2028 Notes, the Company entered into an interest rate swap agreement for a total notional amount of $25,000,000 and $25,000,000 that matures on December 21, 2026 and December 21, 2028, respectively. Under the interest rate swap agreement for the 2026 Notes and the 2028 Notes, the Company receives a fixed interest rate of 8.10% and 8.20% and pays a floating interest rate of SOFR + 4.226% and SOFR + 4.595%, respectively. The Company designated these interest rate swaps, the 2026 Notes, and the 2028 Notes as a qualifying fair value hedge accounting relationship. For more information, see "Note 5. Derivative Instruments."
At December 31, 2024, and December 31, 2023 the carrying amount of the Notes approximated their fair value. The fair values of the Company's debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Notes would be deemed to be Level 3 investments.
The following table summarizes the interest expenses and amortization of financing costs incurred on the Notes for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands):
For the year ended December 31,
2026 Notes interest
$
2,024
$
$
-
2028 Notes interest
$
2,052
$
$
-
Amortization of debt issuance costs
$
$
$
-
Effect of interest rate swap
$
$
-
$
-
Total
$
4,948
$
$
-
Weighted average stated interest rate, net of effect of interest rate swaps(1)
9.7
%
8.2
%
-
Weighted average outstanding balance
50,000
1,507
-
(1) Figures for year ended December 31, 2023 are annualized.
Note 7. Related Party Transactions
Investment Advisory Agreement
On June 2, 2022, the Company entered into an investment advisory agreement with the Adviser. In connection with the Transaction, the Company entered into a new investment agreement between the Company and the Adviser (the "Prior Investment Advisory Agreement"), which was materially identical to the investment advisory agreement, dated June 2, 2022, and became effective on September 6, 2023. At a meeting of the Company’s shareholders held on June 12, 2024, the Company’s shareholders voted to approve an amended investment advisory agreement by and between the Company and the Adviser (the “Investment Advisory Agreement”). Pursuant to the Investment Advisory Agreement, the Company pays the Adviser a fee for its investment advisory and management services consisting of two components-a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee will ultimately be borne by the shareholders.
The Investment Advisory Agreement amended the Prior Investment Advisory Agreement as follows:
(iii)reduced the incentive fee payable by the Company to the Adviser following an initial public offering or a listing of the common stock on a national securities exchange (a "Public Listing") from 20% of all remaining Pre-Incentive Fee Net Investment Income (as defined below) above the “catch-up” to 17.5% of all remaining Pre-Incentive Fee Net Investment Income above the “catch-up”; and
(iv)more accurately reflects the original intent of the parties with respect to the “three-year look back” by revising the description of the calculation of the Income Incentive Fee (as defined below) to more explicitly account for the “three-year look back” and specifically referring to the “aggregate” Pre-Incentive Fee Net Investment Income for the Trailing Twelve Quarters (as defined below) in the description of the calculation; therefore, the foregoing change is clarifying in nature and neither reflects a change in the actual calculation of the Income Incentive Fee nor would result in any change in the fees payable by the Adviser.
Other than the foregoing, no other material provisions of the Prior Investment Advisory Agreement changed.
Base Management Fee
Pursuant to the Investment Advisory Agreement, prior to a Public Listing, the Company pays to the Adviser a fee (the “Management Fee”) for management services in an amount equal to an annual rate of 0.75% of the Company's "Adjusted Gross Assets," The Company's Adjusted Gross Assets is the average of the accreted or amortized cost basis of the Company's portfolio investments, excluding cash and cash equivalents and undrawn capital commitments at the end of the two most recently completed fiscal quarters (and, in the case of the first quarter-end following the Initial Closing, at the end of such fiscal quarter-end). The Management Fee is payable quarterly in arrears. Pursuant to the Investment Advisory Agreement, beginning with the first full calendar quarter following Public Listing, the Company will pay to the Adviser the Management Fee in an amount equal to an annual rate of 1.00% of the Adjusted Gross Assets payable quarterly in arrears (and, in the case of the first full calendar quarter-end following a Public Listing, at the end of such fiscal quarter-end).
For the years ended December 31, 2024, 2023, and 2022, the Company incurred base management fees to the Adviser of $5.7 million, $5.1 million, and $2.8 million, respectively.
As of December 31, 2024, and December 31, 2023, $1.5 million and $1.3 million, respectively, was included in “base management fees payable” in the accompanying consolidated statements of assets and liabilities.
Income Incentive Fee and Capital Gain Incentive Fee Calculation
Pursuant to the Investment Advisory Agreement, the Company pays to the Adviser an incentive fee consisting of two components - an incentive fee based on a percentage of net investment income (the "Income Incentive Fee") and an incentive fee based on a percentage of capital gains(the "Capital Gains Incentive Fee"). The two components of the incentive fee are independent of each other and therefore, one component may be payable to the Adviser even if the other component is not payable to the Adviser.
Income Incentive Fee
The first part of the incentive fee, the Income Incentive Fee, is calculated and payable quarterly in arrears.
Prior to a Public Listing, under the Investment Advisory Agreement, the Income Incentive Fee will be calculated, subject to the Incentive Fee Cap (as defined below), and payable quarterly in arrears in respect of the Trailing Twelve Quarters as follows:
(iv)no incentive fee in any calendar quarter in which the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters does not exceed the hurdle rate of 1.75% for such Trailing Twelve Quarters;
(v)100% of the excess of the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate until the Adviser has received a “catch-up” equal to 12.5% of the aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters; and
(vi)12.5% of the Company’s remaining aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters, if any, that exceeds the “catch-up,”
Beginning with the first full calendar quarter following a Public Listing, under the Investment Advisory Agreement, the Income Incentive Fee will be calculated, subject to the Incentive Fee Cap, and payable quarterly in arrears in respect of the Trailing Twelve Quarters as follows:
(iv)no incentive fee in any calendar quarter in which the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters does not exceed the hurdle rate of 1.75% for such Trailing Twelve Quarters;
(v)100% of the excess of the Company’s aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate until the Adviser has received a “catch-up” equal to 17.5% of the aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters; and
(vi)17.5% of the Company’s remaining aggregate Pre-Incentive Fee Net Investment Income in respect of the relevant Trailing Twelve Quarters, if any, that exceeds the “catch-up,”
“Pre-incentive fee net investment income” means interest income, dividend income, accrued interest on the Subordinated Certificates, and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies accrued during the relevant calendar quarter, minus its operating expenses during the relevant calendar quarters including the Management Fee, expenses payable under the Administration Agreement (as defined below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the Income Incentive Fee. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
The Income Incentive Fee for a particular quarter is subject to a cap (the "Incentive Fee Cap”). Beginning with the first full calendar quarter following a Public Listing, the Incentive Fee Cap is equal to the difference between (x) 12.5% of the Cumulative Net Return (as defined below) from the calendar quarter then ending and the eleven preceding calendar quarters (such period the “Trailing Twelve Quarters”) and (y) the aggregate Income Incentive Fees that were paid to the Adviser by the Company in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters. Following a Public Listing, the Incentive Fee Cap will be equal to the difference between (x) 17.5% of the Cumulative Net Return during the relevant Trailing Twelve Quarters and (y) the aggregate Income Incentive Fees that were paid to the Adviser by the Company in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters. Cumulative Net Return is defined as the sum of (a) pre-incentive fee net investment income in respect of the relevant Trailing Twelve Quarters and (b) cumulative aggregate realized capital
gains, cumulative aggregate realized capital losses, cumulative aggregate unrealized capital depreciation and cumulative aggregate unrealized capital appreciation in respect of the relevant Trailing Twelve Quarters.
For the years ended December 31, 2024, 2023, and 2022, the Company incurred an Income Incentive Fee of $5.6 million, $6.0 million, and $1.3 million, respectively.
As of December 31, 2024 and December 31, 2023, $0.2 million and $2.2 million, respectively, was included in “Income-based incentive fee payable” in the accompanying consolidated statements of assets and liabilities.
Capital Gains Incentive Fee
The second part of the incentive fee, the capital gains incentive fee ("Capital Gains Incentive Fee"), is determined and payable in arrears as of the end of each fiscal year. Prior to a Public Listing, the amount of Capital Gains Incentive Fee is equal to 12.5% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. Beginning with the first full calendar quarter following a Public Listing, the Capital Gains Incentive Fee will be equal to 17.5% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees.
For the year ended December 31, 2024, 2023, and 2022 the Company did not incur a Capital Gains Incentive Fee.
In addition, the Adviser and its affiliates pay to the Company its allocable portion of any transaction, advisory or similar fees received in connection with the Company’s investment activities. The Adviser determines the Company’s allocable portion of such fees based on the Company’s ownership of the investment or securities related to the activity or investment, as applicable. The Adviser and its affiliates retain a portion of any transaction or transaction-related fee (including break-up fees, structuring fees, monitoring fees, commitment fees, or brokerage or underwriting compensation), advisory fees, or similar fees received in connection with the Company’s investment activities to the extent permitted by the 1940 Act, and may earn other transaction or transaction-related fees, advisory fees, or similar fees from the same transactions from sources other than the Company.
Administration Agreement
On June 2, 2022, the Company entered into an administration agreement with Varagon (in its capacity as the administrator, the "Administrator"). In connection with the Transaction, and in conjunction with entering into the Prior Investment Advisory Agreement, the Company entered into a new administration agreement between the Company and the Administrator (the "Administration Agreement"), which became effective on September 6, 2023. The Administration Agreement is materially identical to the prior administration agreement, dated June 2, 2022. Pursuant to the Administration Agreement, the Administrator (or one or more delegated service providers) furnishes the Company with office facilities, together with equipment and clerical, bookkeeping and recordkeeping services at such facilities. Under the Administration Agreement, the Administrator also performs, or oversees the performance of, the Company’s required administrative services, which includes being responsible for the financial records that the Company is required to maintain and preparing reports to the Company’s shareholders and reports filed with the SEC and otherwise assists with the Company’s compliance with the rules and regulations applicable to a BDC and RIC. In addition, the Administrator assists the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s shareholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. The Administrator will charge the Company only for the actual expenses it incurs on its behalf, or its allocable portion thereof, without any profit to the Administrator.
For the years ended December 31, 2024, 2023, and 2022, the Company recorded administrator expenses of $1.2 million, $1.2 million, and $0.7 million, respectively.
As of December 31, 2024 and December 31, 2023, the Company had $0.6 million and $0.3 million, respectively, in "Administrator expenses payable" in the accompanying consolidated statements of assets and liabilities.
On June 2, 2022, the Administrator also entered into a sub-administration agreement with State Street Bank and Trust Company (the “Sub-Administrator”), under which the Sub-Administrator provides various accounting and administrative services to the Company, subject to the oversight of the Administrator, including preparing certain financial information, providing certain treasury services, and providing certain fund accounting services. The Company, on behalf of the Administrator, will pay the Sub-Administrator fees for its services as it determines are commercially reasonable in its sole discretion and for all reasonable expenses. To the extent that the Sub-Administrator outsources any of its functions, the Sub-Administrator pays any compensation associated with such functions.
Expense Reimbursement Agreement
On June 2, 2022, the Company and the Adviser entered into an expense reimbursement agreement (the “Expense Reimbursement Agreement”) pursuant to which the Company reimburses the Adviser or Varagon, as applicable, for any organizational and offering expenses incurred by the Company and funded by the Adviser or Varagon. The Adviser elected to incur the organizational and offering
expenses associated with the Company for the period from July 31, 2019 through March 29, 2022. Such organizational and offering expenses are not reimbursable by the Company (See "Note 2. Significant Accounting Policies").
Any such reimbursement will be made during the first four fiscal quarters following the 24-month period after the Initial Closing (the “Fundraising Period”). The Fundraising Period may be extended by up to an additional 18 months in the sole discretion of the Board (i.e., from 24 months to up to 42 months after the Initial Closing) which, on March 20, 2024, was extended to December 2, 2025 by the Board. For the avoidance of doubt the Company will reimburse the Adviser or, as applicable, Varagon, for the organizational and offering expenses incurred by the Company during the first four fiscal quarters following the extended Fundraising Period (i.e. beginning with the fiscal quarter ending March 31, 2026). The Company’s obligation to reimburse the Adviser or Varagon, as applicable, under the Expense Reimbursement Agreement automatically became a liability of the Company on June 2, 2022, when the Company elected to be regulated as a BDC under the 1940 Act. For the avoidance of doubt, reimbursements under the Expense Reimbursement Agreement are not conditioned on any performance threshold and are not considered a contingent liability for accounting purposes.
Fronting Letter Agreement
On December 15, 2022, the Company and Varagon entered into a Fronting Letter Agreement (the “Fronting Letter”). Pursuant to the Fronting Letter, for purposes of facilitating the Company’s funding obligations under or in connection with one or more of the Company's portfolio investments, upon request by the Company or the Adviser, and the consent of Varagon, Varagon will advance up to an aggregate amount of $15.0 million to the Company (each advance, a "Fronted Amount"). No fees or interest is payable to Varagon by the Company with respect to any Fronted Amount. Each Fronted Amount will be reimbursed to Varagon by the Company within 90 days of receipt without any interest or fees.
On December, 20, 2022, Varagon advanced a Fronted Amount of $10.0 million to the Company. On December 28, 2022, the Company repaid $2.0 million thereof to Varagon. As of December 31, 2022, the Company had $8.0 million remaining due to Varagon, which is included in “Fronting amount payable” in the accompanying consolidated statements of assets and liabilities. On January 17, 2023, the Company repaid Varagon the remaining $8.0 million due to Varagon under the Fronting Letter. As of December 31, 2024 and December 31, 2023, there were no Fronted Amounts advanced by the Company from Varagon.
Placement Agent Agreements
On September 6, 2023, the Adviser entered into an agreement with Man Investments Inc. on behalf of the Company, pursuant to which Man Investments Inc., assists the Company in conducting the Offering (the "Man Placement Agent Agreement"). On October 13, 2023, the Adviser entered into an agreement with Man Investments Inc. on behalf of the Company, pursuant to which Man Investments Inc. assists the Company in conducting the Offering in Canada (together with the Man Placement Agent Agreement, the "Placement Agent Agreements").
For avoidance of doubt, the Adviser or its affiliates are solely responsible for any placement or “finder’s” fees payable to any placement agents engaged by the Adviser on behalf of the Company in connection with the Offering.
Note 8. Commitments
Unfunded commitments
As of December 31, 2024 and December 31, 2023, the Company had commitments under loan and financing agreements to fund up to $112.5 million to 53 portfolio companies and $22.7 million to 29 portfolio companies, respectively. These commitments are primarily composed of senior secured term loans, revolvers, and in the SDLP, and an analysis of their fair value is included in the Consolidated Schedule of Investments. The Company's commitment to fund commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as of December 31, 2024 and December 31, 2023 are shown in the table below (dollars in thousands):
Issuer
As of December 31, 2024
As of December 31, 2023
3G Intermediate, Inc.
1,333
-
3G Intermediate, Inc.
-
Accupac, LLC
1,304
ACP Oak Buyer, Inc.
-
ACP Vault Acquisition, Inc.
1,036
-
ACP Vault Acquisition, Inc.
1,943
-
ADPD Holdings, LLC
-
ADPD Holdings, LLC
ADPD Holdings, LLC
ADPD Holdings, LLC
-
Advanced Web Technologies Holding Company
-
Advanced Web Technologies Holding Company
-
Alert SRC Newco LLC
2,013
-
Alert SRC Newco LLC
-
Apex Dental Partners, LLC
-
Apex Dental Partners, LLC
2,172
-
Basin Innovation Group, LLC
1,773
-
Basin Innovation Group, LLC
1,266
-
Bebright MSO, LLC
-
Bebright MSO, LLC
1,237
-
Boulder Scientific Company, LLC
-
BPCP NSA Intermedco, Inc.
1,409
-
BPCP NSA Intermedco, Inc.
-
BRG Acquisition Co., LLC
Castleworks Home Services Company
Concord III, L.L.C.,
Distinct Holdings, Inc.
1,590
-
Easy Ice, LLC
1,352
-
Easy Ice, LLC
1,500
-
Easy Ice, LLC
-
Eventus Buyer, LLC
1,730
-
Eventus Buyer, LLC
-
Express Wash Acquisition Company, LLC
Eye Health America, LLC
Eye Health America, LLC
1,092
FS Squared Holding Corp.
-
FS Squared Holding Corp.
-
FS Squared Holding Corp.
-
Gen4 Dental Partners OPCO, LLC
-
Gen4 Dental Partners OPCO, LLC
2,927
-
Graffiti Buyer, Inc.
1,213
Hissho Parent, LLC
-
HLSG Intermediate, LLC
-
1,655
Horizon Freight Holdings, Inc.
1,543
-
Horizon Freight Holdings, Inc.
1,543
-
Horizon Freight Holdings, Inc.
-
HTI Intermediate, LLC
-
HTI Intermediate, LLC
-
Hub Pen Company, LLC
-
JTM Foods LLC
KL Bronco Acquisition, Inc.
KL Bronco Acquisition, Inc.
1,250
1,786
KL Charlie Acquisition Company
-
Krayden Holdings, Inc.
1,251
-
Krayden Holdings, Inc.
Krayden Holdings, Inc.
Krayden Holdings, Inc.
Leiters, Inc.
Lightspeed Buyer, Inc.
-
Lightspeed Buyer, Inc.
8,843
-
M&D Midco, Inc.
3,503
M&D Midco, Inc.
1,763
MDI Buyer, Inc.
Municipal Emergency Services, Inc.
2,472
-
MWD Management, LLC
North Haven Stallone Buyer, LLC
-
OIS Management Services, LLC
2,563
-
OIS Management Services, LLC
Oliver Packaging, LLC
Online Labels Group, LLC
Online Labels Group, LLC
Online Labels Group, LLC
Pediatric Home Respiratory Services, LLC
2,250
-
Pediatric Home Respiratory Services, LLC
1,050
-
POY Holdings, LLC
-
1,211
QM Buyer, Inc.
2,306
-
QM Buyer, Inc.
1,153
-
RFI Buyer, Inc.
RWA Wealth Partners, LLC
6,511
RWA Wealth Partners, LLC
1,944
Senior Direct Lending Program, LLC
17,005
8,557
SGA Dental Partners Opco, LLC
1,491
1,394
SI Holdings, Inc.
-
Techmer BB Bidco, LLC
Titan Group Holdco, LLC
-
Titan Group Holdco, LLC
-
Titan Group Holdco, LLC
-
Turbo Buyer, Inc.
-
UHY Advisors, Inc.
1,753
-
UHY Advisors, Inc.
6,623
-
United Musculoskeletal Partners Acquisition Holdings, LLC
-
US Health Partners Management, LLC
-
US Health Partners Management, LLC
-
USN Opco, LLC
USSC Holding Corp.
-
Zavation Medical Products, LLC
-
Total Unfunded Commitments
$
112,456
$
22,714
The Company believes its assets will provide adequate coverage to satisfy these unfunded commitments. As of December 31, 2024, the Company had cash of $69.6 million, available borrowings under the SMBC Facility of $145.0 million, subject to borrowing base limitations, and undrawn capital commitments of $73.5 million.
Also included within commitments, as of December 31, 2024, were commitments to issue up to $0.1 million in letter of credit through a financial intermediary on behalf of certain portfolio companies. As of December 31, 2024, the Company had not issued any letters of credit. If the Company were to issue any letters of credit, it would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations.
Note 9. Directors Fees
The Company’s business and affairs is managed under the direction of the Board. The Board consists of four (4) members, three (3) of whom are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Company (the “Independent Directors”).
The Independent Directors receive an annual fee of $80,000. The Independent Directors will also receive an additional fee of $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each regular meeting of the Board. In addition, the Independent Directors will receive an additional fee of $1,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each special Board meeting. The Independent Directors also will receive a fee of $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. The lead Independent Director will receive an additional annual fee of $7,500. The chair of the Board's audit committee will receive an additional annual fee of $15,000 in lieu of fees for attending audit committee meetings. The chair of the Board's nominating and corporate governance committee will receive an additional annual fee of $7,500 in lieu of fees for attending nominating and corporate governance committee meetings.
For the years ended December 31, 2024, 2023 and 2022, the Company accrued directors' fees of $0.3 million, $0.3 million and $0.3 million, respectively. As of December 31, 2024 and December 31, 2023, the Company had $0.1 million and $0.1 million respectively, in "Directors' fees and expenses payable" in the accompanying consolidated statements of assets and liabilities.
Note 10. Share Data and Distributions
Earnings per share
The following table sets for the computation of basic and diluted earnings per share, for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands, except per share data):
For the year ended December 31,
Net increase (decrease) in net assets resulting from operations
$
39,100
$
42,242
$
9,242
Weighted average shares outstanding(1)
41,517,324
41,499,392
39,848,927
Earnings per share (basic and diluted)(1)
$
0.94
$
1.02
$
0.23
(1) Per share data for the year ended December 31, 2022 was derived by using the weighted average shares outstanding from the June 2, 2022 (commencement of investment operations) through December 31, 2022 and does not include the 100 shares issued in connection with the Company's seed audit on March 29, 2022 that were subsequently redeemed on June 2, 2022 in connection with the Merger.
Capital Activity
The Company is authorized to issue 500,000,000 shares of common stock at a par value of $0.01 per share. The Company intends to offer and sell its shares of common stock to “accredited investors” (as defined in Rule 501(a) of Regulation D promulgated under the 1933 Act in a private placement in reliance on Regulation D and Regulation S, as applicable. The Fundraising Period commenced when the Company held the Initial Closing on June 2, 2022 and entered into subscription agreements in which investors made capital commitments to purchase shares of common stock (the “Subscription Agreements”), providing private placement of the Company’s shares of common stock. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase the Company's shares of common stock up to the amount of their respective capital commitment each time the Company delivers a drawdown notice.
On March 29, 2022, in connection with its seed audit, the Company issued 100 shares of common stock for $10.00 to Varagon, which were subsequently redeemed on June 2, 2022, in connection with the Merger.
As of December 31, 2024, the Company had received capital commitments totaling $488.2 million ($73.5 million remaining undrawn), of which $7.2 million ($1.2 remaining undrawn) is from Varagon and current officers and directors of the Company. On June 2, 2022, the Company held the Initial Closing and entered into Subscription Agreements with a number of investors providing for the private placement of its shares of common stock.
The following table summarizes the total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements from inception through December 31, 2024 (dollars in thousands, except per share data):
Issuance Date
Shares Issued
Proceeds Received
Issuance Price per Share
June 2, 2022
36,130,510
$
361,305
$
10.00
July 12, 2022
2,994,012
$
30,000
$
10.02
September 7, 2022
2,362,205
$
24,000
$
10.16
Distributions and Distribution Reinvestments
Distributions to common shareholders are recorded on the ex-dividend date. The Company elected, and intends to qualify annually, to be treated as a RIC for U.S. federal income tax purposes under the Code. The Company will be required to distribute dividends each tax year as a RIC to its shareholders of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to be eligible for tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a distribution all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board and is based on management’s estimate of the Company’s annual taxable income. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such net realized capital gains for investment.
The Company has adopted an “opt out” distribution reinvestment plan (“DRIP”) for shareholders. As a result, if the Board authorizes, and the Company declares, a dividend or other distribution, each shareholder that has not “opted out” of the DRIP will have their dividends or distributions automatically reinvested in additional shares of our common stock rather than receiving cash distributions. Shareholders who receive distributions in the form of shares of common stock will be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions.
The following table reflects the distributions per share that the Company has declared, including shares issued under the DRIP, on its common stock from inception through December 31, 2024 (dollars in thousands, except per share data):
Distribution
Date Declared
Record Date
Payment Dates
Amount per Share
Cash Distribution
DRIP Shares Issued
DRIP Shares Value
Quarterly
December 12, 2022
December 15, 2022
December 21, 2022
$
0.2635
$
10,892
3,915
$
Quarterly
December 19, 2022
December 23, 2022
January 27, 2023
0.2405
9,941
3,665
Quarterly
March 23, 2023
March 27, 2023
March 31, 2023
0.2222
9,185
3,619
Quarterly
May 10, 2023
July 1, 2023
July 15, 2023
0.2246
9,284
3,780
Quarterly
August 8, 2023
October 2, 2023
October 16, 2023
0.2271
9,387
3,825
Quarterly
November 7, 2023
December 27, 2023
January 17, 2024
0.2397
9,908
4,089
Special
December 18, 2023
December 27, 2023
January 17, 2024
0.1205
4,981
2,056
Quarterly
March 20, 2024
March 29, 2024
April 10, 2024
0.2371
9,809
3,461
Special
March 20, 2024
March 29, 2024
April 10, 2024
0.0333
1,378
Quarterly
May 9, 2024
June 28, 2024
July 17, 2024
0.2371
9,809
3,533
Special
May 9, 2024
June 28, 2024
July 17, 2024
0.0662
2,739
Quarterly
August 6, 2024
September 30, 2024
October 17, 2024
0.2397
9,916
3,699
Special
August 6, 2024
September 30, 2024
October 17, 2024
0.0638
2,639
Quarterly
November 6, 2024
December 31, 2024
January 17, 2025
0.2392
9,911
2,282
Special
November 6, 2024
December 31, 2024
January 17, 2025
0.0675
2,797
Total
$
112,576
41,025
$
Note 11. Income Taxes
The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. As a RIC, the Company generally will not be subject to U.S. federal income tax on any ordinary income or capital gains that it timely distributes to its shareholders as dividends. To qualify as a RIC, the Company must meet certain minimum distribution, source-of-income, and asset diversification requirements. The minimum distribution requirements applicable to RICs generally require the Company to distribute at least 90% of its investment company taxable income, as defined by the Code, each year.
The Company is subject to a nondeductible 4% U.S. federal excise tax on its undistributed income, unless it timely distributes (or is deemed to have timely distributed) an amount equal to the sum of (1) 98% of ordinary income for each calendar year, (2) 98.2% of the amount by which capital gains exceeds capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31 of the calendar year, and (3) any income and gains recognized, but not distributed, from the previous years. While the Company intends to distribute any income and capital gains to avoid imposition of this 4% U.S. federal excise tax, it may not be successful in avoiding entirely the imposition of this tax. In that case, the Company will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirement.
As of December 31, 2024, and December 31, 2023, the Company did not record a U.S. federal income tax expense/(benefit).
Taxable Subsidiaries
The Company uses the liability method to account for its taxable subsidiary's, VCCEH, income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating loss carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. For the year ended December 31, 2024, and the year ended December 31, 2023, the Company determined that no deferred tax asset or liability was necessary.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax positions, would be recorded as tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. The Company had no uncertain tax positions as of and through December 31, 2024.
Federal Income Taxes
The Company is subject to the Code, U.S. federal income tax regulations, and other administrative guidance relating to U.S. federal income tax filing requirements. The Company is expected to have minimal or no income subject to tax and therefore no provision has been included for taxes due. The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code. As a result, the Company generally does not expect to be subject to U.S. federal income taxes.
In the normal course of business, the Company is subject to examination by federal and certain state and local tax regulators. The Company's federal tax returns are generally subject to examination by the Internal Revenue Service for a period of three years after they are filed.
In the normal course of business, the Company is subject to examination by federal and certain state and local tax regulators. The Company adopted a tax year-end of December 31.
For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital gains, or a combination thereof.
The Company's taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income earned in each period and carried forward for distribution in the following period may be different than this estimate.
The following table sets forth the tax cost basis and the estimated aggregate gross unrealized appreciation and depreciation from investments for federal income tax purposes as of December 31, 2024 and December 31, 2023 (dollars in thousands):
December 31, 2024
December 31, 2023
Tax cost of investments
$
812,936
$
686,423
Unrealized appreciation
3,739
1,389
Unrealized depreciation
(12,548
)
(1,775
)
Net unrealized appreciation (depreciation) from investments
$
(8,809
)
$
(386
)
For U.S. federal income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands).
For the year ended December 31,
Ordinary Income
$
49,153
$
42,916
$
20,910
Long-term Capital Gain
$
-
$
-
$
-
Return of capital
$
-
$
-
$
-
For the year ended December 31, 2024, 2023, and 2022 the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company's Statements of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of organizational costs and the tax treatment of partnership investments, as follows (dollars in thousands):
For the year ended December 31,
Undistributed Ordinary Income
$
-
$
-
$
1,998
Undistributed Capital Gains
-
-
-
Capital Loss Carry Forwards
(226
)
(289
)
-
Late Year Losses
-
-
-
Other Accumulated Losses
(13,265
)
(11,575
)
(161
)
Unrealized appreciation/(depreciation)
(8,810
)
(386
)
(13,443
)
Components of distributable earnings/(accumulated deficits) at year end
$
(22,301
)
$
(12,250
)
$
(11,606
)
For U.S. federal income tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. Funds are permitted to carry forward capital losses for an indefinite period, and such losses will retain their character as either short-term or long-term capital losses. For the year ended December 31, 2024 the Company has a capital loss carryforward of $(0.2) million. During the calendar year, the Company utilized $(0.1) million of capital loss carryforwards to offset net realized gains.
During the current fiscal year, there were no permanent differences that resulted in adjustments to distributable earnings or additional paid-in capital.
Tax information for the fiscal year ended December 31, 2024 is an estimate and will not be finally determined until the Company files its 2024 tax return.
Taxable Subsidiaries
The Company uses the liability method to account for its taxable subsidiary's, VCCEH, income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating loss carry forwards that it may use to offset future tax obligations. The Company measures deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences. For the year ended December 31, 2024 and December 31, 2023, the Company determined that no deferred tax asset or liability was necessary.
VCCEH has elected to be taxed as a corporation for U.S. federal income tax purposes. As a result, VCCEH is obligated to pay federal, state and local income tax on its taxable income.
Deferred income taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company's deferred tax assets and liabilities as of December 31, 2024 and December 31, 2023 are as follows (dollars in thousands):
Year Ended December 31, 2024
Year Ended December 31, 2023
Deferred tax assets:
Net operating loss carryforward
$
$
Net unrealized loss on investments
Valuation allowance
(80
)
(91
)
Total deferred tax assets
-
-
Deferred tax liabilities:
Total deferred tax liabilities
-
-
Net deferred tax assets and liabilities
$
-
$
-
The Company's income tax provision consists of the following as of December 31, 2024 (dollars in thousands):
Year Ended December 31, 2024
Year Ended December 31, 2023
Current tax (expense)/benefit
Federal
$
-
$
-
State and Local
-
-
Total current tax (expense)/benefit
-
-
Deferred tax (expense)/benefit
Federal
(7
)
State and Local
(4
)
Valuation allowance
(91
)
Total deferred tax (expense)/benefit
$
-
$
-
Total income tax (expense)/benefit
-
-
Total income tax (expense) benefit for the Company differs from the amount computed by applying the federal statutory income tax rate of 21% to net increase (decrease in net assets from operations for the period January 1, 2024 through December 31, 2024, as follows (dollars in thousands):
Year Ended December 31, 2024
Income tax benefit at federal statutory tax rate
$
9,111
Income attributable to the RIC and not subject to corporate tax
(9,112
)
State and local income tax benefit (net of federal detriment)
-
Prior year net operating loss carryforward
(6
)
Book vs. tax basis in partnership investments
(4
)
Permanent differences
-
Valuation allowance
Total income tax (expense)/benefits
$
-
At December 31, 2024, the Company determined a valuation allowance was required. The Company’s assessment considered, among other matters, the nature, frequency and severity of current and cumulative losses, the duration of statutory carryforward periods and the associated risk that operating loss and capital loss carryforwards are limited or are likely to expire unused, and unrealized gains and losses on investments. Through the consideration of these factors, the Company has determined that it is more likely than not that the Company’s net deferred tax asset would not be realized. As a result, the Company recorded a full valuation allowance with respect to its deferred tax asset for the quarter ended December 31, 2024.
From time to time, the Company may modify its estimates or assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance as new information becomes available. Modifications to the Company’s estimates or assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on or expirations of the Company’s net operating losses and capital loss carryovers (if any) and changes in applicable tax law could result in increases or decreases in the Company’s NAV per share, which could be material
A net operating loss carryforward is available to offset future taxable income. As of December 31, 2024, VCCEH had a net operating loss carryforward for federal income tax purposes of $(0.1) million. This net operating loss may be carried forward indefinitely.
For tax purposes, net realize capital losses generated by VCCEH may be carried over to offset future capital gains, if any. These capital losses can be carried forward for 5 years. As of December 31, 2024, the Company did not have any capital loss carry forwards.
Note 12. Financial Highlights
The following is a schedule of financial highlights for the year ended December 31, 2024, 2023, and 2022 (dollars in thousands, except per share data):
For the year ended December 31, 2024
For the year ended December 31, 2023
For the period from June 2, 2022 (commencement of investment operations) through December 31, 2022
Per Share Data: (1)(2)
Net asset value, beginning of period(3)
$
9.71
$
9.73
$
-
Net investment income (loss)
1.22
1.03
0.55
Net unrealized appreciation (depreciation) on investments
(0.16
)
-
(0.32
)
Net realized gains (losses) on investments
-
(0.01
)
-
Net realized gains (losses) on extinguishment of debt
(0.12
)
-
-
Net increase (decrease) in net assets resulting from operations
0.94
1.02
0.23
Distributions of net investment income to shareholders (4)
(1.18
)
(1.04
)
(0.50
)
Issuance of common stock
-
-
10.00
Net asset value per share, end of period
$
9.47
$
9.71
$
9.73
Number of shares outstanding, end of period
41,524,826
41,505,531
41,490,642
Total return based on net asset value (5)(6)
9.97
%
10.81
%
2.18
%
Net assets attributable to shareholders, end of period
$
393,290
$
403,150
$
403,677
Ratio to average net assets attributable to shareholders:(7)
Average net assets
$
402,245
$
405,570
$
395,488
Total expenses (8)
11.39
%
9.84
%
6.83
%
Total expenses (other than incentive fee) (8)
10.00
%
8.35
%
6.50
%
Net investment income (8)
12.56
%
10.51
%
9.73
%
Interest expense and credit facility fees (8)
7.45
%
5.88
%
4.05
%
Ratios/Supplemental Data:
Asset coverage, end of period (9)
181.63
%
238.22
%
244.95
%
Weighted average shares outstanding(10)(11)
41,517,324
41,499,392
39,848,927
Total capital commitments, end of period
$
488,208
$
488,208
$
488,208
Ratio of total contributed capital to total committed capital, end of period
84.95
%
84.95
%
84.95
%
Average debt outstanding (12)
$
360,645
$
277,548
$
272,563
Average debt outstanding per share
$
8.69
$
6.69
$
6.84
Portfolio turnover (6)(13)
28.62
%
9.85
%
10.20
%
Year of formation
(1) The per share data for 2022 was derived by using the weighted average shares outstanding from June 2, 2022 (commencement of operations) through December 31, 2022. The per share data for 2023 and 2024 was derived by using the weighted average shares outstanding.
(2) Per share data for the year ended December 31, 2022 based upon the weighted average shares outstanding from March 29, 2022 (first issuance of common stock) through December 31, 2022 were as follows: Net investment income of $0.71 per share, net unrealized loss of $0.30 per share, net increase in net assets resulting from operations of $0.41 per share, distributions of net investment income of $0.68 per share, and net asset value per share at the end of the period of $9.73 per share.
(3) Net asset value at the beginning of the period from June 2, 2022 (commencement of operations) through December 31, 2022 is adjusted to reverse the initial share issuance of 100 shares of common stock in connection with the Company's seed audit, as well as $81,049 of accrued expenses. Net asset value after the Company's seed audit was $(810.39) per share.
(4) Distributions declared per common share was calculated as the sum of distributions on common stock declared during the year divided by the number of shares of common stock outstanding at each respective quarter-end date.
(5) Total return is based on the change in net asset value during the year divided by the beginning net asset value for the year, taking into account distributions declared, if any, reinvested in accordance with the Company’s DRIP.
(6) Not annualized for the period from June 2, 2022 (commencement of operations) through December 31, 2022.
(7) Ratios to average net assets attributable to shareholders for the period March 29, 2022 (first issuance of shares of common stock) through December 31, 2022 based on average net assets of $296.6 million and respective ratios as follows: Total expense: 5.25%, total expenses (without incentive fee): 5.07%, net investment income: 7.37%, interest expense and credit facility fees: 3.15%
(8) Annualized for the period from June 2, 2022 (commencement of operations) through December 31, 2022, except in the case of non-recurring expenses (i.e. organizational expenses).
(9) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. Asset coverage ratio per unit does not include unfunded commitments. The inclusion of unfunded commitments in the calculation of the asset coverage ratio per unit would not cause the Company to be below the required amount of regulatory coverage.
(10) Calculated for the period from June 2, 2022 (the commencement of investment operations) through December 31, 2022.
(11) Weighted average common shares outstanding for the year ended December 31, 2022 was 30,531,755, calculated from March 29, 2022 (first issuance of shares of common stock) through December 31, 2022.
(12) Based on daily weighted average balance of debt outstanding during the period.
(13) Portfolio turnover calculation does not include the non-cash acquisition of the SDLP for the period from June 2, 2022 (commencement of operations) through December 31, 2022.
Note 13. Segment Reporting
The Company operates through a single operating and reporting segment with an investment objective to generate both current income and capital appreciation through debt and equity investments. The CODM is comprised of the Company’s chief executive officer, co-presidents and chief financial officer and the CODM assesses the performance and makes operating decisions of the Company on a consolidated basis primarily based on the Company’s consolidated net investment income ("NII") and net increase (decrease) in net assets resulting from operations (“net income”). In addition to numerous other factors and metrics, the CODM utilizes NII and net income as key metrics in determining the amount of dividends to be distributed to the Company’s shareholders. As the Company’s operations comprise of a single reporting segment, the segment assets are reflected on the accompanying consolidated statements of assets and liabilities as “total assets” and the significant segment expenses are listed on the accompanying consolidated statements of operations.
Note 14. Subsequent Events
Management has evaluated subsequent events through March 21, 2025, the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Annual Report on Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2024, except as disclosed below:
Dividend Declaration
On March 13, 2025, the Board declared a dividend of $0.2400 per share and a special dividend of $0.0185 per share, both payable on April 17, 2025 to shareholders of record as of the close of business on March 31, 2025.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management (with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024 based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting as of December 31, 2024 was effective. This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm due to an exemption for emerging growth companies under the JOBS Act.
Change in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recently completed fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
a) None.
b)During the fiscal quarter ended December 31, 2024, no director or officer of the Company has entered into any (i) contract, instruction or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or (ii) any non-Rule 10b5-1 trading arrangement.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item is hereby incorporated by reference from the 2025 Proxy Statement to be filed with the SEC within 120 days following the end of the Company's fiscal year end, which was December 31, 2024,

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference from the 2025 Proxy Statement to be filed with the SEC within 120 days following the end of the Company’s fiscal year end, which was December 31, 2024.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
The information required by this item is hereby incorporated by reference from the 2025 Proxy Statement to be filed with the SEC within 120 days following the end of the Company's fiscal year end, which was December 31, 2024.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is hereby incorporated by reference from the 2025 Proxy Statement to be filed with the SEC within 120 days following the end of the Company’s fiscal year end, which was December 31, 2024.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is hereby incorporated by reference from the 2025 Proxy Statement to be filed with the SEC within 120 days following the end of the Company’s fiscal year end, which was December 31, 2024.

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
(1)Financial Statements - Financial statements and the index to the consolidated financial statements are included in Item 8. Financial Statements and Supplementary Data.
(2)Financial Statement Schedules - None. We have omitted financial statement schedules because they are not required or are not applicable, or the required information is shown in the consolidated statements or notes to the consolidated financial statements.
(3)Exhibits - The following is a list of all exhibits filed as a part of this Annual Report on Form 10-K, including those incorporated by reference
Please note that the agreements included as exhibits to this Annual Report on Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.
(a) Financial Statements
The following financial statements are set forth in Item 8 of Part II:
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: [34])
Report of Independent Registered Public Accounting Firm (PCAOB ID: [42])
Financial Statements:
Consolidated Statements of Assets and Liabilities as of December 31, 2024 and 2023
Consolidated Statements of Operations for the years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Changes in Net Assets for the years ending December 31, 2024, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023 and 2022
Consolidated Schedules of Investments as of December 31, 2024 and 2023
Notes to Consolidated Financial Statements
(b) Exhibits required to be filed by item 601 of Regulation S-K
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
Exhibit
Number
Description
3.1
Articles of Amendment and Restatement (2)
3.2
Amended and Restated Bylaws (1)
3.3
Articles of Merger of the Company (2)
4.1
Form of Subscription Agreement (3)
4.2
Description of Securities (4)
10.1
Amended and Restate Investment Advisory Agreement, dated June 12, 2024, by and between Varagon Capital Corporation and VCC Advisors, LLC (7)
10.2
Administration Agreement, dated September 6, 2023, by and between Varagon Capital Corporation and Varagon Capital Partners, L.P. (5)
10.3
Sub-Administration Agreement, dated June 2, 2022, by and between Varagon Capital Partners, L.P. and State Street Bank and Trust Company (2)
10.4
Transfer Agency Agreement, dated June 2, 2022, by and between Varagon Capital Corporation and State Street Bank and Trust Company (2)
10.5
Distribution Reinvestment Plan (1)
10.6
Form of Indemnification Agreement (1)
10.7
Custody Agreement by and between Varagon Capital Corporation and State Street Bank and Trust Company (1)
10.8
License Agreement, dated June 2, 2022, by and between Varagon Capital Corporation and VCC Advisors, LLC (1)
10.9
Expense Reimbursement Agreement, dated June 2, 2022, by and between Varagon Capital Corporation and VCC Advisors, LLC (2)
10.10
Registration Rights Agreement, dated May 31, 2022, by and among the Company and each of the investors listed therein (2)
10.11
Master Note Purchase Agreement, dated December 21, 2023, by and among Varagon Capital Corporation and each of the purchaser listed in the purchaser scheduled thereto (6)
10.12
Senior Secured Revolving Credit Agreement, dated August 9, 2024, by and among Varagon Capital Corporation, as borrower, Sumitomo Mitsui Banking Corporation, as administrative agent, the issuing banks party thereto, and the lenders party thereto (9)
10.13
Indenture and Security Agreement, dated as of November 26, 2024, by and between VCC CLO 1, LLC, as Issuer, and State Street Bank and Trust Company, as Collateral Trustee (10)
10.14
Collateral Management Agreement, dated as of November 26, 2024, by and between VCC CLO 1, LLC, as Issuer, and Varagon Capital Corporation, as Collateral Manager (10)
10.15
Loan Sale and Contribution Agreement, dated as of November 26, 2024, by and among Varagon Capital Corporation, as the Transferor, VCC CLO 1 Depositor, LLC, as the Depositor, and VCC CLO 1, LLC, as the Issuer (10)
14.1
Code of Ethics of Varagon Capital Corporation (2)
19.1
Insider Trading Policy of Varagon Capital Corporation (8)
21.1*
List of Subsidiaries
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1*
Audited Consolidated Financial Statements of Senior Direct Lending Program as of December 31, 2024 and December 2023 and for the years ended December 31, 2024 and 2023
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed here within.
(1)
Incorporated by reference to the Registrant’s Registration Statement on Form 10 filed on May 27, 2022.
(2)
Incorporated by reference to the Registrant’s Amendment No.1 to the Registration Statement on Form 10 filed on July 15, 2022.
(3)
Incorporated by reference to the Registrant’s Amendment No.2 to the Registration Statement on Form 10 filed on July 22, 2022.
(4)
Incorporated by reference to the Registrant's Annual Report on Form 10-K filed on March 27, 2023.
(5)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on September 7, 2023.
(6)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 21, 2023
(7)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 17, 2024.
(8)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 25, 2024.
(9)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 12, 2024.
(10)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 2, 2024.