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Goldman Sachs Private Middle Market Credit

Filed: 28 Feb 19, 5:24pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:000-55660

 

 

Goldman Sachs Private Middle Market Credit LLC

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 81-3233378

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

200 West Street, New York, New York 10282
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (212)902-0300

Securities registered pursuant to Section 12(b) of the Act:

None

 

Title of each class Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act:

Limited Liability Company Common Units

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report. Not Applicable

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).YES ☐ NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer:

  

  

Accelerated filer:

  

Non-accelerated filer:

  

  

Smaller reporting company:

  

Emerging growth company:

  

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). YES ☐ NO ☒

As of June 30, 2018, there was no established public market for the registrant’s limited liability company common units. The number of the registrant’s limited liability company common units outstanding as of February 28, 2019 was 9,204,203.

 

 

 


GOLDMAN SACHS PRIVATE MIDDLE MARKET CREDIT LLC

Index to Annual Report on Form10-K for

Year Ended December 31, 2018

 

      PAGE
PART I.    4
ITEM 1.  Business    4
ITEM 1A.  Risk Factors    27
ITEM 1B.  Unresolved Staff Comments    50
ITEM 2.  Properties    50
ITEM 3.  Legal Proceedings    50
ITEM 4.  Mine Safety Disclosures    50
PART II.    51
ITEM 5.  Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    51
ITEM 6.  Selected Financial Data    53
ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations    54
ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk    72
ITEM 8.  Consolidated Financial Statements and Supplementary Data    73
ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    114
ITEM 9A.  Controls and Procedures    114
ITEM 9B.  Other Information    114
PART III.    115
ITEM 10.  Directors, Executive Officers and Corporate Governance    115
ITEM 11.  Executive Compensation    121
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    122
ITEM 13.  Certain Relationships and Related Transactions, and Director Independence    122
ITEM 14.  Principal Accounting Fees and Services    123
PART IV.    125
ITEM 15.  Exhibits, Financial Statement Schedules    125
ITEM 16.  Form 10-K Summary    127

 

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “target,” “estimate,” “intend,” “continue” or “believe” or the negatives of, or other variations on, these terms or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. Our forward-looking statements include information in this report regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors” in this Annual Report on Form10-K, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operations and financial position. Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ, from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form10-K, quarterly reports on Form10-Q and current reports on Form8-K. Under Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act, such as this Annual Report on Form10-K.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

 

  

our future operating results;

 

  

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets;

 

  

uncertainty surrounding the financial and political stability of the United States, the United Kingdom, the European Union and China;

 

  

our business prospects and the prospects of our portfolio companies;

 

  

the impact of investments that we expect to make;

 

  

the impact of increased competition;

 

  

our contractual arrangements and relationships with third parties;

 

  

the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

  

the ability of our current and prospective portfolio companies to achieve their objectives;

 

  

the relative and absolute performance of our investment adviser;

 

  

our expected financings and investments;

 

  

the use of borrowed money to finance a portion of our investments;

 

  

our ability to make distributions;

 

  

the adequacy of our cash resources and working capital;

 

  

the timing of cash flows, if any, from the operations of our portfolio companies;

 

  

the impact of future acquisitions and divestitures;

 

  

the effect of changes in tax laws and regulations and interpretations thereof;

 

  

our ability to maintain our status as a BDC and a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”);

 

  

actual and potential conflicts of interest with Goldman Sachs Asset Management, L.P. and its affiliates;

 

  

the ability of our investment adviser to attract and retain highly talented professionals;

 

  

the impact on our business from new or amended legislation or regulations;

 

  

the availability of credit and/or our ability to access the equity and capital markets; and

 

  

currency fluctuations, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars.

 

3


PART I.

Unless indicated otherwise in this Annual Report on Form10-K or the context so requires, the terms “Company,” “we,” “us” or “our” refer to Goldman Sachs Private Middle Market Credit LLC together with its consolidated subsidiaries. The terms “GSAM,” our “Adviser” or our “Investment Adviser” refer to Goldman Sachs Asset Management, L.P., a Delaware limited partnership. The term “Group Inc.” refers to The Goldman Sachs Group, Inc. The term “Goldman Sachs” refers to Group Inc., together with Goldman Sachs & Co. LLC (including its predecessors, “GS & Co.”), GSAM and its other subsidiaries and affiliates. Goldman Sachs advises clients in all markets and transactions and purchases, sells, holds and recommends a broad array of investments for its own accounts and for the accounts of clients and of its personnel, through client accounts and the relationships and products it sponsors, manages and advises (such Goldman Sachs or other client accounts (including us, Goldman Sachs BDC, Inc., a BDC (“GS BDC”) and Goldman Sachs Middle Market Lending Corp. (“GS MMLC”)), relationships and products, collectively, the “Accounts”).

ITEM 1.     BUSINESS

The Company

We are a specialty finance company focused on lending to middle-market companies. We are aclosed-end management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “Investment Company Act”). In addition, we have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016. From our commencement of investment operations on July 1, 2016 through December 31, 2018, we have originated $1.80 billion in aggregate principal amount of debt and equity investments. We seek to generate current income and, to a lesser extent, capital appreciation primarily through direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments.

“Unitranche” loans are first lien loans that may extend deeper in a company’s capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority between different lenders in the unitranche loan. In a number of instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the “last out” portion that we would continue to hold. In exchange for the greater risk of loss, the “last out” portion generally earns a higher interest rate than the “first out” portion. We use the term “mezzanine” to refer to debt that ranks senior only to a borrower’s equity securities and ranks junior in right of payment to all of such borrower’s other indebtedness. We may make multiple investments in the same portfolio company.

We expect to invest, under normal circumstances, at least 80% of our net assets (plus any borrowings for investment purposes), directly or indirectly in private middle-market credit obligations and related instruments. We define “credit obligations and related instruments” for this purpose as any fixed-income instrument, including loans to, and bonds and preferred stock of, portfolio companies and other instruments that provide exposure to such fixed-income instruments. “Middle market” is used to refer to companies with between $5 million and $125 million of annual earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) excludingcertain one-time and non-recurring items that are outside the operations of these companies. While, as a result of fluctuations in the net asset value (“NAV”) of one asset relative to another asset, private middle-market credit obligations and related instruments may represent less than 80% of our net assets (plus any borrowings for investment purposes) at any time, we may not invest, under normal circumstances, more than 20% of our net assets (plus any borrowings for investment purposes) in securities and other instruments that are not private middle-market credit obligations and related instruments. To the extent we determine to invest indirectly in private middle-market credit obligations and related instruments, we may invest through certain synthetic instruments, including derivatives that have similar economic characteristics to private middle-market credit obligations which we will value at market value or, if no market value is ascertainable, at fair value for the purpose of complying with the above mentioned policy. For purposes of determining compliance with our 80% policy, each applicable derivative instrument will be valued based upon its market value. We will notify Unitholders at least 60 days prior to any change to the 80% investment policy described above.

We expect to directly or indirectly invest at least 70% of our total assets in middle-market companies domiciled in the United States. However, we may from time to time invest opportunistically in large U.S. companies,non-U.S. companies, stressed or distressed debt, structured products, private equity or other opportunities, subject to limits imposed by the Investment Company Act.

While our investment program is expected to focus primarily on debt investments, our investments may include equity features, such as a direct investment in the equity or convertible securities of a portfolio company or warrants or options to buy a minority interest in a portfolio company. Any warrants we may receive with debt securities will generally require only a nominal cost to exercise, so as a portfolio company appreciates in value, we may achieve additional investment return from these equity investments. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the portfolio company, upon the occurrence of specified events. In many cases, we may also obtain registration rights in connection with these equity investments, which may include demand and “piggyback” registration rights.

 

4


For a discussion of the competitive landscape we face, please see “Risk Factors—We operate in a highly competitive market for investment opportunities” and “Business—Competitive Advantages.”

Available Information

We file with or submit to the SEC periodic and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information filed electronically by us with the SEC. Copies of these reports, proxy and information statements and other information may be obtained by electronic request at the followinge-mail address: publicinfo@sec.gov.

Investment Strategy

Our origination strategy focuses on leading the negotiation and structuring of the loans or securities in which we invest and holding the investments in our portfolio to maturity. In many cases we are the sole investor in the loan or security in our portfolio. Where there are multiple investors, we generally seek to control or obtain significant influence over the rights of investors in the loan or security. Our investments typically have maturities between three and ten years and generally range in size between $10 million and $75 million, although we may make larger or smaller investments on occasion.

Investment Portfolio

As of December 31, 2018, our portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc. of $0.00 million) consisted of the following:

 

   As of December 31, 2018 

Investment Type

  Amortized
Cost
   Fair Value   Percentage of
Total
Portfolio at
Fair Value
 
   ($ in millions) 

First Lien/Senior Secured Debt

  $743.10   $741.44    53.0

FirstLien/Last-Out Unitranche

   165.26    163.25    11.7 

Second Lien/Senior Secured Debt

   473.20    466.79    33.3 

Unsecured Debt

   4.31    4.30    0.3 

Preferred Stock

   10.20    12.16    0.9 

Common Stock

   11.86    11.29    0.8 

Warrants

   0.10    0.13    0.0 
  

 

 

   

 

 

   

 

 

 

Total Investments

  $    1,408.03   $    1,399.36    100.0
  

 

 

   

 

 

   

 

 

 

As of December 31, 2018, our portfolio consisted of 120 investments in 59 portfolio companies across 28 different industries. The largest industries in our portfolio, based on fair value as of December 31, 2018, were Software, Internet Software & Services, IT Services and Health Care Providers & Services, which represented 10.4%, 9.4%, 8.4% and 8.4%, respectively, of our portfolio at fair value.

The geographic composition of our portfolio at fair value as of December 31, 2018 was 97.9% invested in portfolio companies organized in the United States and 2.1% in portfolio companies organized in Ireland.

 

5


As of December 31, 2018, the weighted average yield by asset type of our total portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.), at amortized cost and fair value, was as follows:

 

   December 31, 2018 
   Amortized
Cost
  Fair
Value
 

Weighted Average Yield(1)

   

First Lien/Senior Secured Debt(2)

   10.0  10.0

FirstLien/Last-Out Unitranche(2)(3)

   11.3  11.8

Second Lien/Senior Secured Debt(2)

   11.2  11.6

Unsecured Debt(2)

   13.6  13.8

Preferred Stock(4)

   0.0  0.0

Common Stock(4)

   0.0  0.0

Warrants(4)

   0.0  0.0

Total Portfolio

   10.4  10.6

 

 (1)  

The weighted average yield of our portfolio does not represent the total return to our Unitholders.

 (2)  

Computed based on (a) the annual actual interest rate or yield earned plus amortization of fees and discounts on the performing debt and other income producing investments as of the reporting date, divided by (b) the total investments (including investments onnon-accrual andnon-income producing investments) at amortized cost or fair value, respectively.

 (3)  

The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments.

 (4)  

Computed based on (a) the stated coupon rate, if any, for each income-producing investment, divided by (b) the total investments (including investments onnon-accrual andnon-income producing investments) at amortized cost or fair value, respectively.

The following table presents certain selected information regarding our investment portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.) as of December 31, 2018:

 

   December 31, 2018 

Number of portfolio companies

   59 

Percentage of performing debt bearing a floating rate (1)

   98.7

Percentage of performing debt bearing a fixed rate (1) (2)

   1.3

Weighted average leverage (net debt/EBITDA)(3)

   5.7x 

Weighted average interest coverage(3)

   2.0x 

Median EBITDA(3)

  $    40.3 million 

 

 (1)  

Measured on a fair value basis. Excludes investments, if any, placed onnon-accrual.

 (2)  

Includes income producing preferred stock investments, if applicable.

 (3)  

For a particular portfolio company, we calculate the level of contractual indebtedness net of cash (“net debt”) owed by the portfolio company and compare that amount to measures of cash flow available to service the net debt. To calculate net debt, we include debt that is both senior and pari passu to the tranche of debt owned by us but exclude debt that is legally and contractually subordinated in ranking to the debt owned by us. We believe this calculation method assists in describing the risk of our portfolio investments, as it takes into consideration contractual rights of repayment of the tranche of debt owned by us relative to other senior and junior creditors of a portfolio company. We typically calculate cash flow available for debt service at a portfolio company by taking EBITDA for the trailing twelve month period. Weighted average net debt to EBITDA is weighted based on the fair value of our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

For a particular portfolio company, we also calculate the level of contractual interest expense owed by the portfolio company, and compare that amount to EBITDA (“interest coverage ratio”). We believe this calculation method assists in describing the risk of our portfolio investments, as it takes into consideration contractual interest obligations of the portfolio company. Weighted average interest coverage is weighted based on the fair value of our performing debt investments, excluding investments where interest coverage may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

Median EBITDA is based on our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

Portfolio company statistics are derived from the most recently available financial statements of each portfolio company as of the reported end date. Statistics of the portfolio companies have not been independently verified by us and may reflect a normalized or adjusted amount.

As of December 31, 2018, investments where net debt to EBITDA may not be the appropriate measure of credit risk represented 28.9% of total debt investments at fair value. Portfolio company statistics are derived from the most recently available financial statements of each portfolio company as of the respective reported end date. Portfolio company statistics have not been independently verified by us and may reflect a normalized or adjusted amount.

Floating rates are primarily London InterBank Offered Rate (“LIBOR”) plus a spread.

 

6


Corporate Structure and Private Offering

We were formed as a Delaware limited partnership on December 23, 2015 with the name Private Middle Market Credit LP and converted to a Delaware limited liability company on April 4, 2016, at which time our name was changed to Goldman Sachs Private Middle Market Credit LLC. We have elected to be regulated as a BDC under the Investment Company Act. In addition, we have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016.

From May 6, 2016 (the “Initial Closing Date”) through May 5, 2017 (the “Final Closing Date”), we accepted subscription agreements from investors acquiring Units in our continuous private offering of common units of our limited liability company interests (the “Units”). Investors acquiring Units in the private offering each entered into a subscription agreement (“Subscription Agreement”) pursuant to which the investor agreed to purchase Units for an aggregate purchase price equal to the portion of its requested capital commitment to us that we accepted (its “Commitment”). Each individual (a “Unitholder”) holding Units is required to make capital contributions (up to the amount of their undrawn Commitment) to purchase Units in respect of its Commitment each time we deliver a drawdown notice, which will be delivered in respect of such Commitment at least five business days (as defined in Rule14d-1 of the Exchange Act) (“Business Days”) prior to the required funding date (the “Drawdown Date”). New Units are issued on each Drawdown Date.

Credit Alternatives GP LLC (the “Initial Member”) made a capital contribution to us of $100 on June 9, 2016 (inception) and served as our sole initial member. We cancelled the Initial Member’s interest in us on July 14, 2016, the first date on which investors (other than the Initial Member) made their initial capital contribution to purchase Units (the “Initial Drawdown Date”).

Subject to certain limited exceptions under the Investment Company Act, on each Drawdown Date, Unitholders will be required to purchase Units at a price equal to our then-current NAV per Unit as of the end of the most recent calendar month prior to the date of the applicable drawdown notice or issuance date, subject to the limitations of Section 23 under the Investment Company Act (which generally prohibits us from issuing Units at a price below the then-current NAV of the Units as determined within 48 hours, excluding Sundays and holidays, of such issuance, subject to certain exceptions).

We held a limited number of closings subsequent to the Initial Closing Date (each date on which a subsequent closing was held, a “Subsequent Closing Date”). On November 1, 2016, our board of directors (the “Board of Directors” or the “Board”) approved an amended and restated LLC agreement (the “LLC Agreement”) and approved an extension of the final date on which we would accept Subscription Agreements to the Final Closing Date.

Unitholders are entitled to receive dividends or other distributions declared by the Board of Directors and are entitled to one vote for each Unit held on all matters submitted to a vote of the Unitholders.

As of December 31, 2018, we had aggregate Commitments and undrawn Commitments from investors as follows:

 

   December 31, 2018 
   Capital
Commitments
($ in millions)
   Unfunded
Capital
Commitments
($ in millions)
   % of Capital
Commitments
Funded
 

Common Units

  $     1,097.43   $    263.38    76

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2018:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

February 21, 2018

   335,966   $32.92 

March 28, 2018

   222,135    21.95 

April 27, 2018

   339,498    32.92 

June 28, 2018

   558,772    54.87 

August 27, 2018

   903,600    87.80 

September 27, 2018

   336,610    32.92 

November 13, 2018

   795,162    76.82 
  

 

 

   

 

 

 

Total capital drawdowns

   3,491,743   $     340.20 
  

 

 

   

 

 

 

 

7


The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2017:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

April 27, 2017

   203,758   $20.01 

April 28, 2017

   535    0.05 

May 26, 2017

   444,153    43.90 

June 29, 2017

   441,837    43.90 

August 21, 2017

   557,806    54.87 

September 28, 2017

   332,027    32.92 

October 30, 2017

   900,334    87.79 
  

 

 

   

 

 

 

Total capital drawdowns

   2,880,450   $     283.44 
  

 

 

   

 

 

 

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the period from June 9, 2016 (inception) to December 31, 2016:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

July 14, 2016

   310,360   $31.04 

July 15, 2016

   4,000    0.40 

August 23, 2016

   160,219    15.72 

September 15, 2016

   1,206,924    117.88 

November 28, 2016

   461,475    45.36 
  

 

 

   

 

 

 

Total capital drawdowns

   2,142,978   $ 210.40 
  

 

 

   

 

 

 

Investment Period

Our investment period commenced on the Initial Closing Date and will continue until May 5, 2019, provided that it may be extended by the Board of Directors, in its discretion, for one additionalsix-month period, and, with the approval of amajority-in-interest of the Unitholders, for up to one additional year thereafter (such period, including any extensions, the “Investment Period”). In addition, the Board of Directors may terminate the Investment Period at any time in its discretion.

Drawdowns may be issued at any time prior to the expiration of the Investment Period for any permitted purpose.

Following the end of the Investment Period, we will have the right to issue drawdowns only (i) to pay, and/or establish reserves for, actual or anticipated Company expenses, liabilities, including the payment or repayment of Financings (as defined below), or other obligations, contingent or otherwise (including the Management Fee), whether incurred before or after the end of the Investment Period, (ii) to fulfill investment commitments made or approved by the Investment Committee (as defined below) prior to the expiration of the Investment Period, (iii) to engage in hedging transactions or (iv) to make additional investments in existing portfolio companies (including transactions to hedge interest rate or currency risks related to such additional investment).

“Financings” are indebtedness for borrowed money (including through the issuance of notes and other evidence of indebtedness), other indebtedness, financings or extensions of credit.

Term

Our term will expire on May 5, 2024, subject to the Board of Directors’ right to liquidate us at any time and to extend our term for up to two successive one year periods (such term, including any extensions, the “Term”). Upon the request of the Board of Directors and the approval of amajority-in-interest of the Unitholders, our Term may be further extended.

We shall be dissolved (i) upon the expiration of our Term (as such Term may be extended pursuant to the above), (ii) at any time upon a decision of the Board of Directors, (iii) if there are no Unitholders, unless our business is continued in accordance with the LLC Agreement) or applicable law or (iv) upon the entry of a decree of judicial dissolution under applicable law.

 

8


Our Investment Adviser

GSAM serves as our Investment Adviser and has been registered as an investment adviser with the SEC since 1990. Subject to the supervision of our Board of Directors, a majority of which is made up of independent directors (including an independent Chairman), GSAM manages ourday-to-day operations and provides us with investment advisory and management services and certain administrative services. GSAM is a subsidiary of Group Inc., a public company that is a bank holding company (a “BHC”), financial holding company (a “FHC”) and a world-wide, full-service financial services organization. Group Inc. is the general partner and owner of GSAM. GSAM has been providing financial solutions for investors since 1988 and had over $1.3 trillion of assets under supervision as of December 31, 2018.

The GSAM Private Credit Group

The Private Credit Group of GSAM (the “GSAM Private Credit Group”) is responsible for identifying investment opportunities, conducting research and due diligence on prospective investments, negotiating and structuring our investments and monitoring and servicing our investments. The GSAM Private Credit Group was comprised of 23 investment professionals, as of December 31, 2018, all of whom are dedicated to the Company’s investment strategy and other funds that share a similar investment strategy with the Company. The GSAM Private Credit Group sits with a broader team known as the “GSAM Credit Alternatives Team” which has additional responsibilities other than those relating to the Company. In addition, GSAM has risk management, legal, accounting, tax, information technology and compliance personnel, among others, who provide services to us. We benefit from the expertise provided by these personnel in our operations.

The GSAM Private Credit Group is dedicated primarily to private corporate credit investment opportunities in North America and utilizes abottom-up, fundamental research approach to lending. The senior members of the GSAM Private Credit Group have been working together since 2006 and have an average of over 15 years of experience in leveraged finance and private transactions.

All investment decisions are made by the investment committee of GSAM’s Private Credit Group (the “Investment Committee”), which currently consists of five voting members: Brendan McGovern, Jon Yoder, David Yu, Jordan Walter and Michael Mastropaolo, as well as threenon-voting members with operational and/or legal expertise. For biographical information about the voting members of the Investment Committee, see “Item 10. Directors, Executive Officers and Corporate Governance—Biographical Information.” The Investment Committee is responsible for approving all of our investments. The Investment Committee also monitors investments in our portfolio and approves all asset dispositions. We expect to benefit from the extensive and varied relevant experience of the investment professionals serving on the Investment Committee, which includes expertise in privately originated and publicly traded leveraged credit, stressed and distressed debt, bankruptcy, mergers and acquisitions and private equity. The voting members of the Investment Committee collectively have over 50 years of experience in middle-market investment and activities related to middle-market investing. The membership of the Investment Committee may change from time to time.

Allocation of Opportunities

Our investment objectives and investment strategies are similar to those of other client accounts managed by our Investment Adviser (including GS BDC and GS MMLC) and the joint venture in which GS BDC has a 50% interest (the “JV”), and an investment appropriate for us may also be appropriate for those Accounts or the JV. This creates potential conflicts in allocating investment opportunities among us and such other Accounts, particularly in circumstances where the availability of such investment opportunities is limited, where the liquidity of such investment opportunities is limited or whereco-investments by us and other Accounts are not permitted under applicable law.

Subject to applicable law, we may invest alongside Goldman Sachs and its Accounts. In certain circumstances, negotiatedco-investments by us and other Accounts may be made only pursuant to an order from the SEC permitting us to do so. Together with our Investment Adviser, GS BDC and GS MMLC, we applied for and received an exemptive order from the SEC that permits us to participate in negotiatedco-investment transactions with certain affiliates (including GS BDC and GS MMLC), each of whose investment adviser is GSAM. After the date of the exemptive order, co-investments may be made subject to certain conditions, including that co-investments are made in a manner consistent with our investment objectives, positions, policies, strategies and restrictions, as well as regulatory requirements and pursuant to the conditions required by the exemptive relief and are allocated fairly among participants. As a result of such order, there could be significant overlap in our investment portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds managed by our Investment Adviser. If our Investment Adviser identifies an investment and we are unable to rely on our exemptive relief for that particular opportunity, our Investment Adviser will be required to determine which Accounts should make the investment at the potential exclusion of other Accounts. In such circumstances, the Investment Adviser will adhere to its investment allocation policy in order to determine the Account to which to allocate the opportunity. The policy provides that our Investment Adviser allocate opportunities through a rotation system or in such other manner as our Investment Adviser determines to be equitable. Accordingly, it is possible that we may not be given the opportunity to participate in investments made by other Accounts.

We are prohibited by the Investment Company Act from participating in certain transactions with our affiliates without the prior approval of the Independent Directors (as defined in “Item 10. Directors, Executive Officers and Corporate Governance”) and, in some cases, of the SEC. Any person that owns, directly or indirectly, five percent or more of our outstanding voting securities is our affiliate for purposes of the Investment Company Act, and we are generally prohibited from buying or selling any assets from or to, or entering into certain “joint” transactions (which could include investments in the same portfolio company) with such affiliates, absent the prior approval of the Independent Directors. Our Investment Adviser and its affiliates, including persons that control, or are under common control with, us or our Investment Adviser, are also considered our affiliates under the Investment Company Act, and we are generally prohibited from buying or selling any assets from or to, or entering into “joint” transactions with, such affiliates without exemptive relief from the SEC.

 

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We may also invest alongside other Accounts advised by our Investment Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law and SEC staff guidance and interpretations. For example, we may invest alongside such Accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other Accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that our Investment Adviser, acting on our behalf and on behalf of its other clients, negotiates no term other than price. We may also invest alongside other Accounts as otherwise permissible under SEC staff guidance and interpretations, applicable regulations and the allocation policy of our Investment Adviser.

To address these potential conflicts, our Investment Adviser has developed allocation policies and procedures that provide that personnel of our Investment Adviser making portfolio decisions for Accounts will make purchase and sale decisions and allocate investment opportunities among Accounts consistent with its fiduciary obligations. To the extent permitted by applicable law, these policies and procedures may result in the pro rata allocation of limited opportunities across eligible Accounts managed by a particular portfolio management team, but in many other cases the allocations reflect numerous other factors as described below. Accounts managed outside of the GSAM Private Credit Group are generally viewed separately for allocation purposes. There will be cases where certain Accounts receive an allocation of an investment opportunity when we do not and vice versa.

In some cases, due to information barriers that are in place, other Accounts may compete with us for specific investment opportunities without being aware that we are competing against each other. Goldman Sachs has a conflicts system in place above these information barriers to identify potential conflicts early in the process and determine if an allocation decision needs to be made. If the conflicts system detects a potential conflict, the legal and compliance departments of Goldman Sachs assess investment opportunities to determine whether a particular investment opportunity is required to be allocated to a particular Account (including us) or is prohibited from being allocated to a particular Account. Subject to a determination by the legal and compliance departments (if applicable), portfolio management teams are then charged with ensuring that investment opportunities are allocated to the appropriate Account.

Personnel of our Investment Adviser involved in decision-making for Accounts may make allocation related decisions for us and other Accounts by reference to one or more factors, including: the Account’s portfolio and its investment horizons, objectives, guidelines and restrictions (including legal and regulatory restrictions); strategic fit and other portfolio management considerations, including different desired levels of investment for different strategies; the expected future capacity of the applicable Accounts; limits on our Investment Adviser’s brokerage discretion; cash and liquidity considerations; and the availability of other appropriate investment opportunities. Suitability considerations, reputational matters and other considerations may also be considered. The application of these considerations may cause differences in the performance of different Accounts that have similar strategies. In addition, in some cases our Investment Adviser may make investment recommendations to Accounts where the Accounts make the investment independently of our Investment Adviser, which may result in a reduction in the availability of the investment opportunity for other Accounts (including us) irrespective of our Investment Adviser’s policies regarding allocation of investments. With respect to GS BDC, our Investment Adviser may also make allocation-related decisions by reference to the JV, consistent with the nature of the relationship between GS BDC and the JV, even though there is no formal investment advisory relationship between our Investment Adviser and the JV. Additional information about our Investment Adviser’s allocation policies is set forth in Item 6 (“Performance-based Fees andSide-by-SideManagement—Side-by-Side Management of Advisory Accounts; Allocation of Opportunities”) of our Investment Adviser’s Form ADV.

Our Investment Adviser, including the GSAM Credit Alternatives Team, may, from time to time, develop and implement new trading strategies or seek to participate in new investment opportunities and trading strategies. These opportunities and strategies may not be employed in all Accounts or may be employed pro rata among Accounts, even if the opportunity or strategy is consistent with the objectives of such Accounts.

During periods of unusual market conditions, our Investment Adviser may deviate from its normal trade allocation practices. For example, this may occur with respect to the management of unlevered and/or long-only Accounts that are typically managed on aside-by-side basis with levered and/or long-short Accounts.

We may or may not receive opportunities referred by Goldman Sachs businesses and affiliates, but in no event do we have any rights with respect to such opportunities. Subject to applicable law, including the Investment Company Act, such opportunities or any portion thereof may be offered to other Accounts, Goldman Sachs, all or certain investors in us, or such other persons or entities as determined by Goldman Sachs in its sole discretion. We will have no rights and will not receive any compensation related to such opportunities. Certain of such opportunities may be referred to us by employees or other personnel of GS & Co., or by third-parties. If we invest in any such opportunities, GS & Co. or such third-parties may be entitled, to the extent permitted by applicable law, including the limitations set forth in Section 57(k) of the Investment Company Act, to compensation from us or from the borrowers in connection with such investments. Any compensation we pay in connection with such referrals will be an operating expense and will accordingly be borne by us (and will not serve to offset any Management Fee or Incentive Fee payable to the Investment Adviser).

In connection with certain of our investments, following our Investment Adviser’s determination that the appropriate portion of an applicable investment opportunity has been offered to us and other Accounts in accordance with the Investment Adviser’s allocation policy and applicable legal requirements, including the Investment Company Act and, if applicable, the terms of the SEC exemptive order on co-investments disclosed herein (collectively, “Applicable Law”), we and/or our Investment Adviser may have the opportunity to offer all or a portion of the excess amounts of such investment opportunity to other persons or entities. These opportunities include, for example, where our Investment Adviser has determined that while it is in our best interests to acquire the full amount of an investment available to it if the alternative is to not make the investment at all, it is further in our best interests of, due to diversification, portfolio management, leverage management, investment profile, risk tolerance or other exposure guidelines or limitations, cash flow or other considerations, for us to hold less economic exposure to the investment than such full amount. Subject to Applicable Law, such opportunities may be structured as an investment alongside us or as a purchase of a portion of the investment from us (through a syndication, participation or otherwise).

In all cases, subject to Applicable Law, our Investment Adviser has broad discretion in determining to whom and in what relative amounts to offer such opportunities, and factors our Investment Adviser may take into account, in its sole discretion, include whether such potential recipient is able to assist or provide a benefit to us in connection with the potential transaction or otherwise, whether our Investment Adviser believes the potential recipient is able to execute a transaction quickly, whether the potential recipient is expected to provide expertise or other advantages in connection with a particular investment, whether our Investment Adviser is aware of such potential recipient’s expertise or interest in these types of opportunities generally or in a subset of such opportunities or, the potential recipient’s target investment sizing. Recipients of these opportunities may, in accordance with Applicable Law, include one or more investors in us, one or more investors in other funds managed by the GSAM Credit Alternatives Team, clients or potential clients of Goldman Sachs, or funds or accounts established for any such persons. These opportunities may give rise to potential conflicts of interest. These opportunities will be offered to the recipients thereof on such terms as our Investment Adviser determines in its sole discretion, subject to Applicable Law, including on a no-fee basis or at prices higher or lower than those paid by us. As a result of these and other reasons, returns with respect to an opportunity may exceed investors’ returns with respect to our investment in the same opportunity.

For a further explanation of the allocation of opportunities and other conflicts and the risks related thereto, please see “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Potential conflicts of interest with other businesses of Goldman Sachs could impact our investment returns.”

 

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Market Opportunity

The GSAM Private Credit Group believes there is an attractive investment opportunity to invest in U.S. middle-market companies. Specifically:

 

  

The middle-market represents a large target market opportunity. According to the National Center for the Middle Market and the CIA World Factbook, the U.S. middle market is comprised of approximately 200,000 companies that represent approximately 33% of the private sector gross domestic product.1 This makes the U.S. middle market equivalent to the world’s third largest global economy on a stand-alone basis. Collectively, the U.S. middle market generates more than $6 trillion in annual revenue. The GSAM Private Credit Group believes that there is an attractive investment environment for us to provide loans to U.S. middle market companies.

 

  

There have been secular changes in ownership structures of middle-market companies. The GSAM Private Credit Group has observed a transformation in the ownership structures of private and public companies. The number of U.S. private-equity companies is at its highest level since 2000. Conversely, the number of listed U.S. domestic companies has dramatically declined over the same time period, yet the average market capitalization of listed U.S. companies has grown. The GSAM Private Credit Group believes that this has resulted in a shift in the ownership of middle-market companies and thus creating a larger market opportunity for us to provide debt capital to the companies that we expect to target.

 

  

There is a large amount ofun-invested private equity capital for middle-market companies. There is a large amount ofun-invested private equity capital for North America buyout funds. The GSAM Private Credit Group believes this creates additional capacity for us as the GSAM Private Credit Group expects private equity firms will seek to leverage their investments by combining equity capital with debt capital.

 

  

Changes in business strategy by banks have further reduced the supply of capital to middle-market companies. The trend of consolidation of regional banks into money center banks has reduced the focus of these businesses on middle-market lending. Money center banks traditionally focus on lending and providing other services to large corporate clients to whom they can deploy larger amounts of capital more efficiently. The GSAM Private Credit Group believes that this has resulted in fewer bank lenders to U.S. middle-market companies and reduced the availability of debt capital to the companies that we expect to target.

 

  

The capital markets have been unable to fill the void in middle-market finance left by banks. While underwritten bond and syndicated loan markets have been robust in recent years, middle-market companies are rarely able to access these markets as participants are generally highly focused on the liquidity characteristics of the bond or loan being issued. For example, mutual funds and exchange traded funds (“ETFs”) are significant buyers of underwritten bonds and broadly syndicated loans. However, mutual funds and ETFs generally require the ability to liquidate their investments quickly in order to fund investor redemptions. Accordingly, the existence of an active secondary market for their investments is an important consideration in the initial investment decision. Because there is typically no active secondary market for the debt of U.S. middle-market companies, mutual funds and ETFs generally do not provide capital to U.S. middle-market companies. The GSAM Private Credit Group believes that this is likely to be a persistent problem for the capital markets and creates an advantage for investors like us who have a more stable capital base and can therefore invest in illiquid assets.

 

  

It is difficult for new lending platforms to enter the middle market and fill the capital void because it is very fragmented. While the middle market is a very large component of the U.S. economy, it is a highly fragmented space with thousands of companies operating in many different geographies and industries. Typically, companies that need capital find lenders and investors based onpre-existing relationships, referrals and word of mouth. Developing the many relationships and wide-spread recognition required to become source of capital to the middle market is a time consuming, highly resource-intensive endeavor. As a result, the GSAM Private Credit Group believes that it is difficult for new lending platforms to successfully enter the middle market, thereby providing insulation from rapid shifts in the supply of capital to the middle market that might otherwise disrupt pricing of capital.

Competitive Advantages

The Goldman Sachs Platform: Group Inc. is a leading global financial institution that provides a wide range of financial services to a substantial and diversified client base, including companies and high net worth individuals, among others. The firm is headquartered in New York, and maintains offices across the United States and in all major financial centers around the world. Group Inc.’s asset management subsidiary, GSAM, is one of the world’s leading investment managers with over 730 investment professionals and approximately $1.3 trillion in assets under supervision as of December 31, 2018. GSAM’s investment teams, including the GSAM Private Credit Group, capitalize on the relationships, market insights, risk management expertise, technology and infrastructure of Goldman Sachs. The GSAM Private Credit Group believes the Goldman Sachs platform delivers a meaningful competitive advantage in the following ways:

 

  

Origination of Investment Opportunities: Goldman Sachs has a preeminent network of relationships and the ability to provide valued intellectual, as well as financial, capital to middle-market borrowers which the GSAM Private Credit Group believes significantly enhances

 

1 

Estimate for 2017 by the National Center for the Middle Market, which defined middle market as companies with annual revenue of $10 million—$1 billion. See http://www.middlemarketcenter.org (relying on data from the CIA World Factbook, availableat https://www.cia.gov/library/publications/the-world-factbook/).

 

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its origination capability. The GSAM Private Credit Group believes that many borrowers prefer to do business with Goldman Sachs and its advised funds because of its ability to offer further services to middle-market companies as they grow in their life cycle, including financial advice, acquisition opportunities and capital markets expertise. The GSAM Private Credit Group is also able to leverage the Goldman Sachs platform to provide borrowers with access to Goldman Sachs’ broad client network, which can be utilized to find new customers and partners as they seek to grow and execute their strategic plans.

 

  

Evaluation of Investment Opportunities: The GSAM Private Credit Group is comprised of seasoned professionals with significant private credit investing experience. The team draws on a diverse array of skill sets, spanning fundamental credit and portfolio management, as well as legal and transactional structuring expertise. The GSAM Private Credit Group is trained in, and utilizes, proprietary investment practices and procedures developed over many decades by Goldman Sachs, including those related to performing due diligence on prospective portfolio investments and reviewing the backgrounds of potential partners. Further, Goldman Sachs is an active participant in a wide array of industries, both in service to clients operating in many different industries and acting as a principal or customer in such industries. Accordingly, Goldman Sachs houses a tremendous amount of industry knowledge and experience. Subject to internal information barriers and related limitations, the GSAM Private Credit Group is able to draw upon these industry insights and expertise as it evaluates investment opportunities.

 

  

Risk Monitoring of Investments: The GSAM Private Credit Group has significant processes and procedures in place, including proprietary information technology systems, to monitor and evaluate the performance of its investments at the asset level. In addition, the GSAM Private Credit Group benefits from Goldman Sachs’ extensive risk management capabilities, which have been developed and honed over many investment cycles. The GSAM Private Credit Group’s portfolio is regularly reviewed and stressed under various scenarios by senior risk management personnel within Goldman Sachs. These scenarios are drawn from the expertise developed by Goldman Sachs for its own balance sheet. This risk monitoring is designed to minimize the risk of capital loss and maintain an investment portfolio that is expected to perform in a broad range of economic conditions.

Operating and Regulatory Structure

We have elected to be treated as a BDC under the Investment Company Act. As a BDC, we are generally prohibited from acquiring assets other than qualifying assets unless, after giving effect to any acquisition, at least 70% of our total assets are qualifying assets. Qualifying assets generally include securities of eligible portfolio companies, cash, cash equivalents, U.S. government securities and high-quality debt instruments maturing in one year or less from the time of investment. Under the rules of the Investment Company Act, “eligible portfolio companies” include (i) private U.S. operating companies, (ii) public U.S. operating companies whose securities are not listed on a national securities exchange (e.g., the New York Stock Exchange) or registered under the Exchange Act, and (iii) public U.S. operating companies having a market capitalization of less than $250 million. Public U.S. operating companies whose securities are quoted on theover-the-counter bulletin board and through OTC Markets Group Inc. are not listed on a national securities exchange and therefore are eligible portfolio companies. In addition, we currently are an “emerging growth company,” as defined in the JOBS Act. See “—Qualifying Assets.”

We have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016. As a RIC, we generally will not be required to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our Unitholders as dividends if we meet certain source of income, distribution, and asset diversification requirements. We intend to timely distribute to our Unitholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and we may choose to carry forward taxable income for distribution in the following year and pay any applicable tax. In addition, the distributions we pay to our Unitholders in a year may exceed our net ordinary income and capital gains for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes.

Investments

We seek to create a portfolio that includes primarily direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments. We expect to make investments through both primary originations and open-market secondary purchases. We currently do not limit our focus to any specific industry. If we are successful in achieving our investment objective, we believe that we will be able to provide our Unitholders with consistent dividend distributions and attractive risk adjusted total returns.

As of December 31, 2018, our portfolio (which term does not include our investment in a money market fund managed by an affiliate of Group Inc.) on a fair value basis, was comprised of approximately 98.0% secured debt investments (53.0% in first lien debt, 11.7% in firstlien/last-out unitranche loans and 33.3% in second lien debt), 0.3% in unsecured debt, 0.9% in preferred stock and 0.8% in common stock and warrants. We expect that our portfolio will continue to include secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, unsecured debt (including mezzanine debt) and, to a lesser extent, equities. In addition to investments in U.S. middle-market companies, we may invest a portion of our capital in opportunistic investments, such as in large U.S. companies, foreign companies, stressed or distressed debt, structured products or private equity. Such investments are intended to enhance our risk adjusted returns to Unitholders, and the proportion of these types of investments will change over time given our views on, among other things, the economic and credit environment in which we are operating, although these types of investments generally will constitute less than 30% of our total assets.

 

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In the future, we may also securitize a portion of our investments in any or all of our assets. We expect that our primary use of funds will be to make investments in portfolio companies, distribute cash to holders of our common Units and pay our operating expenses, including debt service to the extent we borrow or issue senior securities to fund our investments.

On January 4, 2017, the SEC granted GS BDC, GS MMLC and us exemptive relief toco-invest with other funds managed by the GSAM Credit Alternatives investment team in a manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. Additionally, if our Investment Adviser forms other funds in the future, we mayco-invest on a concurrent basis with such other affiliates, subject to compliance with the exemptive relief, applicable regulations and regulatory guidance, as well as applicable allocation procedures.

Investment Criteria

We are committed to a value-oriented philosophy implemented by our Investment Adviser, which manages our portfolio and seeks to minimize the risk of capital loss without foregoing the potential for capital appreciation. We have identified several criteria, discussed below, that GSAM believes are important in identifying and investing in prospective portfolio companies.

These criteria provide general guidelines for our investment decisions. However, not all of these criteria will be met by each prospective portfolio company in which we choose to invest. Generally, we seek to use our experience and access to market information to identify investment candidates and to structure investments quickly and effectively.

 

  

Value orientation and positive cash flow.Our investment philosophy places a premium on fundamental analysis and has a distinct value orientation. We focus on companies in which we can invest at relatively low multiples of operating cash flow and that are profitable at the time of investment on an operating cash flow basis. Typically, we do not expect to invest instart-up companies or companies having speculative business plans.

 

  

Experienced management and established financial sponsor relationships.We generally require that our portfolio companies have an experienced management team. We also require the portfolio companies to have proper incentives in place to induce management to succeed and to act in concert with our interests as investors. In addition, we focus our investments in companies backed by strong financial sponsors that have a history of creating value and with whom members of our Investment Adviser have an established relationship.

 

  

Strong and defensible competitive market position.We seek to invest in target companies that have developed leading market positions within their respective markets and are well-positioned to capitalize on growth opportunities. We also seek companies that demonstrate significant competitive advantages versus their competitors, which should help to protect their market position and profitability while enabling us to protect our principal and avoid capital losses.

 

  

Viable exit strategy.We seek to invest in companies that GSAM believes will provide a steady stream of cash flow to repay our loans and reinvest in their respective businesses. We expect that such internally generated cash flow, leading to the payment of interest on, and the repayment of the principal of, our investments in portfolio companies to be a key means by which we exit from our investments over time. In addition, we also seek to invest in companies whose business models and expected future cash flows offer attractive exit possibilities. These companies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial public offering of common stock or other capital markets transactions.

 

  

Due diligence.Our Investment Adviser takes abottom-up, fundamental research approach to our potential investments. It believes it is critical to conduct extensive due diligence on investment targets and in evaluating new investments. Our Investment Adviser conducts a rigorous due diligence process that is applied to prospective portfolio companies and draws from its experience, industry expertise and network of contacts. In conducting due diligence, our Investment Adviser uses information provided by companies, financial sponsors and publicly available information as well as information from relationships with former and current management teams, consultants, competitors and investment bankers.

Our due diligence typically includes:

 

  

review of historical and prospective financial information;

 

  

review of the capital structure;

 

  

analysis of the business and industry in which the company operates;

 

  

on-site visits;

 

  

interviews with management, employees, customers and vendors of the potential portfolio company;

 

  

review of loan documents;

 

  

background checks; and

 

  

research relating to the portfolio company’s management, industry, markets, products and services and competitors.

 

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Upon the completion of due diligence and a decision to proceed with an investment in a company, the team leading the investment presents the investment opportunity to our Investment Committee. This committee determines whether to pursue the potential investment. All new investments are required to be reviewed by the Investment Committee. The members of the Investment Committee are employees of our Investment Adviser and they do not receive separate compensation from us or our Investment Adviser for serving on the Investment Committee.

Additional due diligence with respect to any investment may be conducted on our behalf (and at our expense) by attorneys prior to the closing of the investment, as well as other outside advisers, as appropriate.

Investment Committee

All investment decisions are made by the Investment Committee which consists of five voting members, Brendan McGovern, Jon Yoder, David Yu, Jordan Walter and Michael Mastropaolo, as well as threenon-voting members with operational or legal expertise. Our Investment Committee is responsible for approving all of our investments. Our Investment Committee also monitors investments in our portfolio and approves all asset dispositions. We expect to benefit from the extensive and varied relevant experience of the investment professionals serving on our Investment Committee, which includes expertise in privately originated and publicly traded leveraged credit, stressed and distressed debt, bankruptcy, mergers and acquisitions and private equity.

The purpose of our Investment Committee is to evaluate and approve, as deemed appropriate, all investments by our Investment Adviser. Our Investment Committee process is intended to bring the diverse experience and perspectives of our Investment Committee’s members to the analysis and consideration of every investment. Our Investment Committee also serves to provide investment consistency and adherence to our Investment Adviser’s investment philosophies and policies. Our Investment Committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.

In addition to reviewing investments, our Investment Committee meetings serve as a forum for discussing credit views and outlooks, as well as reviewing investments. Potential transactions and investment opportunities are also reviewed on a regular basis. Members of our Investment Adviser’s investment team are encouraged to share information and views on credits with our Investment Committee early in their analysis. This process improves the quality of the analysis and assists the deal team members to work more efficiently.

Investment Structure

Once we determine that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers, including senior, junior and equity capital providers, to structure an investment. We negotiate among these parties and use creative and flexible approaches to structure our investment relative to the other capital in the portfolio company’s capital structure.

We expect our secured debt to have terms of approximately three to ten years. We generally obtain security interests in the assets of our portfolio companies that will serve as collateral in support of the repayment of this debt. This collateral may take the form of first or second priority liens on the assets of a portfolio company.

We use the term “mezzanine” to refer to debt that ranks senior only to a borrower’s equity securities and ranks junior in right of payment to all of such borrower’s other indebtedness. Mezzanine debt typically has interest-only payments in the early years, payable in cash orin-kind, with amortization of principal deferred to the later years of the mezzanine debt. In some cases, we may enter into mezzanine debt that, by its terms, converts into equity (or is issued along with warrants for equity) or additional debt securities or defers payments of interest for the first few years after our investment. Typically, our mezzanine debt investments have maturities of three to ten years.

We also invest in unitranche loans, which are loans that combine features of first-lien, second-lien and mezzanine debt, generally in a first-lien position. In a number of instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and other amounts due thereunder over the “last out” portion that we would continue to hold.

In the case of our secured debt and unsecured debt, including mezzanine debt investments, we seek to tailor the terms of the investments to the facts and circumstances of the transactions and the prospective portfolio companies, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio companies to achieve their business plan and improve their profitability. For example, in addition to seeking a senior position in the capital structure of our portfolio companies, we seek to limit the downside potential of our investments by:

 

  

requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

  

incorporating “put” rights and call protection into the investment structure; and

 

  

negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

 

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Our investments may include equity features, such as direct investments in the equity or convertible securities of portfolio companies or warrants or options to buy a minority interest in a portfolio company. Any warrants we may receive with our debt securities generally require only a nominal cost to exercise, so as a portfolio company appreciates in value, we may achieve additional investment return from these equity investments. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the company, upon the occurrence of specified events. In many cases, we may also obtain registration rights in connection with these equity investments, which may include demand and “piggyback” registration rights.

We expect to hold most of our investments to maturity or repayment, but may sell certain investments earlier if a liquidity event takes place, such as the sale or refinancing of a portfolio company. We also may turn over our investments to better position the portfolio as market conditions change.

Ongoing relationships with portfolio companies

Monitoring

Our Investment Adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if they are meeting their respective business plans and to assess the appropriate course of action for each company. Our Investment Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

 

  

assessment of success in adhering to the portfolio company’s business plan and compliance with covenants;

 

  

periodic or regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and accomplishments;

 

  

comparisons to our other portfolio companies in the industry, if any;

 

  

attendance at and participation in board meetings or presentations by portfolio companies; and

 

  

review of monthly and quarterly financial statements and financial projections of portfolio companies.

As part of our monitoring process, our Investment Adviser also employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, the Investment Adviser grades the credit risk of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or 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. The grading system is as follows:

 

  

investments with a grade of 1 involve the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit;

 

  

investments with a grade of 2 involve a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing as expected and the risk factors to our ability to ultimately recoup the cost of our investment are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a grade of 2;

 

  

investments with a grade of 3 indicate that the risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of factors such as declining performance andnon-compliance with debt covenants; however, payments are generally not more than 120 days past due; and

 

  

investments with a grade of 4 indicate that the risk to our ability to recoup the initial cost basis of such investment has substantially increased since origination or acquisition, and the portfolio company likely has materially declining performance. For debt investments with an investment grade of 4, in most cases, most or all of the debt covenants are out of compliance and payments are substantially delinquent. For investments graded 4, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit.

Our Investment Adviser grades the investments in our portfolio at least quarterly and it is possible that the grade of a portfolio investment may be reduced or increased over time. For investments graded 3 or 4, our Investment Adviser enhances its level of scrutiny over the monitoring of such portfolio company.

 

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Managerial Assistance

As a BDC, we must offer, and must provide upon request, significant managerial assistance to certain of our eligible portfolio companies within the meaning of Section 55 of the Investment Company Act. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Our Investment Adviser or an affiliate thereof may provide such managerial assistance on our behalf to portfolio companies that request such assistance. We may receive fees for these services. See “—Managerial Assistance to Portfolio Companies.”

Competition

Our primary competitors provide financing to middle-market companies and include other BDCs, commercial and investment banks, commercial financing companies, collateralized loan obligations (“CLOs”), private funds, including hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us.

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. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC.

While we expect to use the industry information of GSAM’s investment professionals to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies, we do not seek to compete primarily based on the interest rates we offer and GSAM believes that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our reputation in the market, our existing investment platform, the seasoned investment professionals of our Investment Adviser, our experience and focus on middle-market companies, our disciplined investment philosophy, our extensive industry focus and relationships and our flexible transaction structuring.

Staffing

We do not currently have any employees. Ourday-to-day operations are managed by our Investment Adviser. Our Investment Adviser has hired and expects to continue to hire professionals with skills applicable to our business plan, including experience in middle-market investing, leveraged finance and capital markets.

Properties

We do not own any real estate or other properties materially important to our operations. Our principal executive offices are located at 200 West Street, New York, New York 10282. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.

Legal Proceedings

We and our Investment Adviser are not currently subject to any material legal proceedings, although we may, from time to time, be involved in litigation arising out of operations in the normal course of business or otherwise.

Our Administrator

Pursuant to our Administration Agreement (as defined below), our administrator is responsible for providing various accounting and administrative services to us. Our administrator is entitled to fees as described in “—Administration Agreement.” To the extent that our administrator outsources any of its functions, the administrator will pay any compensation associated with such functions. See “—Administration Agreement.”

Management Agreements

Investment Advisory Agreement

The investment advisory and management agreement (the “Investment Advisory Agreement”) with our Investment Adviser was entered into as of April 11, 2016. The Investment Advisory Agreement will remain in full force and effect so long as such continuance is specifically approved at least annually by (a) the vote of a majority of the Independent Directors in accordance with the requirements of the Investment Company Act, and (b) a vote of a majority of the Board of Directors or a majority of our outstanding voting securities, as defined in the Investment Company Act. The Investment Advisory Agreement may, on 60 days’ written notice to the other party, be terminated in its entirety at any time without the payment of any penalty, by the Board of Directors or by vote of a majority of our outstanding voting securities, on the one hand, or by our Investment Adviser, on the other hand. The Investment Advisory Agreement also will automatically terminate in the event of its assignment (as defined in the Investment Company Act). See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—We are dependent upon management personnel of our Investment Adviser for our success.”

 

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Management Services

Pursuant to the terms of the Investment Advisory Agreement, GSAM, subject to the overall supervision of the Board of Directors, manages ourday-to-day operations and provides investment advisory and management services to us. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Our Investment Adviser, its principals, investment professionals and employees and the members of its Investment Committee have certain conflicts of interest.”

Subject to compliance with applicable law and published SEC guidance, nothing contained in the Investment Advisory Agreement in any way precludes, restricts or limits the activities of our Investment Adviser or any of its respective subsidiaries or affiliated parties.

Management Fee

Pursuant to the Investment Advisory Agreement, we pay our Investment Adviser a management fee (the “Management Fee”), payable quarterly in arrears, equal to 0.375% (i.e., an annual rate of 1.50%) of our average NAV (including uninvested cash and cash equivalents) at the end of the then-current quarter and the prior calendar quarter (and, in the case of our first quarter, our NAV as of suchquarter-end). The Management Fee for any partial quarter will be appropriately prorated.

For the year ended December 31, 2018, Management Fees amounted to $9.60 million. As of December 31, 2018, $2.91 million remained payable. For the year ended December 31, 2017, Management Fees amounted to $4.80 million.

Incentive Fee

Pursuant to the Investment Advisory Agreement, we pay to our Investment Adviser an Incentive Fee (the “Incentive Fee”) as follows:

 

 (a)

First, no Incentive Fee is payable to our Investment Adviser until we have made cumulative distributions pursuant to this clause (a) equal to aggregate Contributed Capital (as defined below);

 

 (b)

Second, no Incentive Fee is payable to our Investment Adviser until we have made cumulative distributions pursuant to this clause (b) equal to a 7% return per annum, compounded annually, on aggregate unreturned Contributed Capital, from the date each capital contribution is made through the date such capital has been returned;

 

 (c)

Third, subject to clauses (a) and (b), our Investment Adviser is entitled to an Incentive Fee equal to 100% of all amounts designated by us as proceeds intended for distribution and Incentive Fee payments, until such time as the cumulative Incentive Fee paid to our Investment Adviser pursuant to this clause (c) is equal to 15% of the amount by which the sum of (i) cumulative distributions to Unitholders pursuant to clauses (a) and (b) above and (ii) the cumulative Incentive Fee previously paid to our Investment Adviser pursuant to this clause (c) exceeds Contributed Capital; and

 

 (c)

Fourth, at any time that clause (c) has been satisfied, our Investment Adviser is entitled to an Incentive Fee equal to 15% of all amounts designated by us as proceeds intended for distribution and Incentive Fee payments.

The Incentive Fee is calculated on a cumulative basis and the amount of the Incentive Fee payable prior to a proposed distribution will be determined and, if applicable, paid in accordance with the foregoing formula each time amounts are to be distributed to the Unitholders. The Incentive Fee is a fee owed by us to our Investment Adviser and is not paid out of distributions made to Unitholders.

In no event will an amount be paid with respect to the Incentive Fee to the extent it would cause the aggregate amount of our capital gains paid in respect of the Incentive Fee to exceed 20% of our realized capital gains computed net of all realized capital losses and unrealized capital depreciation, in each case determined on a cumulative basis from inception of us through the date of the proposed payment.

“Contributed Capital” is the aggregate amount of capital contributions that have been made by all Unitholders in respect of their Units to us. All distributions (or deemed distributions), including investment income (i.e. proceeds received in respect of interest payments, dividends and fees) and proceeds attributable to the repayment or disposition of any Investment, to Unitholders will be considered a return of Contributed Capital. Unreturned Contributed Capital equals aggregate Contributed Capital minus cumulative distributions, but is never less than zero.

The term “proceeds intended for distribution and Incentive Fee payments” includes proceeds from the full or partial realization of our Investments and income from investing activities and may include return of capital, ordinary income and capital gains.

If, at our termination, our Investment Adviser has received aggregate payments of Incentive Fees in excess of the amount our Investment Adviser would have received had the Incentive Fees been determined upon such termination, then our Investment Adviser will reimburse us for the difference between the amount of Incentive Fees actually received and the amount determined at termination (the “Investment Adviser Reimbursement Obligation”). However, our Investment Adviser will not be required to reimburse us an amount greater than the aggregate Incentive Fees paid to our Investment Adviser, reduced by the excess (if any) of (a) the aggregate federal, state and local income tax liability our Investment Adviser incurred in connection with the payment of such Incentive Fees (assuming the highest marginal applicable federal and New York city and state income tax rates applied to such payments), over (b) an amount equal to the U.S. federal and state tax benefits available to our Investment Adviser by virtue of the payment made by our Investment Adviser pursuant to its Investment Adviser Reimbursement Obligation (assuming that, to the extent such payments are deductible by our Investment Adviser, the benefit of such deductions will be computed using the then highest marginal applicable federal and New York city and state income tax rates).

 

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If the Investment Advisory Agreement is terminated prior to our termination (other than our Investment Adviser voluntarily terminating the agreement), we will pay to our Investment Adviser a final Incentive Fee payment (the “Final Incentive Fee Payment”). The Final Incentive Fee Payment will be calculated as of the date the Investment Advisory Agreement is terminated and will equal the amount of Incentive Fee that would be payable to our Investment Adviser if (a) all Investments were liquidated for their current value (but without taking into account any unrealized appreciation of any Investment), and any unamortized deferred Investment-related fees would be deemed accelerated, (b) the proceeds from such liquidation were used to pay all our outstanding liabilities, and (c) the remainder was distributed to Unitholders and paid as Incentive Fee in accordance with the Incentive Fee waterfall described above for determining the amount of the Incentive Fee. The Company will make the Final Incentive Fee Payment in cash on or immediately following the date the Investment Advisory Agreement is so terminated. Our Investment Adviser Reimbursement Obligation will be determined as of the date of the termination of the Investment Advisory Agreement for purposes of the Final Incentive Fee Payment.

Example Incentive Fee Calculations

Case #1 (5.00% return on Contributed Capital)

Assume $100.00 of aggregate Contributed Capital, with the entire amount contributed on January 1.

The Company produces $5.00 of net profit over the year (after payment of all Company expenses including the Management Fee) and liquidates on December 31, designating $105.00 for distribution and Incentive Fee payments.

Step 1: Unitholders receive distributions totaling their $100.00 of aggregate Contributed Capital. There remains $5.00 designated for distribution and Incentive Fee payments.

Step 2: Unitholders are entitled to 100% of the remaining amount until they have received a 7% annual return on their unreturned Contributed Capital, which in this case totals $7.00. The remaining $5.00 is distributed to the Unitholders in satisfaction of this entitlement, leaving no further amounts designated for distribution and Incentive Fee payments.

In this case the total Incentive Fee received by our Investment Adviser is $0.00, or 0% of the $5.00 of net profit to us.

Case #2 (7.75% return on Contributed Capital)

Assume $100.00 of aggregate Contributed Capital, with the entire amount contributed on January 1.

The Company produces $7.75 of net profit over the year (after payment of all Company expenses including the Management Fee) and liquidates on December 31, designating $107.75 for distribution and Incentive Fee payments.

Step 1: Unitholders receive distributions totaling their $100.00 of aggregate Contributed Capital. There remains $7.75 designated for distribution and Incentive Fee payments.

Step 2: Unitholders are entitled to 100% of the remaining amount until they have received a 7% annual return on their unreturned Contributed Capital, which in this case totals $7.00. $7.00 is distributed to the Unitholders in satisfaction of this entitlement. There remains $0.75 designated for distribution and Incentive Fee payments.

Step 3: Our Investment Adviser is entitled to 100% of the remaining amount until it has received 15% of total distributions and Incentive Fee payments in excess of Contributed Capital, which in this case totals approximately $1.24. The remaining $0.75 is paid to our Investment Adviser as an Incentive Fee, leaving no further amounts designated for distribution and Incentive Fee payments.

In this case the total Incentive Fee received by our Investment Adviser is $0.75, or 9.68% of the $7.75 of net profit to us.

 

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Case #3 (12.00% return on Contributed Capital)

Assume $100 of aggregate Contributed Capital, with the entire amount contributed on January 1.

The Company produces $12.00 of net profit over the year (after payment of all Company expenses including the Management Fee) and liquidates on December 31, designating $112.00 for distribution and Incentive Fee payments.

Step 1: Unitholders receive distributions totaling their $100.00 of aggregate Contributed Capital. There remains $12.00 designated for distribution and Incentive Fee payments.

Step 2: Unitholders are entitled to 100% of the remaining amount until they have received a 7% annual return on their unreturned Contributed Capital, which in this case totals $7.00. $7.00 is distributed to the Unitholders in satisfaction of this entitlement. There remains $5.00 designated for distribution and Incentive Fee payments.

Step 3: Our Investment Adviser is entitled to 100% of the remaining amount until it has received 15% of total distributions and Incentive Fee payments in excess of Contributed Capital, which in this case totals approximately $1.24. Such amount is paid to our Investment Adviser as an Incentive Fee in satisfaction of this entitlement. There remains approximately $3.76 designated for distribution and Incentive Fee payments.

Step 4: Unitholders are entitled to 85% of the remaining amount and our Investment Adviser is entitled to 15% of the remaining amount. Therefore, the Unitholders receive approximately $3.20 in additional distributions while our Investment Adviser receives approximately $0.56 in additional Incentive Fee payments.

In this case the total Incentive Fee received by our Investment Adviser is $1.80, or 15.00% of the $12.00 of net profit to us.

Board Approval of the Investment Advisory Agreement

Our Board of Directors determined at an in person meeting held on August 1, 2018 to approve the continuation of the Investment Advisory Agreement. In its consideration of the renewal of the Investment Advisory Agreement, the Board of Directors focused on information it had received relating to, among other things:

 

  

the nature, quality and extent of the advisory and other services provided to us by the Investment Adviser;

 

  

the contractual terms of the Investment Advisory Agreement, including the structure of the Management Fee imposed on net assets (including cash) and the Incentive Fee imposed on net investment income and capital gains;

 

  

comparative data with respect to the advisory fees and other expenses paid by other BDCs managed by the Investment Adviser;

 

  

information about the services performed and the personnel performing such services under the Investment Advisory Agreement;

 

  

comparative data with respect to our investment performance and the performance of another BDC managed by the Investment Adviser;

 

  

the Investment Adviser’s revenues andpre-tax profit margins with respect to its management of us;

 

  

any existing and potential benefits to the Investment Adviser or its affiliates from its relationship with us;

 

  

other potential benefits to us as a result of our relationship with the Investment Adviser; and

 

  

such other matters as the Board of Directors determined were relevant to their consideration of the Investment Advisory Agreement.

In connection with their consideration of the renewal of the Investment Advisory Agreement, our Board of Directors gave weight to each of the factors described above, but did not identify any one particular factor as controlling their decision. After deliberation and consideration of all of the information provided, including the factors described above, the Board of Directors concluded, in the exercise of their business judgment, that the management fees paid by us were reasonable in light of the services provided to us by the Investment Adviser, the Investment Adviser’s costs, and our current and reasonably foreseeable asset levels. The Board of Directors unanimously concluded that the Investment Adviser’s continued management likely would benefit us and our Unitholders and that the Investment Advisory Agreement should be approved and continued with respect to us until August 31, 2019.

For the period from June 9, 2016 (inception) to December 31, 2016, we paid our Investment Adviser a total of $0.22 million in fees (excluding fees that are accrued but not paid) pursuant to the Investment Advisory Agreement, which consisted of $0.22 million in Management Fees and no Incentive Fees. For the year ended December 31, 2017, we paid our Investment Adviser a total of $3.83 million in fees (excluding fees that are accrued but not paid) pursuant to the Investment Advisory Agreement), which consisted of $3.83 million in Management Fees and no Incentive Fees. For the year ended December 31, 2018, we paid our Investment Adviser a total of $8.37 million in fees (excluding fees that are accrued but not paid) pursuant to the Investment Advisory Agreement), which consisted of $8.37 million in Management Fees and no Incentive Fees.

 

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Duration and Termination

The Investment Advisory Agreement will remain in full force and effect for successive annual periods, but only so long as such continuance is specifically approved at least annually by (a) the vote of a majority of our Independent Directors and (b) by a vote of a majority of our Board of Directors or of a majority of our outstanding voting securities, as defined in the Investment Company Act. The Investment Management Agreement may, on 60 days’ written notice to the other party, be terminated in its entirety at any time without the payment of any penalty, by our Board of Directors, by vote of a majority of our outstanding voting stock or by our Investment Adviser. The Investment Management Agreement shall automatically terminate in the event of its assignment. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—We are dependent upon management personnel of our Investment Adviser for our success.”

Limited Liability of our Investment Adviser

Our Investment Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by us in connection with the matters to which the Investment Advisory Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on our Investment Adviser’s part in the performance of its duties or from reckless disregard by our Investment Adviser of its obligations and duties under the Investment Advisory Agreement. Any person, even though also employed by our Investment Adviser, who may be or become an employee of and paid by us shall be deemed, when acting within the scope of his or her employment by us, to be acting in such employment solely for us and not as our Investment Adviser’s employee or agent. These protections may lead our Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Our Investment Adviser will be paid the Management Fee even if the value of your investment declines and our Investment Adviser’s Incentive Fee may create incentives for it to make certain kinds of investments.”

Organization of our Investment Adviser

Our Investment Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The principal executive offices of our Investment Adviser are located at 200 West Street, New York, New York 10282.

Organizational and Operating Expenses

Our primary operating expenses include the payment of the Management Fee and the Incentive Fee to our Investment Adviser, legal and professional fees, interest and other expenses of Financings (as defined in “—Investment Period” above) and other operating and overhead related expenses. The Management Fee and Incentive Fee compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions in accordance with the Investment Advisory Agreement and Administration Agreement, including those relating to: (i) our operational and organizational expenses; (ii) our fees and expenses, including travel expenses, incurred by our Investment Adviser or payable to third parties related to our investments, including, among others, professional fees (including the fees and expenses of consultants and experts) and fees and expenses from evaluating, monitoring, researching and performing due diligence on investments and prospective investments; (iii) interest and other expense payable on Financings, if any, incurred by us; (iv) fees and expenses incurred by us in connection with membership in investment company organizations; (v) brokers’ commissions; (vi) fees and expenses associated with calculating our NAV (including the costs and expenses of any independent valuation firm); (vii) legal, auditing or accounting expenses; (viii) taxes or governmental fees; (ix) the fees and expenses of our Administrator, transfer agent orsub-transfer agent; (x) the cost of preparing unit certificates or any other expenses, including clerical expenses of issue or repurchase of the Units; (xi) the expenses of and fees for registering or qualifying Units for sale and of maintaining our registration or qualifying and registering us as a broker or a dealer; (xii) the fees and expenses of our Independent Directors; (xiii) the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by the LLC Agreement or other organizational documents of us insofar as they govern agreements with any such custodian; (xiv) the cost of preparing and distributing reports, proxy statements and notices to holders of equity interests in us, the SEC and other regulatory authorities; (xv) insurance premiums; (xvi) costs of holding Unitholder meetings; and (xvii) costs incurred in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with our business and the amount of any judgment or settlement paid in connection therewith, or the enforcement of our rights against any person and indemnification or contribution expenses payable by us to any person and other extraordinary expenses not incurred in the ordinary course of our business. Our Investment Adviser is not required to pay expenses of activities which are primarily intended to result in sales of Units, including all costs and expenses associated with the preparation and distribution of any private placement memorandum or subscription agreements.

Company expenses borne by us in the ordinary course on an annual basis (excluding Management Fees, the Incentive Fee, organizational andstart-up expenses, and leverage-related expenses) shall not exceed an amount equal to 0.5% of the aggregate amount of Commitments to us by investors. Expenses incurred outside of the ordinary course, including litigation and similar expenses, are difficult to predict and are, therefore, not subject to such a cap.

We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.

 

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Administration Agreement

We have entered into an administration agreement (the “Administration Agreement”) with State Street Bank and Trust Company (the “Administrator”), under which the Administrator is responsible for providing various accounting and administrative services to us.

The Administration Agreement provides that the Administrator will not be liable to us for any damages or other losses arising out of the performance of its services thereunder except under certain circumstances, and contains provisions for the indemnification of the Administrator by us against liabilities to other parties arising in connection with the performance of its services to us.

We pay the Administrator fees for its services as we determine are commercially reasonable in our sole discretion. We also reimburse the Administrator for all reasonable expenses. To the extent that the Administrator outsources any of its functions, the Administrator will pay any compensation associated with such functions.

We are not obligated to retain the Administrator. The Administration Agreement is terminable by either party without penalty upon 30 days’ written notice to the other party.

The terms of the Administration Agreement that we may enter with any subsequent administrator may differ materially from the terms of the Administration Agreement with the Administrator in effect prior to such retention, including providing for a fee structure that results in us, directly or indirectly, bearing higher fees for similar services and other terms that are potentially less advantageous to us. The Unitholders will not be entitled to receive prior notice of the engagement of an alternate administrator or of the terms of any agreement that is entered into with such administrator.

Transfer Agent

State Street Bank and Trust Company serves as our transfer agent and disbursing agent.

License Agreement

We have entered into a license agreement (the “License Agreement”) with GS & Co. pursuant to which we have been granted a personal,non-exclusive, worldwide, royalty-free right and license to use the “Goldman Sachs” name. Under the License Agreement, we do not have the right to use the Goldman Sachs name if GSAM or another affiliate of Goldman Sachs is not our investment adviser or if our continued use of such license results in a violation of applicable law, results in a regulatory burden or has adverse regulatory consequences. Other than with respect to this limited license, we have no legal right to the “Goldman Sachs” name.

Regulation

We have elected to be regulated as a BDC under the Investment Company Act. As with other companies regulated by the Investment Company Act, a BDC must adhere to certain substantive regulatory requirements. The Investment Company Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers orsub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the Investment Company Act. In addition, the Investment Company Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as a BDC unless approved by a majority of the outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the Investment Company Act as the vote: (i) of 67% or more of the voting securities present at such meeting, if the holders of more than 50% of the outstanding voting securities of such company are present or represented by proxy or (ii) of more than 50% of the outstanding voting securities of such company, whichever is less.

Any issuance of preferred securities must comply with the requirements of the Investment Company Act. Additionally, the Investment Company Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to the Units and before any purchase of Units is made, such preferred securities together with all other senior securities must not exceed an amount equal to 50% of our total assets (66 2/3% if certain requirements are met) after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of preferred securities, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred securities are in arrears by two full years or more. Certain other matters under the Investment Company Act require a separate class vote of the holders of any issued and outstanding preferred securities. For example, holders of preferred securities would be entitled to vote separately as a class from the holders of units on a proposal involving a plan of reorganization adversely affecting such preferred securities.

We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed a “principal underwriter” as that term is defined under the Securities Act of 1933, as amended (the “Securities Act”). We may purchase or otherwise receive warrants which offer an opportunity (not a requirement) to purchase common stock of a portfolio company in connection with an acquisition financing or other investments. Similarly, we may acquire rights that obligate an issuer of acquired securities or their affiliates to repurchase the securities at certain times, under certain circumstances.

 

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We do not intend to acquire securities issued by any investment company whereby our investment would exceed the limits imposed by the Investment Company Act. Under these limits, we generally cannot (1) acquire more than 3% of the total outstanding voting stock of any registered investment company, (2) invest more than 5% of the value of our total assets in the securities of one registered investment company, or (3) invest more than 10% of the value of our total assets in the securities of registered investment companies in general. These limitations do not apply where we acquire interests in a money market fund as long as we do not pay a sales charge or service fee in connection with the purchase. With respect to the portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject Unitholders to additional expenses. None of the policies described above are fundamental and each such policy may be changed without Unitholder approval, subject to any limitations imposed by the Investment Company Act.

Private funds that are excluded from the definition of “investment company” pursuant to either Section 3(c)(1) or 3(c)(7) of the Investment Company Act are also subject to certain of the limits under the Investment Company Act noted above. Specifically, such private funds generally may not acquire directly or through a controlled entity more than 3% of our total outstanding Units (measured at the time of the acquisition).

Investment companies registered under the Investment Company Act are also subject to the restriction as well as other limitations under the Investment Company Act that would restrict the amount that they are able to invest in our securities. As a result, certain investors would be required to hold a smaller position in the Units than if they were not subject to such restrictions.

We are generally not able to issue and sell the Units at a price below the then-current NAV per unit. We may, however, sell the Units at a price below the then-current NAV per Unit if the Board of Directors determines that such sale is in our best interests and the best interests of the Unitholders, and the Unitholders approve such sale.

We expect to deploy substantially all proceeds from our offerings for investment purposes within two years of May 5, 2017.

Qualifying Assets

Under the Investment Company Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the Investment Company Act, which are referred to as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets (not including certain assets specified in the Investment Company Act) represent at least 70% of the BDC’s total assets. The principal categories of qualifying assets relevant to our proposed business are the following:

 

 (1)

Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding thirteen months an affiliated person of an eligible portfolio company, or from any other person, subject to such rules and regulations as may be prescribed by the SEC. An eligible portfolio company is defined in the Investment Company Act as any issuer that:

 

 (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 (“SBIC”) wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the Investment Company Act; and

 

 (c)

satisfies any of the following:

 

  

does not have any class of securities listed on a national securities exchange or has a class of securities listed on a national securities exchange but has an aggregate market value of outstanding common equity of less than $250 million;

 

  

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

 

  

is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.

 

 (2)

Securities of any eligible portfolio company that we control.

 

 (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 at least 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 options, 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.

 

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Managerial Assistance to Portfolio Companies

A BDC must be 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 in (1), (2) or (3) above under “—Qualifying Assets.” However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must also either control the issuer of the securities or offer to make available to the issuer of the securities (other than small and solvent companies described above) 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 (as long as the BDC does not make available significant managerial assistance solely in this fashion). 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.

Temporary Investments

As a BDC, pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash items (such as money market funds), 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 are qualifying assets. We may invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements 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 which 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, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would generally not meet the asset diversification requirements in order to qualify as a RIC for U.S. federal income tax purposes.

Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Indebtedness and Senior Securities

As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of equity securities senior to the Units if our asset coverage ratio, as defined under the Investment Company Act, is at least equal to 200% immediately after each such issuance (or 150% if certain requirements are met). The Small Business Credit Availability Act modified the applicable provisions of the Investment Company Act to reduce the required asset coverage ratio applicable to BDCs to 150%, subject to certain approval and disclosure requirements and, in the case of BDCs without common equity listed on a national securities exchange, such as us, an offer to repurchase shares held by the BDC’s stockholders as of the date the requisite approval is obtained. As a result, BDCs are able to increase their leverage capacity if shareholders approve a proposal to do so. If a BDC receives shareholder approval, it would be allowed to increase its leverage capacity on the first day after such approval. Alternatively, the legislation allows the majority of the directors who are not “interested persons,” as defined in the Investment Company Act, of the BDC to approve an increase in its leverage capacity, and such approval would become effective after one year. In addition, except in limited circumstances, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit any distribution to Unitholders or the repurchase of our Units unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of its total assets for temporary purposes without regard to asset coverage. A loan is presumed to be made for temporary or emergency purposes if it is repaid within 60 days and is not extended or renewed; otherwise it is presumed to not be for temporary purposes. For a discussion of the risks associated with leverage, “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—We borrow money, which may magnify the potential for gain or loss and may increase the risk of investing in us.”

Code of Ethics

We have adopted a Code of Ethics pursuant to Rule17j-1 under the Investment Company Act and we have also approved our Investment Adviser’s Code of Ethics that it adopted in accordance with Rule17j-1 and Rule204A-1 under the Advisers Act. These codes of ethics establish, among other things, procedures for personal investments and restrict certain personal securities transactions, including transactions in securities that are held by us. Personnel subject to each code may invest in securities for their personal investment accounts, so long as such investments are made in accordance with the code’s requirements. The Codes of Ethics are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies may also be obtained by electronic request to publicinfo@sec.gov.

Proxy Voting Policies and Procedures

We have delegated the voting of portfolio securities to our Investment Adviser. For Accounts for which our Investment Adviser has voting discretion, our Investment Adviser has adopted policies and procedures (the “Proxy Voting Policy”) for the voting of proxies. Under the Proxy Voting Policy, our Investment Adviser’s guiding principles in performing proxy voting are to make decisions that favor proposals that tend to maximize a company’s shareholder value and are not influenced by conflicts of interest. To implement these guiding principles for investments in publicly-traded equities, our Investment Adviser has developed customized proxy voting guidelines (the “Guidelines”) that it generally applies when voting on behalf of client accounts. These Guidelines address a wide variety of individual topics, including, among other matters, shareholder voting rights, anti-takeover defenses, board structures, the election of directors, executive and director compensation, reorganizations, mergers, issues of corporate social responsibility and various shareholder proposals.

 

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The Proxy Voting Policy, including the Guidelines, is reviewed periodically to assure that it continues to be consistent with our Investment Adviser’s guiding principles. The Guidelines embody the positions and factors our Investment Adviser generally considers important in casting proxy votes.

Our Investment Adviser has retained a third-party proxy voting service (the “Proxy Service”), currently Institutional Shareholder Services, to assist in the implementation and administration of certain proxy voting- related functions including, operational, recordkeeping, and reporting services. The Proxy Service also prepares a written analysis and recommendation (a “Recommendation”) of each proxy vote that reflects the Proxy Service’s application of the Guidelines to particular proxy issues.

While it is our Investment Adviser’s policy generally to follow the Guidelines and Recommendations from the Proxy Service, our Investment Adviser’s portfolio management teams (the “Portfolio Management Teams”) may, on certain proxy votes, seek approval to diverge from the Guidelines or a Recommendation by following an “override” process. Such decisions are subject to a review and approval process, including a determination that the decision is not influenced by any conflict of interest. A Portfolio Management Team that receives approval through the override process to cast a proxy vote that diverges from the Guidelines and/or a Recommendation may vote differently than other Portfolio Management Teams that did not seek to override the vote. In forming their views on particular matters, the Portfolio Management Teams are also permitted to consider applicable regional rules and practices, including codes of conduct and other guides, regarding proxy voting, in addition to the Guidelines and Recommendations. Our Investment Adviser may hire other service providers to replace or supplement the Proxy Service with respect to any of the services our Investment Adviser currently receives from the Proxy Service.

From time to time, our Investment Adviser may face regulatory, compliance, legal or logistical limits with respect to voting securities that it may purchase or hold for client accounts which can affect our Investment Adviser’s ability to vote such proxies, as well as the desirability of voting such proxies. Among other limits, federal, state and foreign regulatory restrictions or company specific ownership limits, as well as legal matters related to consolidated groups, may restrict the total percentage of an issuer’s voting securities that our Investment Adviser can hold for clients and the nature of our Investment Adviser’s voting in such securities. Our Investment Adviser’s ability to vote proxies may also be affected by, among other things: (i) late receipt of meeting notices; (ii) requirements to vote proxies in person; (iii) restrictions on a foreigner’s ability to exercise votes; (iv) potential difficulties in translating the proxy; (v) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions; and (vi) requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting.

Our Investment Adviser conducts periodic due diligence meetings with the Proxy Service which include a review of the Proxy Service’s general organizational structure, new developments with respect to research and technology, work flow improvements and internal due diligence with respect to conflicts of interest.

Our Investment Adviser has adopted policies and procedures designed to prevent conflicts of interest from influencing the proxy voting decisions that our Investment Adviser makes on behalf of a client account and to help assure that such decisions are made in accordance with our Investment Adviser’s fiduciary obligations to its clients. These policies and procedures include our Investment Adviser’s use of the Guidelines and Recommendations from the Proxy Service, the override approval process previously discussed, and the establishment of information barriers between our Investment Adviser and other Goldman Sachs’ businesses. Notwithstanding such proxy voting policies and procedures, actual proxy voting decision of our Investment Adviser may have the effect of benefitting the interest of other clients or businesses of other divisions or units of Goldman Sachs and/or its affiliates, provided that our Investment Adviser believes such voting decisions to be in accordance with its fiduciary obligations. See “Item 13(a). Transactions with Related Persons; Review, Approval or Ratification of Transaction with Related Persons.”

Voting decisions with respect to fixed income securities and the securities of privately held issuers generally will be made by our Investment Adviser based on its assessment of the particular transactions or other matters at issue.

Unitholders may obtain information about how we voted proxies by making a written request for proxy voting information to: State Street Bank and Trust Company, our Administrator. Requests should be addressed to:

State Street Bank and Trust Company

Attention: Compliance

100 Huntington Avenue

Copley Place Tower 2, Floor 3

Boston, MA 02116

With a copy to:

State Street Bank and Trust Company Legal Division—Global Services Americas

One Lincoln Street, 21st Floor

Boston, MA 02111

Attn: Senior Vice President and Senior Managing Counsel

 

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Privacy Principles

The following information is provided to help investors understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

We may collect nonpublic personal information regarding investors from sources such as subscription agreements, investor questionnaires and other forms; individual investors’ account histories; and correspondence between us and individual investors. We may share information that we collect regarding an investor with its affiliates and the employees of such affiliates for everyday business purposes, for example, to service the investor’s accounts and, unless an investor opts out, provide the investor with information about other products and services offered by us or its affiliates that may be of interest to the investor. In addition, we may disclose information that we collect regarding investors to third parties who are not affiliated with us (i) as authorized by the investors in investor subscription agreements or our organizational documents; (ii) as required by applicable law or in connection with a properly authorized legal or regulatory investigation, subpoena or summons, or to respond to judicial process or government regulatory authorities having property jurisdiction; (iii) as required to fulfill investor instructions; or (iv) as otherwise permitted by applicable law to perform support services for investor accounts or process investor transactions with us or our affiliates.

Any party not affiliated with us that receives nonpublic personal information relating to investors from us are required to adhere to confidentiality agreements and to maintain appropriate safeguards to protect investor information. Additionally, for officers, employees and agents of ours and our affiliates, access to such information is restricted to those who need such access to provide services to us and investors. We maintain physical, electronic and procedural safeguards to seek to guard investor nonpublic personal information.

Other

We may also be prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of the members of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the prohibition on transactions by BDCs with affiliates to prohibit “joint” transactions among entities that share a common investment adviser or under common control with the investment adviser. The staff of the SEC has grantedno-action relief permitting purchases of a single class of privately placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. Except in certain limited circumstances, we will be unable to invest in any issuer in which another client sponsored or managed by our Investment Adviser has previously invested, including GS BDC and GS MMLC. On January 4, 2017, the SEC granted GS BDC, GS MMLC and us, as well as certain other funds that may be managed by GSAM, including the GSAM Credit Alternatives investment team, in the future, exemptive relief to make negotiatedco-investments, subject to certain terms and conditions in the exemptive relief. As a result of the exemptive relief, there could be significant overlap in our portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds established by the GSAM Credit Alternatives Team that are able to rely on the order.

As a BDC, the SEC will periodically examine us for compliance with the Investment Company Act.

We are required to provide and maintain a bond issued by a reputable fidelity insurance company in order to protect against larceny and embezzlement, covering each of our officers and employees, who may singly, or jointly with others, have access to our securities or funds. Furthermore, as a BDC, we are prohibited from protecting any director, officer, investment adviser or underwriter against any liability to us or our Unitholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

We and our Investment Adviser are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these 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.

Compliance with the Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. The Sarbanes-Oxley Act requires us to review our 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 future regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

 

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Compliance with the JOBS Act

We are, and expect to remain, an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, as it may be amended from time to time (the “JOBS Act”), until the earliest of:

 

  

the last day of the fiscal year in which our total annual gross revenues first exceed $1.07 billion;

 

  

the date on which we have, during the prior three-year period, issued more than $1.0 billion innon-convertible debt;

 

  

the last day of a fiscal year in which we (1) have an aggregate worldwide market value of Units held bynon-affiliates of $700 million or more (measured at the end of each fiscal year) as of the last business day of our most recently completed second fiscal quarter and (2) have been an Exchange Act reporting company for at least one year (and filed at least one annual report under the Exchange Act); or

 

  

The date five years after the date of an initial public offering of us.

Under the JOBS Act, we are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which would require that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. This may increase the risk that material weaknesses or other deficiencies in our internal control over financial reporting go undetected. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure— Efforts to comply with Section 404 of the Sarbanes-Oxley Act will involve significant expenditures, and noncompliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us.”

In addition, Section 13(a) of the Exchange Act, as amended by Section 102(b) of the JOBS Act, provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. However, pursuant to Section 107 of the JOBS Act, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required fornon-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Compliance with the Bank Holding Company Act

As a BHC and FHC, the activities of Group Inc. and its affiliates are subject to certain restrictions imposed by the Bank Holding Company Act of 1956, as amended (the “BHCA”), and related regulations. BHCs and FHCs are subject to supervision and regulation by the Federal Reserve Board (the “Federal Reserve”). Because Group Inc. may be deemed to “control” us within the meaning of the BHCA, restrictions under the BHCA could apply to us as well. Accordingly, the BHCA and other applicable banking laws, rules, regulations and guidelines, and their interpretation and administration by the appropriate regulatory agencies, including the Federal Reserve, may restrict our investments, transactions and operations and may restrict the transactions and relationships between our Investment Adviser, Group Inc. and their affiliates, on the one hand, and us on the other hand. For example, the BHCA regulations applicable to Group Inc. and us may, among other things, restrict our ability to make certain investments or the size of certain investments, impose a maximum holding period on some or all of our investments and restrict our and our Investment Adviser’s ability to participate in the management and operations of the companies in which we invest. In addition, certain BHCA regulations may require aggregation of the positions owned, held or controlled by related entities. Thus, in certain circumstances, positions held by Group Inc. and its affiliates (including our Investment Adviser) for client and proprietary accounts may need to be aggregated with positions held by us. In this case, where BHCA regulations impose a cap on the amount of a position that may be held, Goldman Sachs may utilize available capacity to make investments for its proprietary accounts or for the accounts of other clients, which may require us to limit and/or liquidate certain investments. Additionally, Goldman Sachs may in the future, in its sole discretion and without notice to investors, engage in activities impacting us and/or our Investment Adviser in order to comply with the BHCA or other legal requirements applicable to, or reduce or eliminate the impact or applicability of any bank regulatory or other restrictions on, Goldman Sachs, us or other funds and accounts managed by our Investment Adviser and its affiliates. In addition, Goldman Sachs may cease in the future to qualify as a FHC, which may subject us to additional restrictions. Moreover, there can be no assurance that the bank regulatory requirements applicable to Goldman Sachs and us, or the interpretation thereof, will not change, or that any such change will not have a material adverse effect on us. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Our activities may be limited as a result of potentially being deemed to be controlled by a bank holding company.”

 

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ITEM 1A.     RISK FACTORS

Investing in our securities involves certain risks relating to our structure and investment objective. You should carefully consider these risk factors, together with all of the other information included in this report, before you decide whether to make an investment in our securities. The risks set forth below are not the only risks we face, and we may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the NAV of our securities could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Structure

Our limited term and that of the Investment Period may impact our investment strategy.

Unless earlier liquidated by the Board of Directors or extended by the Board of Directors (and, to the extent necessary, amajority-in-interest of the Unitholders), our Term will end on the seven year anniversary of the Final Closing Date. Due to our finite Term, we may be required to sell Investments at an inopportune time, which could adversely affect our performance and/or cause us to seek to invest in loans with a shorter term than would be the case if our Term was longer, which might adversely affect the nature and/or quality of our Investments.

Following the expiration of the Investment Period, we will not be permitted to reinvest proceeds realized by us from the sale or repayment of any investment. Accordingly, we may be required to distribute such proceeds to Unitholders, which may cause our fixed expenses to increase as a percentage of assets under management. In addition, any proceeds realized by us from the sale or repayment of Investments could result in an increased concentration of our portfolio, which could increase the risks associated with ownership of the Units. For more, see “—Risks Relating to Our Portfolio Company Investments—Our portfolio may be focused in a limited number of portfolio companies, which will subject us to a risk of significant loss if any of these companies default on their obligations under any of their debt instruments or if there is a downturn in a particular industry.”

The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets in the United States, which may have a negative impact on our business and operations.

From time to time, capital markets may experience periods of disruption and instability. For example, from 2008 to 2009, the global capital markets were unstable as evidenced by the lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, there-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 various 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. There have been more recent periods of volatility and there can be no assurance that adverse market conditions will not repeat themselves in the future. If similar adverse and volatile market conditions repeat in the future, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow. Equity capital may be particularly difficult to raise during periods of adverse or volatile market conditions because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional Units at a price less than the NAV per Unit without first obtaining approval for such issuance from the Unitholders and the Independent Directors.

Moreover, there-appearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of time or worsened market conditions, including as a result of United States government shutdowns or the perceived creditworthiness of the United States, could make it difficult for us to borrow money or to extend the maturity of or refinance any indebtedness we may have under similar terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if any, may be at a higher cost and on less favorable terms and conditions than would currently be available. If we are unable to raise or refinance debt, Unitholders may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new commitments or to fund existing commitments to our portfolio companies.

Given the periods of extreme volatility and dislocation in the capital markets from time to time, many BDCs have faced, and may in the future face, a challenging environment in which to raise or access capital. In addition, significant changes in the capital markets, including the extreme volatility and disruption over the past several years, has had, and may in the future have, a negative effect on asset valuations of our investments and on the potential for liquidity events involving these investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our investment valuations. Further, the illiquidity of our investments may make it difficult for us to sell such investments to access capital if required. As a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. In addition, a prolonged period of market illiquidity may cause us to reduce the volume of loans and debt securities we originate and/or fund and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows. An inability to raise or access capital could have a material adverse impact on our business, financial condition or results of operations.

 

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Global economic, political and market conditions may adversely affect our business, financial condition and results of operations, including our revenue growth and profitability.

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, have contributed and may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

In August 2011 and then affirmed in August 2013, Standard & Poor’s Rating Services lowered its long-term sovereign credit rating on the United States from “AAA” to “AA+”. Additionally, in January of 2012, Standard & Poor’s Rating Services lowered its long-term sovereign credit rating for several large European countries. These ratings negatively impacted global markets and economic conditions. Although U.S. lawmakers have taken steps to avoid further downgrades, U.S. budget deficit concerns and similar conditions in Europe, China and elsewhere have increased the possibility of additional credit-rating downgrades and worsening global economic and market conditions. There can be no assurance that current or future governmental measures to mitigate these conditions will be effective. These conditions, government actions and future developments may cause interest rates and borrowing costs to rise, which may adversely affect our ability to access debt financing on favorable terms and may increase the interest costs of our borrowers, hampering their ability to repay us. Continued or future adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.

In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities, suggesting that key economic indicators, such as the unemployment rate, had showed signs of improvement since the inception of the program. It is possible that, without quantitative easing by the Federal Reserve, these developments, along with the United States government’s credit and deficit concerns and other global economic conditions, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Additionally, the Federal Reserve has raised its federal funds target rate five times since December 2016. However, if key economic indicators, such as the unemployment rate or inflation, do not progress at a rate consistent with the Federal Reserve’s objectives, the target range for the federal funds rate may further increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms and may also increase the costs of our borrowers, hampering their ability to repay us.

Legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. These or other regulatory changes could result in greater competition from banks and other lenders with which we compete for lending and other investment opportunities. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a material adverse effect on our business, financial condition and results of operations.

Our operation as a BDC imposes numerous constraints on us and significantly reduces our operating flexibility. In addition, if we fail to maintain our status as a BDC, we might be regulated as aclosed-end investment company, which would subject us to additional regulatory restrictions.

The Investment Company Act imposes numerous constraints on the operations of BDCs. For example, BDCs generally are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private companies or thinly traded public companies, cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the time of investment. These constraints may hinder our Investment Adviser’s ability to take advantage of attractive investment opportunities and to achieve our investment objective. Furthermore, any failure to comply with the requirements imposed on BDCs by the Investment Company Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants.

We may be precluded from investing in what our Investment Adviser believes are attractive investments if such investments are not qualifying assets for purposes of the Investment Company Act. If we do not invest a sufficient portion of our assets in qualifying assets, we will be prohibited from making any additional investment that is not a qualifying asset and could be forced to forgo attractive investment opportunities. Similarly, these rules could prevent us from makingfollow-on investments in existing portfolio companies (which could result in the dilution of our position).

If we fail to maintain our status as a BDC, we might be regulated as aclosed-end investment company that is required to register under the Investment Company Act, which would subject us to additional regulatory restrictions and significantly decrease our operating flexibility. In addition, any such failure could cause an event of default under any outstanding indebtedness we might have, which could have a material adverse effect on our business, financial condition or results of operations.

 

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We will be subject to corporate-level U.S. federal income tax on all of our income if we are unable to maintain our qualification for tax treatment as a RIC under Subchapter M of the Code, which would have a material adverse effect on our financial performance.

Although we have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016, we cannot assure you that we will be able to maintain RIC status. To maintain RIC status and be relieved of U.S. federal income taxes on income and gains distributed to Unitholders, we must meet the annual distribution,source-of-income and asset diversification requirements described below.

 

 

The annual distribution requirement for a RIC will generally be satisfied if we distribute to Unitholders on an annual basis at least 90% of our investment company taxable income (generally, our net ordinary income plus the excess of our realized net short-term capital gains over realized net long-term capital losses, determined without regard to the dividends paid deduction) for each taxable year. Because we use debt financing, we are subject to an asset coverage ratio requirement under the Investment Company Act, and we are subject to certain covenants contained in our credit agreements and other debt financing agreements. This asset coverage ratio requirement and these covenants could, under certain circumstances, restrict us from making distributions to Unitholders that are necessary for us to satisfy the distribution requirement. If we are unable to obtain cash from other sources, and thus are unable to make sufficient distributions to Unitholders, we could fail to maintain our RIC tax treatment and thus become subject to corporate-level U.S. federal income tax (and any applicable U.S. state and local taxes).

 

 

Thesource-of-income requirement will be satisfied if at least 90% of our gross income for each year is derived from dividends, interest, gains from the sale of stock or securities, payments with respect to loans of certain securities, net income derived from an interest in a “qualified publicly traded partnership” or other income derived with respect to our business of investing in such stock or securities.

 

 

The asset diversification requirement will be satisfied if, at the end of each quarter of our taxable year, at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs and other acceptable securities, and no more than 25% of the value of our assets is invested in the securities (other than U.S. government securities or securities of other RICs) of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of our RIC status. 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.

If we fail to maintain our RIC status for any reason, and we do not qualify for certain relief provisions under the Code, we would be subject to corporate-level U.S. federal income tax (and any applicable U.S. state and local taxes). In this event, the resulting taxes and any resulting penalties could substantially reduce our net assets, the amount of our income available for distribution and the amount of our distributions to Unitholders, which would have a material adverse effect on our financial performance.

We are dependent upon management personnel of our Investment Adviser for our success.

We do not have any employees. We depend on the experience, diligence, skill and network of business contacts of the GSAM Credit Alternatives Team, together with other investment professionals that our Investment Adviser currently employs, or may subsequently retain, to identify, evaluate, negotiate, structure, close, monitor and manage our investments. Our success depends to a significant extent on the continued service and coordination of our Investment Adviser’s senior investment professionals. The departure of any of our Investment Adviser’s key personnel, including members of the Investment Committee, or of a significant number of the investment professionals of our Investment Adviser, could have a material adverse effect on our business, financial condition or results of operations. In addition, we cannot assure investors that our Investment Adviser will remain our investment adviser or that we will continue to have access to our Investment Adviser or its investment professionals. See “—Our Investment Adviser can resign on 60 days’ notice. We may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.”

Our Investment Adviser, its principals, investment professionals and employees and the members of its Investment Committee have certain conflicts of interest.

Our Investment Adviser, its principals, affiliates, investment professionals and employees, the members of its Investment Committee and our officers and directors serve or may serve now or in the future as investment advisers, officers, directors, principals of, or in their capacities with respect to, public or private entities (including other BDCs and other investment funds) that operate in the same or a related line of business as us. For example, we have the same management and Investment Committee teams as GS BDC and GS MMLC. Therefore, we expect these individuals may have obligations to investors in such other BDCs, the fulfillment of which might not be in our best interests or the best interests of Unitholders, and we expect that investment opportunities will satisfy the investment criteria for both us and such other business development companies. In addition, GSAM and its affiliates also manage other investment funds (including vehicles in which Goldman Sachs and its personnel have an interest), and are expected to manage other vehicles in the future that have investment mandates

 

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that are similar, in whole or in part, to ours and, accordingly, may invest in asset classes similar to those targeted by us. As a result, our Investment Adviser and/or its affiliates may face conflicts in allocating investment opportunities between such other entities and us. The fact that our investment advisory fees may be lower than those of certain other funds advised by GSAM could result in this conflict of interest affecting us adversely relative to such other funds.

Subject to applicable law, Goldman Sachs or Accounts may invest alongside us. In certain circumstances, negotiatedco-investments by us and other Accounts may be made only pursuant to an order from the SEC permitting us to do so. On January 4, 2017, the SEC granted GSAM, GS BDC, GS MMLC and the Company the Exemptive Relief, that permits us toco-invest with GS BDC, GS MMLC and certain other funds that may be managed by GSAM, including the GSAM Credit Alternatives Team, in the future, subject to certain conditions, such as that co-investments be made in a manner consistent with our investment objectives, positions, policies, strategies and restrictions, as well as regulatory requirements and pursuant to the conditions required by the Exemptive Relief. Under the terms of the exemptive relief, a “required majority” (as defined in Section 57(o) of the Investment Company Act) of our Independent Directors must make certain conclusions in connection with aco-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to us and our Unitholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our Unitholders and is consistent with our board of directors approved criteria. See “—Our ability to enter into transactions with our affiliates is restricted.”

As a result of such order, there could be significant overlap in our investment portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds managed by our Investment Adviser. If we are unable to rely on our exemptive relief for a particular opportunity when our Investment Adviser identifies certain investments, it will be required to determine which Accounts should make the investment at the potential exclusion of other Accounts. In such circumstances, our Investment Adviser will adhere to its investment allocation policy in order to determine the Account to which to allocate the opportunity. The policy provides that our Investment Adviser allocate opportunities through a rotation system or in such other manner as our Investment Adviser determines to be equitable. Accordingly, it is possible that we may not be given the opportunity to participate in investments made by other Accounts.

Goldman Sachs’ financial and other interests may incentivize Goldman Sachs to favor other Accounts.

Our Investment Adviser receives performance-based compensation in respect of its investment management activities on our behalf, which rewards our Investment Adviser for positive performance of our investment portfolio. As a result, our Investment Adviser may make investments for us that present a greater potential for return but also a greater risk of loss or that are more speculative than would be the case in the absence of performance-based compensation. In addition, our Investment Adviser may simultaneously manage other Accounts (including other business development companies (including GS BDC and GS MMLC)) for which our Investment Adviser may be entitled to receive greater fees or other compensation (as a percentage of performance or otherwise) than it receives in respect of us. In addition, subject to applicable law, Goldman Sachs may invest in other Accounts (including other business development companies (including GS BDC and GS MMLC)), and such investments may constitute substantial percentages of such other Accounts’ outstanding equity interests. Therefore, our Investment Adviser may have an incentive to favor such other Accounts over us. To address these types of conflicts, the Investment Adviser has adopted policies and procedures under which investment opportunities will be allocated in a manner that it believes is consistent with its obligations as an investment adviser. However, the amount, timing, structuring or terms of an investment by us may differ from, and performance may be different than, the investments and performance of other Accounts.

Our financial condition and results of operations depend on our Investment Adviser’s ability to manage our future growth effectively.

Our ability to achieve our investment objective depends on our Investment Adviser’s ability to identify, invest in and monitor companies that meet our investment criteria.

Accomplishing this result on a cost-effective basis is largely a function of the structuring of our investment process and the ability of our Investment Adviser to provide competent, attentive and efficient services to us. Our executive officers and the members of the Investment Committee have substantial responsibilities in connection with their roles at our Investment Adviser, with respect to GS BDC, GS MMLC and other clients of our Investment Adviser, as well as responsibilities under the Investment Advisory Agreement. We may also be called upon to provide significant managerial assistance to certain of our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, our Investment Adviser may need to hire, train, supervise, manage and retain new employees. However, we cannot assure investors that we will be able to do so effectively. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Our ability to grow depends on our access to adequate capital.

If we do not have adequate capital available for investment, our performance could be adversely affected. In addition, we have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016. To maintain our status as a RIC, among other requirements, we are required to timely distribute to Unitholders at least 90% of our investment company taxable income (determined without regard to the dividends paid deduction), which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, if any, for each taxable year. Consequently, such distributions will not be available to fund new Investments. During the Investment Period, we may issue Units to subscribers, but our ability to sell additional securities may be adversely affected by a number of factors including our performance prior to such date or general market conditions. While we are permitted to reinvest proceeds realized from the sale or repayment of Investments

 

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during the Investment Period, subject to the requirements of Section 852(a) of Subchapter M of the Code and the terms of any indebtedness or Preferred Units, after the expiration of the Investment Period, we will not be permitted to do so, subject to certain exceptions. Accordingly, after the Investment Period, we expect to use debt financing to fund our growth, if any. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.

Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. These constraints may hinder our Investment Adviser’s ability to take advantage of attractive investment opportunities and to achieve our investment objective.

Regulations governing our operation as a BDC affect our ability to raise additional capital, and the ways in which we can do so. Raising additional capital may expose us to risks, including the typical risks associated with leverage, and may result in dilution to our current Unitholders. The Investment Company Act limits our ability to borrow amounts or issue debt securities or Preferred Units, which we refer to collectively as “senior securities,” to amounts such that our asset coverage ratio, as defined under the Investment Company Act, equals at least 200% immediately after such borrowing or issuance (except in connection with certain trading practices or investments) or 150% if certain requirements are met, as described below. Consequently, if the value of our assets declines, we may be required to sell a portion of our Investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when this may be disadvantageous to us and, as a result, our Unitholders. The Small Business Credit Availability Act modified the applicable provisions of the Investment Company Act to reduce the required asset coverage ratio applicable to BDCs to 150%, subject to certain approval and disclosure requirements and, in the case of BDCs without common equity listed on a national securities exchange, such as the Company, an offer to repurchase shares held by the BDC’s stockholders as of the date the requisite approval is obtained. Under the legislation, BDCs are able to increase their leverage capacity if shareholders approve a proposal to do so. If a BDC receives shareholder approval, it would be allowed to increase its leverage capacity on the first day after such approval. Alternatively, the legislation allows the majority of the directors who are not “interested persons,” as defined in the Investment Company Act, of the BDC to approve an increase in its leverage capacity, and such approval would become effective after one year. As a result, BDCs may be able to incur additional leverage in the future, and the risks associated with an investment in BDCs may increase.

We borrow money, which may magnify the potential for gain or loss and may increase the risk of investing in us.

As part of our business strategy, we may borrow from and issue senior debt securities to banks, insurance companies and other lenders or investors. Holders of these senior securities or other credit facilities will have claims on our assets that are superior to the claims of Unitholders. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have if we did not employ leverage. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make distributions to Unitholders. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.

Also, if we have senior debt securities or other credit facilities, any obligations to such creditors may be secured by a pledge of and a security interest in some of all of our assets, including our portfolio of investments and cash. In the case of a liquidation event, those lenders would receive proceeds to the extent of their security interest before any distributions are made to our Unitholders. Furthermore, the revolving credit facility with JPMorgan Chase Bank, National Association (the “JPM Revolving Credit Facility”) and the revolving credit facility with Bank of America, N.A. (the “BoA Revolving Credit Facility” and together with the JPM Revolving Credit Facility, the “Revolving Credit Facilities”) impose, and any credit agreement or other debt financing agreement into which we may enter may impose, financial and operating covenants that restrict our investment activities (including restrictions on industry concentrations), remedies on default and similar matters. In connection with any future borrowings, our lenders may also require us to pledge assets.

In addition, we may be unable to obtain our desired leverage, which would, in turn, affect investors’ return on investment.

The following table illustrates the effect of leverage on returns from an investment in our Units assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical, and actual returns may be higher or lower than those appearing in the table below.

 

Assumed Return on Our Portfolio (Net of Expenses)

     (10.00)%   (5.00)%   0.00  5.00   10.00

Corresponding return to Unitholders (1)

     (21.56)%   (12.67)%   (3.77)%   5.12   14.02

 

(1)

Assumes (i) $1,436.51 million in total assets as of December 31, 2018, (ii) $574.46 million in outstanding indebtedness as of December 31, 2018, (iii) $807.46 million in net assets as of December 31, 2018 and (iv) an annualized average interest rate on our indebtedness as of December 31, 2018, excluding fees (such as fees on undrawn amounts and amortization of financing costs), of 5.30%.

Based on our outstanding indebtedness of $574.46 million as of December 31, 2018 and an annualized average interest rate on our indebtedness as of December 31, 2018, excluding fees (such as fees on undrawn amounts and amortization of financing costs), of 5.30%, our investment portfolio at fair value would have had to produce an annual return of approximately 2.18% to cover annual interest payments on the outstanding debt.

 

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We operate in a highly competitive market for investment opportunities.

A number of entities, including GS BDC and GS MMLC, compete with us to make the types of investments that we make in middle-market companies. We compete with other BDCs, commercial and investment banks, commercial financing companies, CLOs, private funds, including hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are more experienced, substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds, perpetual fund lives and access to funding sources that are not available to us. 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. Furthermore, certain of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC and that the Code imposes on us as a RIC. Additionally, an investment opportunity may be appropriate for one or more of us and GS BDC, GS MMLC or any other investment fund managed by our affiliates, andco-investment may not be possible. In these instances GSAM will adhere to its investment allocation policy in order to determine to which entity to allocate the opportunity. Also, as a result of this competition, we may not be able to secure attractive investment opportunities from time to time.

We do not seek to compete primarily based on the interest rates we offer, and GSAM believes that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our reputation in the market, our existing investment platform, the seasoned investment professionals of our Investment Adviser, our experience and focus on middle-market companies, our disciplined investment philosophy, our extensive industry focus and relationships and our flexible transaction structuring.

We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on less favorable terms than what we may have originally anticipated, which may impact our return on these investments. We cannot assure investors that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

Our Investment Adviser will be paid the Management Fee even if the value of the Unitholders’ investments declines and our Investment Adviser’s Incentive Fee may create incentives for it to make certain kinds of investments.

Our Investment Adviser is entitled to an Incentive Fee from us based on our investment performance. The Incentive Fee payable by us to our Investment Adviser may create an incentive for our Investment Adviser to make investments on behalf of us that are risky or more speculative than would be the case in the absence of such a compensation arrangement, and also to incur leverage, which will tend to enhance returns where our portfolio has positive returns. Additionally, the Management Fee is payable even in the event the value of Unitholders’ investments declines.

We incur significant costs as a result of being registered under the Exchange Act.

We incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight. See “Item 1. Business—Compliance with the Sarbanes-Oxley Act.” We have implemented 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 our business, financial condition, results of operations and cash flows. We have incurred, and expect to incur in the future, significant annual expenses related to these steps and directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, additional administrative expenses payable to the Administrator to compensate it for hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses associated with being a public company.

The systems and resources necessary to comply with public company reporting requirements will increase further once we cease to be an “emerging growth company” under the JOBS Act. As long as we remain an emerging growth company we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

Efforts to comply with Section 404 of the Sarbanes-Oxley Act will involve significant expenditures, and noncompliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us.

Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes Oxley Act. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. As a result, we incur additional expenses that may negatively impact our financial performance and our ability to make distributions. This process also may result in a diversion of

 

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management’s time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we may be adversely affected.

Potential conflicts of interest with other businesses of Goldman Sachs could impact our investment returns.

There are significant potential conflicts of interest that could negatively impact our investment returns. A number of these potential conflicts of interest with affiliates of our Investment Adviser and Group Inc. are discussed in more detail elsewhere in this report.

Group Inc., including its affiliates and personnel, is a BHC and a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization, and a major participant in global financial markets that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments andhigh-net-worth individuals. As such, it acts as an investor, investment banker, research provider, investment manager, financer, advisor, market maker, proprietary trader, prime broker, lender, agent and principal. In those and other capacities, Goldman Sachs purchases, sells and holds a broad array of investments, actively trades securities, derivatives, loans, commodities, currencies, credit default swaps, indices, baskets and other financial instruments and products for its own Accounts or for the Accounts of its customers, and has other direct and indirect interests, in the global fixed income, currency, commodity, equity, bank loan and other markets in which we invest or may invest. Such additional businesses and interests will likely give rise to potential conflicts of interest and may restrict the way we operate our business. For example, (1) we may not be able to conduct transactions relating to investments in portfolio companies because our Investment Adviser is not permitted to obtain or use material nonpublic information in effecting purchases and sales in public securities transactions for us, or (2) Goldman Sachs, the clients it advises, and its personnel may engage (or consider engaging) in commercial arrangements or transactions with us (subject to any limitations under the law), and/or may compete for commercial arrangements or transactions in the same types of companies, assets, securities or other assets or instruments as us. Transactions by, advice to and activities of such Accounts (including potentially Goldman Sachs acting on a proprietary basis), may involve the same or related companies, securities or other assets or instruments as those in which we invest and may negatively affect us (including our ability to engage in a transaction or other activities) or the prices or terms at which our transactions or other activities may be effected. For example, Goldman Sachs may be engaged to provide advice to an account that is considering entering into a transaction with us, and Goldman Sachs may advise the account not to pursue the transaction with us, or otherwise in connection with a potential transaction provide advice to the account that would be adverse to us. See “Our Investment Adviser, its principals, investment professionals and employees and the members of its Investment Committee have certain conflicts of interest” and “—Our ability to enter into transactions with our affiliates is restricted.” In addition, GS & Co. may, to the extent permitted by applicable law, including the limitations set forth in Section 57(k) of the Investment Company Act, receive compensation from us or from the borrowers if we make any investments based on opportunities that such employees or personnel of GS & Co. have referred to us. Such compensation might incentivize GS & Co. or its employees or personnel to refer opportunities or to recommend investments that might otherwise be unsuitable for us. Further, any such compensation paid by us, or paid by the borrower (to which we would otherwise have been entitled) in connection with such investments, may negatively impact our returns.

Furthermore, Goldman Sachs is currently, and in the future expects to be, raising capital for new public and private investment vehicles that have, or when formed will have, the primary purpose of middle-market direct lending. These investment vehicles, as well as existing investment vehicles (including GS BDC and GS MMLC), will compete with us for investments. Although our Investment Adviser and its affiliates will endeavor to allocate investment opportunities among their clients, including us, in a fair and equitable manner and consistent with applicable allocation procedures, it is expected that, in the future, we may not be given the opportunity to participate in investments made by other clients or entities managed by our Investment Adviser or its affiliates or that we may participate in such investments to a lesser extent due to participation by such other clients or entities.

In addition, subject to applicable law, Goldman Sachs or another investment account or vehicle managed or controlled by Goldman Sachs may hold securities, loans or other instruments of a portfolio company in a different class or a different part of the capital structure than securities, loans or other instruments of such portfolio company held by us. As a result, Goldman Sachs or another investment account or vehicle may pursue or enforce rights or activities, or refrain from pursuing or enforcing rights or activities, on behalf of its own account, that could have an adverse effect on us. In addition, to the extent Goldman Sachs has invested in a portfolio company for its own account, Goldman Sachs may limit the transactions engaged in by us with respect to such portfolio company or issuer for reputational, legal, regulatory or other reasons.

The Board of Directors may change our investment objective, operating policies and strategies without prior notice or Unitholder approval.

The Board of Directors has the authority to modify or waive certain of our operating policies and strategies without prior notice (except as required by the Investment Company Act or other applicable laws) and without Unitholder approval. However, absent Unitholder approval, we 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 the Units. Nevertheless, the effects may adversely affect our business and impact our ability to make distributions.

 

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Changes in laws or regulations governing our operations or the operations of our portfolio companies, changes in the interpretation thereof or newly enacted laws or regulations, or any failure by us or our portfolio companies to comply with these laws or regulations, could require changes to certain of our or our portfolio companies’ business practices, negatively impact our or our portfolio companies’ operations, cash flows or financial condition, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.

We and our portfolio companies are subject to regulation at the local, state, federal and, in some cases, foreign levels. These laws and regulations, as well as their interpretation, are likely to change from time to time, and new laws and regulations may be enacted. Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations, or any failure by us or our portfolio companies to comply with these laws or regulations, could require changes to certain of our or our portfolio companies’ business practices, negatively impact our or our portfolio companies’ operations, cash flows or financial condition, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies. In addition to the legal, tax and regulatory changes that are expected to occur, there may be unanticipated changes and uncertainty regarding any such changes. The legal, tax and regulatory environment for BDCs, investment advisers and the instruments that they utilize (including derivative instruments) is continuously evolving. In addition, there is significant uncertainty regarding certain legislation and the regulations that have been adopted and future regulations that will need to be adopted pursuant to such legislation) and, consequently, the full impact that such legislation will ultimately have on us and the markets in which we trade and invest is not fully known. Such uncertainty and any resulting confusion may itself be detrimental to the efficient functioning of the markets and the success of certain investment strategies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) impacts many aspects of the financial services industry. Many of the provisions of the Dodd-Frank Act have been implemented, while others will still require final rulemaking by regulatory authorities. While the full impact of the Dodd-Frank Act on us and our portfolio companies may not be known for an extended period of time, the Dodd-Frank Act, including current rules and regulations and proposed rules implementing its provisions and the interpretation of those rules, along with other legislative and regulatory proposals directed at the financial services industry that are proposed or pending in the U.S. Congress, may negatively impact the operations, cash flows or financial condition of us and our portfolio companies, impose additional costs on us and our portfolio companies, intensify the regulatory supervision of us and our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.

Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of thenon-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation ofnon-bank credit extension could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business.

On March 23, 2018, President Trump signed into law the Small Business Credit Availability Act, which modified the applicable provisions of the Investment Company Act to reduce the required asset coverage ratio applicable to BDCs from 200% to 150%, subject to certain approval and disclosure requirements (including either unitholder approval or approval of both a majority of the directors who have no financial interest in the matter and a majority of the directors who are not “interested persons,” as defined in the Investment Company Act, of the BDC). As a result, BDCs may be able to incur additional leverage in the future, and the risks associated with an investment in BDCs may increase. See “—Regulations governing our operations as a BDC affect our ability to, and the way in which we, raise additional capital. These constraints may hinder our Investment Adviser’s ability to take advantage of attractive investment opportunities and to achieve our investment objective.”

The Tax Cuts and Jobs Act could have a negative effect on us, our subsidiaries, our portfolio companies and the holders of our Securities.

On December 22, 2017, President Trump signed H.R. 1 (the “Tax Cuts and Jobs Act”) into law. The Tax Cuts and Jobs Act makes significant changes to the United States income tax rules applicable to both individuals and entities, including corporations. The Tax Cuts and Jobs Act includes provisions that, among other things, reduce the U.S. corporate tax rate, introduce a capital investment deduction, limit the interest deduction, limit the use of net operating losses to offset future taxable income and make extensive changes to the U.S. international tax system. The Tax Cuts and Jobs Act is complex andfar-reaching, and we cannot predict the impact its enactment will have on us, our subsidiaries, our portfolio companies and the holders of our securities.

Our Investment Adviser can resign on 60 days’ notice. We may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

Our Investment Adviser has the right, under the Investment Advisory Agreement, to resign at any time upon 60 days’ written notice, regardless of whether we have found a replacement. If our Investment Adviser resigns, we may not be able to find a new external investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, 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 Units may decline.

 

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Our Investment Adviser’s responsibilities and its liability to us are limited under the Investment Advisory Agreement, which may lead our Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account.

Our Investment Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by us in connection with the matters to which the Investment Advisory Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on our Investment Adviser’s part in the performance of its duties or from reckless disregard by our Investment Adviser of its obligations and duties under the Investment Advisory Agreement. Any person, even though also employed by our Investment Adviser, who may be or become an employee of and paid by us shall be deemed, when acting within the scope of his or her employment by us, to be acting in such employment solely for us and not as our Investment Adviser’s employee or agent. These protections may lead our Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account. See “—Our Investment Adviser will be paid the Management Fee even if the value of Unitholders’ investments declines and our Investment Adviser’s Incentive Fee may create incentives for it to make certain kinds of investments.”

Our ability to enter into transactions with our affiliates is restricted.

As a BDC, we are prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates without the prior approval of a majority of the Independent Directors who have no financial interest in the transaction, or in some cases, the prior approval of the SEC. For example, any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is deemed to be an affiliate for purposes of the Investment Company Act and, if this is the only reason such person is an affiliate, we are generally prohibited from buying any asset from or selling any asset (other than Units) to such affiliate, absent the prior approval of such directors. The Investment Company Act also prohibits “joint transactions” with an affiliate, which could include joint investments in the same portfolio company, without approval of the Independent Directors or in some cases the prior approval of the SEC. Moreover, except in certain limited circumstances, we are prohibited from buying any asset from or selling any asset to a holder of more than 25% of our voting securities, absent prior approval of the SEC. The analysis of whether a particular transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing. In certain circumstances, negotiatedco-investments may be made only pursuant to an order from the SEC permitting us to do so. On January 4, 2017, we received an exemptive order from the SEC that permits us to participate in negotiatedco-investment transactions with certain affiliates (including GS BDC and GS MMLC), each of whose investment adviser is GSAM, in a manner consistent with our investment objectives, positions, policies, strategies and restrictions, as well as regulatory requirements and pursuant to the conditions required by the exemptive relief. As a result of such order, there could be significant overlap in our investment portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds managed by our Investment Adviser. Additionally, if our Investment Adviser forms other funds in the future, we mayco-invest on a concurrent basis with such other affiliates, subject to compliance with the exemptive relief, applicable regulations and regulatory guidance, as well as applicable allocation procedures. Additionally, except in certain circumstances, we will be unable to invest in any issuer in which another client sponsored or managed by our Investment Adviser has previously invested, including GS BDC and GS MMLC. In particular, we may be unable to make afollow-on investment in a portfolio company if the existing investment was not made pursuant to the SEC exemptive order we received on January 4, 2017.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including interest rates payable on debt investments we make, default rates on such investments, 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 certain markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods or the full fiscal year.

We are exposed to risks associated with changes in interest rates.

Our debt investments may be based on floating rates, such as LIBOR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate. General interest rate fluctuations may have a substantial negative impact on our Investments, the value of the Units and our rate of return on invested capital. Currently, most of our floating rate investments are linked to LIBOR and it is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held by or issued to us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

Because we borrow money, our net investment income depends, in part, upon the difference between the rate at which we borrow funds or pay distributions on preferred stock and the rate that our investments yield. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

 

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A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on our net interest income. However, an increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates, including subordinated loans, senior and junior secured and unsecured debt securities and loans and high yield bonds, and also could increase our interest expense, thereby decreasing our net income. Also, an increase in interest rates available to investors could make an investment in Units less attractive if we are not able to increase our dividend rate, which could reduce the value of the Units. Further, rising interest rates could also adversely affect our performance if such increases cause our borrowing costs to rise at a rate in excess of the rate that our investments yield.

Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum interest rates (such as a LIBOR floor), while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest income from Investments is not increasing in a corresponding manner as a result of such minimum interest rates.

In periods of rising interest rates, to the extent we borrow money subject to a floating interest rate, our cost of funds would increase, which could reduce our net investment income. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum interest rates (such as a LIBOR floor), while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner as a result of such minimum interest rates.

If general interest rates rise, there is a risk that the portfolio companies in which we hold floating rate securities will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. In addition, rising interest rates may increase pressure on us to provide fixed rate loans to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by increased interest income from such fixed-rate investments

A change in the general level of interest rates can be expected to lead to a change in the interest rate we receive on many of our debt investments. Accordingly, a change in the interest rate could make it easier for us to meet or exceed the performance threshold in our Investment Advisory Agreement and may result in a substantial increase in the amount of Incentive Fees payable to our Investment Adviser.

The continued uncertainty related to the sustainability and pace of economic recovery in the U.S. and globally could have a negative impact on our business.

Our business is directly influenced by the economic cycle, and could be negatively impacted by a downturn in economic activity in the U.S. as well as globally. Fiscal and monetary actions taken by U.S. andnon-U.S. government and regulatory authorities could have a material adverse impact on our business. To the extent uncertainty regarding the U.S. or global economy negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be adversely affected. Moreover, Federal Reserve policy, including with respect to certain interest rates and the decision to end its quantitative easing policy, along with the general policies of the current Presidential administration, may also adversely affect the value, volatility and liquidity of dividend- and interest-paying securities. Market volatility, rising interest rates and/or a return to unfavorable economic conditions could adversely affect our business.

Our activities may be limited as a result of potentially being deemed to be controlled by a bank holding company.

Goldman Sachs is a BHC under the BHCA and is therefore subject to supervision and regulation by the Federal Reserve. In addition, Goldman Sachs is a FHC under the BHCA, which is a status available to BHCs that meet certain criteria. FHCs may engage in a broader range of activities than BHCs that are not FHCs. However, the activities of FHCs and their affiliates remain subject to certain restrictions imposed by the BHCA and related regulations. Because Goldman Sachs may be deemed to “control” us within the meaning of the BHCA, these restrictions could apply to us as well. Accordingly, the BHCA and other applicable banking laws, rules, regulations and guidelines, and their interpretation and administration by the appropriate regulatory agencies, including the Federal Reserve, may restrict our investments, transactions and operations and may restrict the transactions and relationships between our Investment Adviser, Goldman Sachs and their affiliates, on the one hand, and us on the other hand. For example, the BHCA regulations applicable to Goldman Sachs and us may, among other things, restrict our ability to make certain investments or the size of certain investments, impose a maximum holding period on some or all of our investments and restrict our and our Investment Adviser’s ability to participate in the management and operations of the companies in which we invest. In addition, certain BHCA regulations may require aggregation of the positions owned, held or controlled by related entities. Thus, in certain circumstances, positions held by Goldman Sachs and its affiliates (including our Investment Adviser) for client and proprietary Accounts may need to be aggregated with positions held by us. In this case, where BHCA regulations impose a cap on the amount of a position that may be held, Goldman Sachs may utilize available capacity to make investments for its proprietary Accounts or for the Accounts of other clients, which may require us to limit and/or liquidate certain investments.

These restrictions may materially adversely affect us by, among other things, affecting our Investment Adviser’s ability to pursue certain strategies within our investment program or trade in certain securities. In addition, Goldman Sachs may cease in the future to qualify as an FHC, which may subject us to additional restrictions. Moreover, there can be no assurance that the bank regulatory requirements applicable to Goldman Sachs and us, or the interpretation thereof, will not change, or that any such change will not have a material adverse effect on us.

 

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Goldman Sachs may in the future, in its sole discretion and without notice to investors, engage in activities impacting us and/or our Investment Adviser in order to comply with the BHCA or other legal requirements applicable to, or reduce or eliminate the impact or applicability of any bank regulatory or other restrictions on, Goldman Sachs, us or other funds and Accounts managed by our Investment Adviser and its affiliates. Goldman Sachs may seek to accomplish this result by causing GSAM to resign as our Investment Adviser, voting for changes to the Board of Directors, causing Goldman Sachs personnel to resign from the Board of Directors, reducing the amount of Goldman Sachs’ investment in us (if any), revoking our right to use the Goldman Sachs name or any combination of the foregoing, or by such other means as it determines in its sole discretion. Any replacement investment adviser appointed by us may be unaffiliated with Goldman Sachs.

Recent Commodity Futures Trading Commission rulemaking may have a negative impact on us and our Investment Adviser.

The Commodity Futures Trading Commission (the “CFTC”) and the SEC have issued final rules establishing that certain swap transactions are subject to CFTC regulation. Engaging in such swap or other commodity interest transactions such as futures contracts or options on futures contracts may cause us to fall within the definition of “commodity pool” under the Commodity Exchange Act and related CFTC regulations. Our Investment Adviser has claimedno-action relief from CFTC registration and regulation as a commodity pool operator pursuant to a CFTC staffno-action letter with respect to our operations, with the result that we will be limited in our ability to use futures contracts or options on futures contracts or engage in swap transactions. Specifically, the CFTC staff no action letter (the “BDC CFTCNo-Action Letter”) imposes strict limitations on using such derivatives other than for hedging purposes, whereby the use of derivatives not used solely for hedging purposes is generally limited to situations where (i) the aggregate initial margin and premiums required to establish such positions does not exceed five percent of the liquidation value of our portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; or (ii) the aggregate net notional value of such derivatives does not exceed 100% of the liquidation value of our portfolio. Moreover, we anticipate entering into transactions involving such derivatives to a very limited extent solely for hedging purposes or otherwise within the limitations of the BDC CFTCNo-Action Letter.

We are dependent on information systems, and systems failures, as well as operating failures, could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.

Our business is dependent on our Investment Adviser’s and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of the Investment Advisory Agreement or an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

  

sudden electrical or telecommunications outages;

 

  

natural disasters such as earthquakes, tornadoes and hurricanes;

 

  

disease pandemics;

 

  

events arising from local or larger scale political or social matters, including terrorist acts; and

 

  

cyber-attacks.

In addition to our dependence on information systems, poor operating performance by our service providers could adversely impact us.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the value of Units and our ability to pay distributions to Unitholders.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve a third party or our own personnel gaining unauthorized access to our information systems for purposes of obtaining ransom payments, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for loss or misappropriation of data, stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our reputation or business relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by Goldman Sachs and third-party service providers. Goldman Sachs and these third-party service providers have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that a cyber incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident.

 

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Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.

In 2015, the SEC proposed a new rule under the Investment Company Act that would govern the use of derivatives (defined to include any swap, security-based swap, futures contract, forward contract, option or any similar instrument) as well as financial commitment transactions (defined to include reverse repurchase agreements, short sale borrowings and any firm or standby commitment agreement or similar agreement) by BDCs. Under the proposed rule, a BDC would be required to comply with one of two alternative portfolio limitations and manage the risks associated with derivatives transactions and financial commitment transactions by segregating certain assets. Furthermore, a BDC that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program. If the SEC adopts this rule in the form proposed, our ability to enter into transactions involving such instruments may be hindered, which could have an adverse effect on our business, financial condition and results of operations.

The United Kingdom referendum decision to leave the European Union may create significant risks and uncertainty for global markets and our investments.

The decision made in the United Kingdom referendum in June 2016 to leave the European Union (commonly known as “Brexit”) has led to volatility in global financial markets, and in particular in the markets of the United Kingdom and across Europe, and may also lead to weakening in political, regulatory, consumer, corporate and financial confidence in the United Kingdom and Europe. The United Kingdom and European Union announced in March 2018 an agreement in principle to transitional provisions under which European Union law would remain in force in the United Kingdom until the end of December 2020, but this remains subject to the successful conclusion of an agreement between the United Kingdom and the European Union. In the absence of such an agreement there would be no transitional provisions and the United Kingdom would exit the European Union at the end of the two year period on March 29, 2019, and the relationship between the United Kingdom and the European Union would be based on the World Trade Organization rules. The process for the United Kingdom to exit the European Union, and the longer term economic, legal, political, regulatory and social framework to be put in place between the United Kingdom and the European Union remain unclear and may lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. The mid-to-long term uncertainty may have a negative effect on the performance of any investments located or with operations in the United Kingdom or Europe. Additionally, the decision made in the United Kingdom referendum may lead to a call for similar referenda in other European jurisdictions which may cause increased economic volatility and uncertainty in the European and global markets. This volatility and uncertainty may have an adverse effect on the economy generally and on the ability of us and our portfolio companies to execute our respective strategies and to receive attractive returns.

In particular, currency volatility may mean that the returns of us and our portfolio companies are adversely affected by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency hedging. Fluctuations in the value of the British Pound and/or the euro, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of our portfolio companies located in the United Kingdom or Europe.

Certain investors are limited in their ability to make significant investments in us.

Private funds that are excluded from the definition of “investment company” either pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act are restricted from acquiring directly or through a controlled entity more than 3% of our total outstanding voting equity (measured at the time of the acquisition). Investment companies registered under the Investment Company Act are also subject to this restriction as well as other limitations under the Investment Company Act that would restrict the amount that they are able to invest in our securities. As a result, certain investors may be precluded from acquiring additional Units, at a time that they might desire to do so.

Investors may fail to pay their undrawn Commitment.

The obligation of Unitholders to fund undrawn Commitments is without defense, counterclaim or offset of any kind. However, if a Unitholder fails to pay any amount of its Commitment when called, other Unitholders who have an undrawn Commitment may be required to fund their respective Commitments sooner and in a greater amount (but not more than their undrawn Commitment) than they otherwise would have absent such a default.

In addition, if funding of Commitments by other Unitholders and borrowings by us are inadequate to cover defaulted Commitments, we may make fewer Investments and be less diversified than if all Unitholders had paid their contributions. Additionally, we may be forced to obtain substitute sources of liquidity by selling Investments (to the extent permitted by the LLC Agreement) to meet our funding obligations. Such forced sales of investment assets by us may be at disadvantageous prices. In addition, if we are not able to obtain substitute sources of liquidity, we may default on our funding obligations.

 

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Risks Relating to Our Portfolio Company Investments

Our investments are very risky and highly speculative.

We invest primarily through direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as select equity investments. The securities in which we invest typically are not rated by any rating agency, and if they were rated, they would be below investment grade (rated lower than “Baa3” by Moody’s Investors Service and lower than“BBB-” by Fitch Ratings or S&P). These securities, which may be referred to as “junk bonds,” “high yield bonds” or “leveraged loans,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Therefore, our investments may result in an above average amount of risk and volatility or loss of principal. We also may invest in other assets, including U.S. government securities and structured securities. These investments entail additional risks that could adversely affect our investment returns.

Secured Debt. When we make a secured debt investment, we generally take a security interest in the available assets of the portfolio company, including the equity interests of any subsidiaries, which we expect to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our debt investment 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 lien could be subordinated to claims of other creditors, such as trade 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 debt investment. Consequently, the fact that our debt is secured does not guarantee that we will receive principal and interest payments according to the debt investment’s terms, or at all, or that we will be able to collect on the loan, in full or at all, should we enforce our remedies.

Unsecured Debt, including Mezzanine Debt. Our unsecured debt investments, including mezzanine debt investments, generally will be subordinated to senior debt in the event of an insolvency. This may result in an above average amount of risk and loss of principal.

Equity Investments. When we invest in secured debt or unsecured debt, including mezzanine debt, we may acquire equity securities from the company in which we make the investment. In addition, we may invest in the equity securities of portfolio companies independent of any debt investment. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we hold 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.

Investing in middle-market companies involves a number of significant risks.

Investing in 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 our 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 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 from time to time be parties to litigation, 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;

 

  

there is generally little public information about these companies, they and their financial information are not subject to the reporting requirements of the Exchange Act and other regulations that govern public companies and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed investment decision and cause us to lose money on our investments;

 

  

our executive officers, directors and Investment Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; 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, including any debt securities held by us, upon maturity.

 

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Many of our portfolio securities do not have a readily available market price and we value these securities at fair value as determined in good faith under procedures adopted by our Board of Directors, which valuation is inherently subjective and may not reflect what we may actually realize for the sale of the investment.

The majority of our investments are expected to be in debt instruments that do not have readily ascertainable market prices. The fair value of assets that are not publicly traded or whose market prices are not readily available are determined in good faith under procedures adopted by our Board of Directors. Our Board of Directors utilizes the services of independent third-party valuation firms (“Independent Valuation Advisors”) in determining the fair value of a portion of the securities in our portfolio as of each quarter end. Investment professionals from our Investment Adviser also prepare portfolio company valuations using sources and/or proprietary models depending on the availability of information on our assets and the type of asset being valued, all in accordance with our valuation policy.

Because fair valuations, and particularly fair valuations 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, it may be more difficult for investors to value accurately our investments and could lead to undervaluation or overvaluation of the Units. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility.

Our NAV as of a particular date may be materially greater than or less than the value that would be realized if our 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 our NAV.

When our NAV is determined other than on aquarter-end (such as in connection with issuances of shares of our common Units on dates occurringmid-quarter), such determinations of NAV are generally made by our Investment Adviser, acting under delegated authority from, and subject to the supervision of our Board of Directors. While such NAV determinations are made in accordance with procedures adopted by our Board of Directors, such intra-quarter NAV determinations do not follow the same procedures asquarter-end NAV determinations, such as the input of our Audit Committee or Independent Valuation Advisors, which may heighten the risks described above. However, we intend to comply at all times with the limitations of Section 23 under the Investment Company Act (which generally prohibits us from issuing Units at a price below the then-current NAV of the Units as determined within 48 hours, excluding Sundays and holidays, of such issuance, subject to certain exceptions).

The lack of liquidity in our investments may adversely affect our business.

Various restrictions render our investments relatively illiquid, which may adversely affect our business. As we generally make investments in private companies, substantially all of these Investments are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. Our Investment Adviser is not permitted to obtain or use materialnon-public information in effecting purchases and sales in public securities transactions for us, which could create an additional limitation on the liquidity of our investments. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. Therefore, if we are required to or desire to liquidate all or a portion of our portfolio quickly, we could realize significantly less than the value at which we have recorded our investments, or could be unable to dispose of our investments in a timely manner or at such times as we deem advisable.

Our portfolio may be focused in a limited number of portfolio companies, which will subject us to a risk of significant loss if any of these companies default on their obligations under any of their debt instruments or if there is a downturn in a particular industry.

We are classified as anon-diversified investment company within the meaning of the Investment Company Act, which means that we are not limited by the Investment Company Act with respect to the proportion of our assets that we may invest in securities of a single issuer, excluding limitations on investments in certain other financial and investment companies. To the extent that 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 diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. 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. Further, any industry in which we are meaningfully concentrated at any given time could be subject to significant risks that could adversely impact our aggregate returns. For example, as of December 31, 2018, Software, together with Internet Software & Services, represented 19.8% of our portfolio at fair value. Our investments in Software and Internet Software & Services are subject to substantial risks, including, but not limited to, intense competition, changing technology, shifting user needs, frequent introductions of new products and services, competitors in different industries and ranging from large established companies to emerging startups, decreasing average selling prices of products and services resulting from rapid technological changes, and various legal and regulatory risks.

 

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We may not be in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

We do not generally hold controlling equity positions in our portfolio companies. While we are obligated as a BDC to offer to make managerial assistance available to our portfolio companies, there can be no assurance that management personnel of our portfolio companies will accept or rely on such assistance. To the extent that we do not hold a controlling equity interest in a portfolio company, we are subject to the risk that such portfolio company may make business decisions with which we disagree, and the stockholders and management of such 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 and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

In addition, we may not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors.

We may be subject to risks associated with investments in real estate loans.

Our Investment Adviser, on our behalf, may periodically invest in loans related to real estate and real estate-related assets, and such investments will be subject to the risks inherent to investment in real estate-related assets generally. These risks include, but are not limited to, regional, national and international economic conditions, the supply and demand for properties, the financial resources of tenants, buyers and sellers of properties, changes in building, environmental, zoning and other laws and regulations, changes in real property tax rates, changes in interest rates and the availability of financing, which may render the sale or refinancing of properties difficult or impracticable, environmental liabilities, uninsured losses, acts of God, natural disasters, terrorist attacks, acts of war (declared and undeclared), strikes and other factors which are beyond the control of our Investment Adviser and us.

We may be subject to risks associated with investments in energy companies.

The energy industry has been in a period of disruption and volatility that has been characterized by fluctuations in oil and gas prices and production levels. This disruption and volatility has led to, and future disruptions and volatility may lead to, decreases in the credit quality and performance of our potential debt and equity investments in energy companies, which could, in turn, negatively impact the fair value of our investments in energy companies. Any prolonged decline in oil and gas prices or production levels could adversely impact the ability of our potential portfolio companies in the energy industry to satisfy financial or operating covenants that may be imposed by us and other lenders or to make payments to us as and when due, which could have a material adverse effect on our business, financial condition and results of operations. In addition, energy companies are subject to supply and demand fluctuations in the markets in which they operate, which are impacted by numerous factors, including weather, use of renewable fuel sources, natural disasters, governmental regulation and general economic conditions, in addition to the effects of increasing regulation and general operational risks, any of which could have a material adverse effect on the performance and value of our energy-related investments as well as our cash flows from such investments.

Our failure to makefollow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as“follow-on” investments, in order to:

 

  

increase or maintain in whole or in part our equity ownership percentage;

 

  

exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or

 

  

attempt to preserve or enhance the value of our investment.

We may elect not to make follow on investments or may lack sufficient funds to make those investments.

We will have the discretion to make anyfollow-on investments, subject to the availability of capital resources and the limitations set forth in “Item 1 Business.”The failure to makefollow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and the initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desiredfollow-on investment, we may elect not to make afollow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements, compliance with covenants contained in our Revolving Credit Facilities or compliance with the requirements for maintenance of our RIC status.

 

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The portfolio companies may prepay loans, which may reduce stated yields in the future if the capital returned cannot be invested in transactions with equal or greater expected yields.

Certain of the loans we make are prepayable at any time, with some prepayable at no premium to par. We cannot predict when such loans may be prepaid. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that permit such portfolio company to replace existing financing with less expensive capital. In periods of rising interest rates, the risk of prepayment of floating rate loans may increase if other financing sources are available. As market conditions change frequently, it is unknown when, and if, this may be possible for each portfolio company. In the case of some of these loans, having the loan prepaid early may reduce the achievable yield for us in the future below the current yield disclosed for our portfolio if the capital returned cannot be invested in transactions with equal or greater expected yields.

Investments in common and preferred equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk.

Although common stock has historically generated higher average total returns than fixed income securities over the long term, common stock also has experienced significantly more volatility in those returns. Our equity investments may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:

 

  

any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness (including trade creditors) or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process;

 

  

to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment; and

 

  

in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of the portfolio company.

Even if the portfolio company is successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can otherwise sell our investment. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell them.

There are special risks associated with investing in preferred securities, including:

 

  

preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes before we receive such distributions;

 

  

preferred securities are subordinated to debt in terms of priority to income and liquidation payments, and therefore will be subject to greater credit risk than debt;

 

  

preferred securities may be substantially less liquid than many other securities, such as common stock or U.S. government securities; and

 

  

generally, preferred security holders have no voting rights with respect to the issuing company, subject to limited exceptions.

Additionally, when we invest in debt securities, we may acquire warrants or other equity securities as well. 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 may invest, to the extent permitted by law, in the equity securities of investment funds that are operating pursuant to certain exceptions to the Investment Company Act and, to the extent we so invest, will bear our ratable share of any such company’s expenses, including management and performance fees. We will also remain obligated to pay the Management Fee and Incentive Fee to our Investment Adviser with respect to the assets invested in the securities and instruments of such companies. With respect to each of these investments, the Unitholders will bear their pro rata share of the Management Fee and Incentive Fee due to our Investment Adviser as well as indirectly bearing the management and performance fees and other expenses of any such investment funds or advisers.

By originating loans to companies that are experiencing significant financial or business difficulties, we may be exposed to distressed lending risks.

 

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As part of our lending activities, we may originate loans to companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although the terms of such financing may result in significant financial returns to us, they involve 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 we will correctly evaluate the value of the assets collateralizing our loans or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a company that we fund, we may lose all or part of the amounts advanced to the borrower or may be required to accept collateral with a value less than the amount of the loan advanced by us to the borrower.

We may be exposed to special risks associated with bankruptcy cases.

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 our interests. Furthermore, there are instances where creditors can lose their ranking and priority if they are considered to have taken over management of a borrower.

The reorganization of a company can involve substantial legal, professional and administrative costs to a lender and the borrower; it is subject to unpredictable and lengthy delays; and during the process a company’s competitive position may erode, key management may depart and a company may not be able to invest its capital 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 will, in most cases, not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value.

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, we could become subject to a lender’s liability claim, if, among other things, the borrower requests significant managerial assistance from us and we provide such assistance as contemplated by the Investment Company Act.

Declines in market prices and liquidity in the corporate debt markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our NAV.

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 under procedures adopted by our Board of Directors. We may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time), the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow (taking into consideration current market interest rates and credit spreads), the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to similar publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our NAV by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer unrealized losses, which could have a material adverse impact on our business, financial condition and results of operations.

Economic recessions or downturns could impair our portfolio companies and harm our operating results.

Our portfolio companies may be susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. Therefore, during these periods ournon-performing assets may increase and the value of our portfolio may decrease if we are required to write down the values of our investments. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. 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. These events could prevent us from increasing investments and harm our operating results.

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 the portfolio company’s assets representing collateral for its obligations. This could trigger cross defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

 

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Our portfolio companies may have incurred or issued, or may in the future incur or issue, debt or equity securities that rank equally with, or senior to, our investments in such companies, which could have an adverse effect on us in any liquidation of the portfolio company.

Our portfolio companies may have, or may be permitted to incur, other debt, or issue other equity securities that rank equally with or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments 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. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company typically are entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our Investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

Additionally, certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt, which will be secured on a first priority basis. 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 portfolio company under the agreements governing the loans. 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 us. 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 loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.

The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights as junior lenders are adversely affected. In addition, a bankruptcy court may choose not to enforce an intercreditor agreement or other arrangement with creditors. Similar risks to the foregoing may apply where we hold the last out piece of a unitranche loan.

We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such portfolio 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 loan 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 us. 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 our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then the unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.

Our portfolio companies may be highly leveraged.

Many of our portfolio companies may be highly leveraged, which may have adverse consequences to these portfolio companies and to us as an investor. These portfolio companies may be subject to restrictive financial and operating covenants and the leverage may impair these portfolio companies’ ability to finance their future operations and capital needs. As a result, these portfolio companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

Our investments innon-U.S. companies may involve significant risks in addition to the risks inherent in U.S. Investments.

Our investment strategy contemplates potential investments in securities ofnon-U.S. companies to the extent permissible under the Investment Company Act. Investing innon-U.S. companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition ofnon-U.S. taxes (potentially at confiscatory levels), less liquid markets, less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. These risks are likely to be more pronounced for investments in companies located in emerging markets and particularly for middle market companies in these economies.

 

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Although most of our investments are denominated in U.S. dollars, any investments that are denominated in anon-U.S. currency will be subject to the risk that the value of a particular currency will change in relation to the U.S. dollar. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure investors that such strategies will be effective or without risk to us.

We may expose ourselves to risks if we engage in hedging transactions.

Subject to applicable provisions of the Investment Company Act and applicable CFTC regulations, we may enter into hedging transactions in a manner consistent with SEC guidance, which may expose us to risks associated with such transactions. Such hedging may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may include counter-party credit risk.

Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

The success of any hedging transactions we may enter into will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. 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. Moreover, for a variety of reasons, we may not seek to (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated innon-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. See also “—Risks Relating to Our Business and Structure—We are exposed to risks associated with changes in interest rates.”

We may form one or more CLOs, which may subject us to certain structured financing risks.

To the extent permissible under risk retention rules adopted pursuant to Section 941 of the Dodd-Frank Act and applicable provisions of the Investment Company Act, to finance investments, we may securitize certain of our investments, including through the formation of one or more CLOs, while retaining all or most of the exposure to the performance of these investments. This would involve contributing a pool of assets to a special purpose entity, and selling debt interests in such entity on anon-recourse or limited-recourse basis to purchasers. Any interest in any such CLO held by us may be considered a“non-qualifying asset” for purposes of the Investment Company Act.

If we create a CLO, we will depend on distributions from the CLO’s assets out of its earnings and cash flows to enable us to make distributions to Unitholders. The ability of a CLO to make distributions will be subject to various limitations, including the terms and covenants of the debt it issues. For example, tests (based on interest coverage or other financial ratios or other criteria) may restrict our ability, as holder of a CLO’s equity interests, to receive cash flow from these investments. There is no assurance any such performance tests will be satisfied. Also, a CLO 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. As a result, there may be a lag, which could be significant, between the repayment or other realization on a loan or other assets in, and the distribution of cash out of, a CLO, or cash flow may be completely restricted for the life of the CLO. If we do not receive cash flow from any such CLO that is necessary to satisfy the annual distribution requirement for maintaining our RIC status, and we are unable to obtain cash from other sources necessary to satisfy this requirement, we could fail to maintain our status as a RIC, which would have a material adverse effect on our financial performance.

In addition, a decline in the credit quality of loans in a CLO due to poor operating results of the relevant borrower, declines in the value of loan collateral or increases in defaults, among other things, may force a CLO to sell certain assets at a loss, reducing their earnings and, in turn, cash potentially available for distribution to us for distribution to Unitholders.

To the extent that any losses are incurred by the CLO in respect of any collateral, such losses will be borne first by us as owner of equity interests. Finally, any equity interests that we retain in a CLO will not be secured by the assets of the CLO, and we will rank behind all creditors of the CLO.

 

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We will have broad discretion over the use of proceeds of the funds we raise from investors and will use proceeds in part to satisfy operating expenses.

There can be no assurance that we will be able to locate a sufficient number of suitable investment opportunities to allow us to successfully deploy capital that we raise from investors in a timeframe that will permit investors to earn above-market returns. To the extent we are unable to invest substantially all of the capital we raise within our contemplated timeframe, our investment income, and in turn our results of operations, will likely be materially adversely affected. See “—Risks Relating to Our Business and Structure—We are a new company and have limited operating history.”

We intend to use substantially all of the proceeds from the offering of Units, net of expenses, to make investments in accordance with our investment objectives and strategies. We anticipate that the remainder will be used for working capital and general corporate purposes, including the payment of operating expenses. However, subject to the restrictions of applicable law and regulations, including the Investment Company Act, we have significant flexibility in applying the proceeds of the funds we raise from investors and may use the net proceeds in ways with which Unitholders may not agree, or for purposes other than those contemplated at the time of the capital raising. We may also pay operating expenses, and may pay other expenses such as due diligence expenses of potential new Investments, from net proceeds. Our ability to achieve our investment objective may be limited to the extent that net proceeds of the funds we raise from investors, pending full investment by us in portfolio companies, are used to pay operating expenses.

We may invest a significant portion of our assets in high-quality short- term investments, which will generate lower rates of return than those expected from the interest generated on our intended investment program.

From time to time, a significant portion of our assets may be invested in a money market fund managed by an affiliate of Group Inc. This investment may earn yields substantially lower than the income that we expect to receive from investments made in accordance with our investment objective. As a result, we may not be able to achieve our investment objective and/or pay any dividends while a significant portion of our assets are invested in the money market fund or, if we are able to do so, such dividends may be substantially lower than the dividends that we expect to pay when our portfolio is fully invested in accordance with our investment objectives. If we do not realize yields in excess of our expenses, we may incur operating losses.

Risks Relating to the Units

Investing in Units involves an above average degree of risk.

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. The investments in portfolio companies may be highly speculative and aggressive, and therefore an investment in Units may not be suitable for someone with lower risk tolerance.

A Unitholder’s interest in us will be diluted if we issue additional Units, which could reduce the overall value of an investment in us.

Unitholders do not have preemptive rights to any Units we issue in the future. We may decide in accordance with the process described below, to issue additional equity interests at or below the NAV per Unit. To the extent we issue additional equity interests, a Unitholder’s percentage ownership interest in us may be diluted. In addition, if such Units are issued below NAV, existing Unitholders may also experience dilution in the book value and fair value of their Units.

We are generally not able to issue and sell Units at a price per Unit below the then-current NAV per Unit. We may, however, sell Units, warrants, options or rights to acquire Units, at a price below the then-current NAV per Unit (i) with the consent of a majority in interest of our Unitholders (and a majority in interest of our Unitholders who are not affiliates of us) and (ii) if, among other things, a majority of our Independent Directors and a majority of our directors who have no financial interest in the transaction determine that such sale is in the best interests of us and our Unitholders.

We may in the future determine to issue Preferred Units, which could adversely affect the value of the Units.

The issuance of Preferred Units with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of Preferred Units could make an investment in the Units less attractive. In addition, the dividends on any Preferred Units we issue must be cumulative. Payment of dividends and repayment of the liquidation preference of Preferred Units must take preference over any distributions or other payments to Unitholders, and holders of Preferred Units are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference (other than convertible Preferred Units that converts into Units). In addition, under the Investment Company Act, Preferred Units would constitute a “senior security” for purposes of our 200% asset coverage test.

 

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We may not be able to pay investors distributions on Units, our distributions to investors may not grow over time and a portion of our distributions to investors may be a return of capital for U.S. federal income tax purposes.

Subject to the requirements of Section 852(a) of Subchapter M of the Code, and the terms of any indebtedness or Preferred Units, we intend to (i) distribute to Unitholders, pro rata based on the number of Units held by each Unitholder, before the end of each taxable year net proceeds attributable to the repayment or disposition of Investments (together with any interest, dividends and other net cash flow in respect of such Investments), except to the extent such proceeds from repayment or disposition are permitted to be, and are, retained for reinvestment prior to the termination of the Investment Period, (ii) distribute quarterly investment income (i.e., proceeds received in respect of interest payments, dividends or fees as opposed to proceeds received in connection with the disposition or repayment of an investment), and (iii) distribute substantially all of our investment company taxable income and net capital gain for each taxable year in order to qualify for treatment as a RIC under Subchapter M of the Code for any such taxable year. All distributions will be paid at the discretion of our Board of Directors and will depend on such factors as the Board determines to be relevant from time to time, including our earnings, financial condition and compliance with any debt covenants we may be subject to. Accordingly, we may not pay distributions to Unitholders.

The distributions we pay to Unitholders in a year may exceed our taxable income for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes that would reduce a holder’s adjusted tax basis in its Units and correspondingly increase such holder’s gain, or reduce such holder’s loss, on disposition of such Units. Distributions in excess of a holder’s adjusted tax basis in its Units will constitute capital gains to such holder. Unitholders who periodically receive the payment of a distribution from a RIC consisting of a return of capital for U.S. federal income tax purposes may be under the impression that they are receiving a distribution of RIC’s net ordinary income or capital gains when they are not. Accordingly, Unitholders should read carefully any written disclosure accompanying a distribution from us and the information about the specific tax characteristics of our distributions provided to Unitholders after the end of each calendar year, and should not assume that the source of any distribution is our net ordinary income or capital gains.

The tax treatment of anon-U.S. Unitholder in its jurisdiction of tax residence will depend entirely on the laws of such jurisdiction, and may vary considerably from jurisdiction to jurisdiction.

Depending on (i) the laws of suchnon-U.S. Unitholder’s jurisdiction of tax residence, (ii) how we are treated in such jurisdiction, and (iii) our activities, an investment in us could result in suchnon-U.S. Unitholder recognizing adverse tax consequences in its jurisdiction of tax residence, including with respect to any generally required or additional tax filings and/or additional disclosure required in such filings in relation to the treatment for tax purposes in the relevant jurisdiction of an interest in us and/or of distributions from us and any uncertainties arising in that respect (our not being established under the laws of the relevant jurisdiction), the possibility of taxable income significantly in excess of cash distributed to anon-U.S. Unitholder, and possibly in excess of our actual economic income, the possibilities of losing deductions or the ability to utilize tax basis and of sums invested being returned in the form of taxable income or gains, and the possibility of being subject to tax at unfavorable tax rates. Anon-U.S. Unitholder may also be subject to restrictions on the use of its share of our deductions and losses in its jurisdiction of tax residence. Each prospective investor is urged to consult its own tax advisors with respect to the tax and tax filing consequences, if any, in its jurisdiction of tax residence of an investment in us, as well as any other jurisdiction in which such prospective investor is subject to taxation.

We may have difficulty paying our required distributions if we recognize taxable income before or without receiving cash representing such income.

For U.S. federal income tax purposes, we will include in our taxable income certain amounts that we have not yet received in cash, such as original issue discount (“OID”) or accruals on a contingent payment debt instrument, which may occur if we receive warrants in connection with the origination of a loan or possibly in other circumstances or contracted payment-in-kind (“PIK”) interest, which generally represents contractual interest added to the loan balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment assets, and increases in loan balances as a result of PIK interest will be included in our taxable income before we receive any corresponding cash payments. We also may be required to include in our taxable income certain other amounts that we will not receive in cash. The credit risk associated with the collectability of deferred payments may be increased as and when a portfolio company increases the amount of interest on which it is deferring cash payment through deferred interest features. Our investments with a deferred interest feature may represent a higher credit risk than loans for which interest must be paid in full in cash on a regular basis. For example, even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is scheduled to occur upon maturity of the obligation.

Because in certain cases we may recognize taxable income before or without receiving cash representing such income, we may have difficulty making distributions to Unitholders that will be sufficient to enable us to meet the annual distribution requirement necessary for us to maintain our status as a RIC. Accordingly, we may need to sell some of our assets at times and/or at prices that we would not consider advantageous, we may need to raise additional equity or debt capital, or we may need to forego new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that are advantageous to our business) to enable us to make distributions to Unitholders that will be sufficient to enable us to meet the annual distribution requirement. If we are unable to obtain cash from other sources to meet the annual distribution requirement, we may fail to qualify for the U.S. federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level U.S. federal income tax (and any applicable U.S. state and local taxes).

 

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Unitholders may receive Units as distributions, which could result in adverse tax consequences to them.

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a distribution in Units instead of in cash. The Company is not subject to restrictions on the circumstances in which it may declare a portion of a distribution in Units but would generally anticipate doing so only in unusual situations, such as, for example, if we do not have sufficient cash to meet its RIC distribution requirements under the Code. Generally, were we to declare such a distribution, we would allow Unitholders to elect payment in cash and/or Units of equivalent value, with a percentage limitation on the portion of the total distribution available to be received in cash. Under published IRS guidance, the entire distribution will generally be treated as a taxable distribution for U.S. federal income tax purposes, and count towards our RIC distribution requirements under the Code, if certain conditions are satisfied. Among other things, the aggregate amount of cash available to be distributed to all Unitholders is required to be at least 20% of the aggregate declared distribution. If too many Unitholders elect to receive cash, the cash available for distribution is required to be allocated among the Unitholders electing to receive cash (with the balance of the distribution paid in Units) under a formula provided in the applicable IRS guidance. The number of Units declared would thus depend on the applicable percentage limitation on cash available for distribution, the Unitholders’ individual elections to receive cash or stock, and the value of the Units. Each Unitholder generally would be treated as having received a taxable distribution (including for purposes of the withholding tax rules applicable to anon-U.S. Unitholder) on the date the distribution is received in an amount equal to the cash that such Unitholder would have received if the entire distribution had been paid in cash, even if the Unitholder received all or most of the distribution in Units. We currently do not intend to pay distributions in Units, but there can be no assurance we will not do so in the future.

If we are not treated as a “publicly offered regulated investment company,” as defined in the Code, U.S. Unitholders that are individuals, trusts or estates will be taxed as though they received a distribution of some of our expenses.

We expect to be treated as a “publicly offered regulated investment company” as a result of Units being held by at least 500 persons at all times during a taxable year. However, we cannot assure investors that we will be treated as a publicly offered regulated investment company for all years. If we are not treated as a publicly offered regulated investment company for any calendar year, each U.S. Unitholder that is an individual, trust or estate will be treated as having received a dividend from us in the amount of such U.S. Unitholder’s allocable share of the Management Fees and Incentive Fees paid to our Investment Adviser and certain of our other expenses for the calendar year, and these fees and expenses will be treated as miscellaneous itemized deductions of such U.S. Unitholder. Miscellaneous itemized deductions of a U.S. Unitholder that is an individual, trust or estate are disallowed under the Tax Cuts and Jobs Act for tax years beginning before January 1, 2026, and thereafter generally are (i) deductible by such Unitholders only to the extent that the aggregate of such U.S. Unitholder’s miscellaneous itemized deductions exceeds 2% of such U.S. Unitholder’s adjusted gross income for U.S. federal income tax purposes, (ii) are not deductible for purposes of the alternative minimum tax and (iii) are subject to the overall limitation on itemized deductions under the Code. In addition, if we are not treated as a publicly offered regulated investment company, we will be subject to limitations on the deductibility of certain “preferential dividends” that are distributed to Unitholders on anon-pro-rata basis.

Non-U.S. Unitholders may be subject to withholding of U.S. federal income tax on dividends paid by us.

Distributions of our “investment company taxable income” to anon-U.S. Unitholder that are not effectively connected with thenon-U.S. Unitholder’s conduct of a trade or business within the United States will be subject to withholding of U.S. federal income tax at a 30% rate (or lower rate provided by an applicable income tax treaty) to the extent of our current or accumulated earnings and profits.

Certain properly reported dividends are generally exempt from withholding of U.S. federal income tax where they are paid in respect of our (i) “qualified net interest income” (generally, our U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we or thenon-U.S. Unitholder are at least a 10% equity holder, reduced by expenses that are allocable to such income) or (ii) “qualified short-term capital gains” (generally, the excess of our net short-term capital gain over our net long-term capital loss for such taxable year), and certain other requirements are satisfied.

NO ASSURANCE CAN BE GIVEN AS TO WHETHER ANY OF OUR DISTRIBUTIONS WILL BE ELIGIBLE FOR THIS EXEMPTION FROM WITHHOLDING OF U.S. FEDERAL INCOME TAX. IN PARTICULAR, THIS EXEMPTION WILL NOT APPLY TO OUR DISTRIBUTIONS PAID IN RESPECT OF OURNON-U.S. SOURCE INTEREST INCOME OR OUR DIVIDEND INCOME (OR ANY OTHER TYPE OF INCOME OTHER THAN GENERALLY OURNON-CONTINGENT U.S.-SOURCE INTEREST INCOME RECEIVED FROM UNRELATED OBLIGORS AND OUR QUALIFIED SHORT-TERM CAPITAL GAINS). IN THE CASE OF UNITS HELD THROUGH AN INTERMEDIARY, THE INTERMEDIARY MAY WITHHOLD U.S. FEDERAL INCOME TAX EVEN IF WE REPORT THE PAYMENT AS QUALIFIED NET INTEREST INCOME OR QUALIFIED SHORT-TERM CAPITAL GAIN. BECAUSE THE UNITS WILL BE SUBJECT TO SIGNIFICANT TRANSFER RESTRICTIONS, AND AN INVESTMENT IN UNITS WILL GENERALLY BE ILLIQUID,NON-U.S. UNITHOLDERS WHOSE DISTRIBUTIONS ON UNITS ARE SUBJECT TO WITHHOLDING OF U.S. FEDERAL INCOME TAX MAY NOT BE ABLE TO TRANSFER THEIR UNITS EASILY OR QUICKLY OR AT ALL.

 

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To the extent OID and PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income.

Our investments may include OID instruments and PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:

 

 

The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.

 

 

Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation.

 

 

OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions.

For accounting purposes, any cash distributions to shareholders representing OID and PIK income are not treated as coming frompaid-in capital, even if the cash to pay them comes from offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the Investment Company Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.

The Units are limited in their transferability; we may repurchase or force a sale of a Unitholder’s Units.

Unitholders are not permitted to transfer their Units, including a transfer of solely an economic interest, without the prior written consent of us. While we expect not to unreasonably withhold our prior written consent to transfers by Unitholders, adverse tax consequences for certain of our U.S. holders may arise if we have fewer than 500 beneficial owners of our capital stock. Accordingly, we expect to withhold our consent if any such transfer would or may result in us having fewer than 550 beneficial owners of our capital stock. Additionally, we expect to withhold our consent if any such transfer would (i) be prohibited by or trigger a prepayment under our debt or other credit facilities, (ii) result in a violation of applicable securities law, (iii) result in us no longer being eligible to be treated as a RIC, (iv) result in us being subject to additional regulatory or compliance requirements imposed by laws other than the Exchange Act or the Investment Company Act, or (v) result in our assets becoming “plan assets” of any ERISA Member within the meaning of the Plan Assets Regulation (the regulation concerning the definition of “plan assets” under ERISA adopted by the United State Department of Labor and codified in 29 C.F.R.§2510.3-101, as modified by Section 3(42) of ERISA). Finally, Units may be transferred only in transactions that are exempt from registration under the Securities Act and the applicable securities laws of other jurisdictions, and therefore investors will be subject to restrictions on resale and transfer associated with securities sold pursuant to Regulation D, Regulation S and other exemptions from registration under the Securities Act.

Any transfer of Units in violation of these provisions will be void, and any intended recipient of the Units will acquire no rights in such Units and will not be treated as a Unitholder for any purpose. Prospective investors in us should not invest in us unless they are prepared to retain their Units until we liquidate.

Under the terms of the LLC Agreement, in the event any person is or becomes the owner of Units, and such ownership would result in a violation of any of the above provisions, we may, and each Unitholder has agreed and acknowledged that we have the power to, cause us to repurchase the Units of such person, or require such person to transfer their Units to another person; provided, any such repurchase will be conducted in accordance with the terms of the LLC Agreement and Section 23 of the Investment Company Act and applicable rules thereunder.

 

49


ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.    PROPERTIES.

We maintain our principal executive office at 200 West Street, New York, New York 10282. We do not own any real estate.

ITEM 3.    LEGAL PROCEEDINGS.

From time to time, we may be a party to certain legal proceedings, including proceedings relating to the enforcement of our rights under loans to or other contracts with our portfolio companies. We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

 

50


PART II.

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is currently no public market for the Units, and we do not expect one to develop in the future.

Unitholders

Prior to the Initial Drawdown Date, the Initial Member, an affiliate of our Investment Adviser, was the sole owner of our membership interests, which were acquired for an initial capital contribution of $100. We cancelled the Initial Member’s interest in us on the Initial Drawdown Date. Concurrent with the cancellation, investors (other than the Initial Member) made their initial capital contribution to purchase Units.

As of February 28, 2019, there were approximately 1,000 holders of record of our Units.

Sales of Unregistered Securities

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2018:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

February 21, 2018

   335,966   $32.92 

March 28, 2018

   222,135    21.95 

April 27, 2018

   339,498    32.92 

June 28, 2018

   558,772    54.87 

August 27, 2018

   903,600    87.80 

September 27, 2018

   336,610    32.92 

November 13, 2018

   795,162    76.82 
  

 

 

   

 

 

 

Total capital drawdowns

   3,491,743   $340.20 
  

 

 

   

 

 

 

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2017:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

April 27, 2017

   203,758   $20.01 

April 28, 2017

   535    0.05 

May 26, 2017

   444,153    43.90 

June 29, 2017

   441,837    43.90 

August 21, 2017

   557,806    54.87 

September 28, 2017

   332,027    32.92 

October 30, 2017

   900,334    87.79 
  

 

 

   

 

 

 

Total capital drawdowns

   2,880,450   $283.44 
  

 

 

   

 

 

 

The following table summarizes the total Units issued and aggregate purchase price related to capital drawdowns during period from June 9, 2016 (inception) to December 31, 2016:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

July 14, 2016

   310,360   $31.04 

July 15, 2016

   4,000    0.40 

August 23, 2016

   160,219    15.72 

September 15, 2016

   1,206,924    117.88 

November 28, 2016

   461,475    45.36 
  

 

 

   

 

 

 

Total capital drawdowns

   2,142,978   $210.40 
  

 

 

   

 

 

 

 

51


Each of the above issuances and sales of the Units was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Regulation D or Regulation S under the Securities Act. Each purchaser of Units was required to represent that it is (i) either an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act or, in the case of Units sold outside the United States, not a “U.S. person” in accordance with Regulation S of the Securities Act and (ii) was acquiring the Units purchased by it for investment and not with a view to resale or distribution. We do not engage in general solicitation or advertising and do not offer securities to the public, in connection with such issuances and sales.

Because the Units were acquired by investors in one or more transactions “not involving a public offering,” they are “restricted securities” and may be required to be held indefinitely. Our Units may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) our consent is granted and (ii) the Units are registered under applicable securities laws or specifically exempted from registration (in which case the Unitholder 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 the Units until we are liquidated. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of Units may be made except by registration of the transfer on our books. Each transferee will be required to execute our LLC Agreement pursuant to which they will agree to be bound by these restrictions and the other restrictions imposed on the Units.

Distributions

Subject to the requirements of Section 852(a) of Subchapter M of the Code, and the terms of any indebtedness or Preferred Units, we intend to (i) distribute to Unitholders, pro rata based on the number of Units held by each Unitholder, before the end of each taxable year, or in certain cases, during the following taxable year, net proceeds attributable to the repayment or disposition of investments (together with any interest, dividends and other net cash flow in respect of such investments), except to the extent such proceeds from repayment or disposition are retained for reinvestment prior to the termination of the Investment Period in accordance with “—Recycling” below, (ii) distribute quarterly investment income (i.e. proceeds received in respect of interest payments, dividends or fees as opposed to proceeds received in connection with the disposition or repayment of an Investment) commencing with the quarter ended December 31, 2016, and (iii) distribute substantially all of its investment company taxable income and net capital gain for each taxable year in order to maintain our status as a RIC under Subchapter M of the Code for any such taxable year.

Depending upon the level of taxable income and net capital gain earned in a year, we may choose to retain certain net capital gain for reinvestment and carry forward taxable income for distribution in the following year and pay any applicable tax. Distributions to Unitholders will be appropriately adjusted for any taxes payable by us or any direct or indirect subsidiary through which we invest (including any corporate, state, local,non-U.S. and withholding taxes).

No distribution shall be made to a Unitholder to the extent not permitted under applicable law. Although we do not intend to do so, we have the ability to declare a portion of a dividend in Units.

The following tables summarize the distributions declared on our Units during the years ended December 31, 2018 and 2017:

 

   

Year Ended December 31, 2018

 

Date Declared

  

Record Date

  

Payment Date

  Distributions per
Share
 

February 21, 2018

  March 30, 2018  April 25, 2018  $2.93 

May 1, 2018

  June 29, 2018  July 25, 2018   2.92 

August 1, 2018

  September 28, 2018  October 25, 2018   2.78 

October 30, 2018

  December 31, 2018  January 25, 2018   2.99 
      

 

 

 

Total Distributions Declared

      $    11.62 
      

 

 

 
   

Year Ended December 31, 2017

 

Date Declared

  

Record Date

  

Payment Date

  Distributions per
Share
 

February 22, 2017

  March 31, 2017  April 17, 2017  $2.02 

May 1, 2017

  June 30, 2017  July 26, 2017   2.40 

August 1, 2017

  September 29, 2017  October 24, 2017   2.42 

October 31, 2017

  December 29, 2017  January 23, 2018   2.83 
      

 

 

 

Total Distributions Declared

      $    9.67 
      

 

 

 

The distributions declared during the years ended December 31, 2018 and 2017 and for the period from June 9, 2016 (inception) to December 31, 2016 were derived from net investment income determined on a tax basis.

 

52


Recycling

Subject to the requirements of Section 852(a) of Subchapter M of the Code and the terms of any indebtedness or Preferred Units, proceeds realized by us from the sale or repayment of any investment (as opposed to investment income) during the Investment Period (but not in excess of the cost of any such investment) may be retained and reinvested by us; provided that such additional amounts reinvested shall not, in the aggregate, exceed our total Unitholder Commitments. Any amounts so reinvested will not reduce a Unitholder’s undrawn Commitment.

To the extent that we retain net capital gains for reinvestment or carry forward taxable income for distribution in the following year, there may be certain tax consequences to us and our Unitholders.

ITEM 6.    SELECTED FINANCIAL DATA

The table below sets forth our selected consolidated historical financial data for the periods indicated. The selected consolidated financial data as of and for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report on Form10-K.

The selected consolidated financial information and other data presented below should be read in conjunction with the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements and the notes thereto included elsewhere in this annual report on Form10-K.

 

   For the
Year
Ended
December 31,
2018
  For the
Year
Ended
December 31,
2017
   For the period
from June 9,
2016

(inception) to
December 31,
2016
 

Consolidated statement of operations data (in thousands):

 

   

Total investment income

  $123,766  $53,542   $5,793 

Net expenses

   53,567   24,032    4,003 
  

 

 

  

 

 

   

 

 

 

Net investment income (loss)

  $70,199  $29,510   $1,790 
  

 

 

  

 

 

   

 

 

 

Net realized and unrealized gain (loss)

   (7,128  1,356    254 

Income tax provision, realized and unrealized gain

   (1,081       
  

 

 

  

 

 

   

 

 

 

Net increase in Members’ Capital resulting from operations

  $    61,990  $    30,866   $    2,044 
  

 

 

  

 

 

   

 

 

 

Per unit data

     

Net investment income (loss) (basic and diluted)

  $10.78  $9.16   $1.67 

Earnings (basic and diluted)

  $9.52  $9.58   $1.91 

Distributions declared

  $11.62  $9.67   $1.40 
   As of
December 31,
2018
  As of
December 31,
2017
   As of
December 31,
2016
 

Consolidated statement of financial condition (in thousands)

 

   

Total assets

  $1,436,509  $895,349   $344,465 

Total investments, at fair value

   1,399,361   876,923    337,747 

Total liabilities

   629,048   407,843    135,024 

Total debt

   574,462   383,500    130,000 

Total Members’ Capital

   807,461   487,506    209,441 

Per unit data

     

Net asset value

  $94.83  $97.05   $97.73 

 

53


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. The discussion and analysis contained in this section refers to our financial condition, results of operations and cash flows. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Please see “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with this discussion and analysis. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this report.

OVERVIEW

We are a specialty finance company focused on lending to middle-market companies. We are aclosed-end management investment company that has elected to be regulated as a BDC under the Investment Company Act. In addition, we have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016. From our commencement of investment operations on July 1, 2016 through December 31, 2018, we have originated $1.80 billion in aggregate principal amount of debt and equity investments prior to any subsequent exits and repayments. We seek to generate current income and, to a lesser extent, capital appreciation primarily through direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments.

“Unitranche” loans are first lien loans that may extend deeper in a company’s capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority between different lenders in the unitranche loan. In a number of instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the “last out” portion that we would continue to hold. In exchange for the greater risk of loss, the “last out” portion generally earns a higher interest rate than our “first out” portion. We use the term “mezzanine” to refer to debt that ranks senior only to a borrower’s equity securities and ranks junior in right of payment to all of such borrower’s other indebtedness. We may make multiple investments in the same portfolio company.

We expect to invest, under normal circumstances, at least 80% of our net assets (plus any borrowings for investment purposes), directly or indirectly in private middle-market credit obligations and related instruments. We define “credit obligations and related instruments” for this purpose as any fixed-income instrument, including loans to, and bonds and preferred stock of, portfolio companies and other instruments that provide exposure to such fixed-income instruments. “Middle market” is used to refer to companies with between $5 million and $125 million of annual EBITDA excludingcertain one-time and non-recurring items that are outside the operations of these companies. While, as a result of fluctuations in the NAV of one asset relative to another asset, private middle-market credit obligations and related instruments may represent less than 80% of our net assets (plus any borrowings for investment purposes) at any time, we may not invest, under normal circumstances, more than 20% of our net assets (plus any borrowings for investment purposes) in securities and other instruments that are not private middle-market credit obligations and related instruments. To the extent we determine to invest indirectly in private middle-market credit obligations and related instruments, we may invest through certain synthetic instruments, including derivatives that have similar economic characteristics to private middle-market credit obligations. For purposes of determining compliance with our 80% policy, each applicable derivative instrument will be valued based upon its market value. We will notify our Unitholders at least 60 days prior to any change to the 80% investment policy described above.

We expect to directly or indirectly invest at least 70% of our total assets in middle-market companies domiciled in the United States. However, we may from time to time invest opportunistically in large U.S. companies,non-U.S. companies, stressed or distressed debt, structured products, private equity or other opportunities, subject to limits imposed by the Investment Company Act.

While our investment program is expected to focus primarily on debt investments, our investments may include equity features, such as a direct investment in the equity or convertible securities of a portfolio company or warrants or options to buy a minority interest in a portfolio company. Any warrants we may receive with debt securities will generally require only a nominal cost to exercise, so as a portfolio company appreciates in value, we may achieve additional investment return from these equity investments. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the portfolio company, upon the occurrence of specified events. In many cases, we may also obtain registration rights in connection with these equity investments, which may include demand and “piggyback” registration rights.

For a discussion of the competitive landscape we face, please see “Item 1A. Risk Factors—We operate in a highly competitive market for investment opportunities” and “Item 1. Business—Competitive Advantages.”

 

54


KEY COMPONENTS OF OPERATIONS

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the amount of capital we have available to us and the competitive environment for the type of investments we make.

As a BDC, we may not acquire any assets other than “qualifying assets” specified in the Investment Company 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 investments in “eligible portfolio companies.” Pursuant to rules adopted by the SEC, “eligible portfolio companies” include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenues

We generate revenue in the form of interest income on debt investments and, to a lesser extent, capital gains and distributions, if any, on equity securities that we may acquire in portfolio companies. Some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt investments and any accrued but unpaid interest generally becomes due at the maturity date.

We generate revenues primarily through receipt of interest income from the investments we hold. In addition, we may generate revenue in the form of commitment, origination, structuring, syndication, exit fees or diligence fees, fees for providing managerial assistance and consulting fees. Portfolio company fees (directors’ fees, consulting fees, administrative fees, tax advisory fees and other similar compensation) will be paid to us, unless, to the extent required by applicable law or exemptive relief, if any, therefrom, we receive our allocable portion of such fees when invested in the same portfolio company as other Accounts, which other Accounts could receive their allocable portion of such fee. We do not expect to receive material fee income as it is not our principal investment strategy. We record contractual prepayment premiums on loans and debt securities as interest income.

Dividend income on preferred equity investments is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity investments is recorded on the record date for private portfolio companies and on theex-dividend date for publicly traded portfolio companies. Interest and dividend income are presented net of withholding tax, if any.

Expenses

Our primary operating expenses include the payment of the Management Fee and the Incentive Fee to the Investment Adviser, legal and professional fees, interest and other debt expenses and other operating and overhead related expenses. The Management Fee and Incentive Fee compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. Pursuant to the Investment Advisory Agreement, Company expenses borne by us in the ordinary course on an annual basis (excluding Management Fees, Incentive Fees, organizational andstart-up expenses and leverage-related expenses) will not exceed an amount equal to 0.5% of the aggregate amount of commitments to us by holders of our Units; provided, however, that expenses incurred outside of the ordinary course, including litigation and similar expenses, are not subject to such cap. We bear all other costs and expenses of our operations and transactions in accordance with our Investment Advisory Agreement and Administration Agreement, including those relating to:

 

  

our operational and organizational expenses;

 

  

fees and expenses, including travel expenses, incurred by our Investment Adviser or payable to third parties related to our investments, including, among others, professional fees (including the fees and expenses of consultants and experts) and fees and expenses from evaluating, monitoring, researching and performing due diligence on investments and prospective investments;

 

  

interest, fees and other expenses payable on indebtedness for borrowed money (including through the issuance of notes and other evidence of indebtedness), other indebtedness, financings or extensions of credit, if any, incurred by us;

 

  

fees and expenses incurred by us in connection with membership in investment company organizations;

 

  

brokers’ commissions;

 

  

fees and expenses associated with calculating our NAV (including the costs and expenses of any independent valuation firm);

 

  

legal, auditing or accounting expenses;

 

  

taxes or governmental fees;

 

  

the fees and expenses of our administrator, transfer agent, orsub-transfer agent;

 

  

the cost of preparing unit certificates or any other expenses, including clerical expenses of issue or repurchase of our Units;

 

55


  

the expenses of and fees for registering or qualifying our Units for sale and of maintaining our registration or qualifying and registering us as a broker or a dealer;

 

  

the fees and expenses of our directors who are not affiliated with our Investment Adviser;

 

  

the cost of preparing and distributing reports, proxy statements and notices to our Unitholders, the SEC and other regulatory authorities;

 

  

costs of holding unitholder meetings;

 

  

the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by limited liability company agreement or other organizational documents insofar as they govern agreements with any such custodian;

 

  

insurance premiums; and

 

  

costs incurred in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with our business and the amount of any judgment or settlement paid in connection therewith, or the enforcement of our rights against any person and indemnification or contribution expenses payable by us to any person and other extraordinary expenses not incurred in the ordinary course of our business.

Our Investment Adviser will not be required to pay expenses of activities which are primarily intended to result in sales of Units.

We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. Costs relating to future offerings of securities would be incremental.

Leverage

The Revolving Credit Facilities allow us to borrow money and lever our investment portfolio, subject to the limitations of the Investment Company Act, with the objective of increasing our yield. This is known as “leverage” and could increase or decrease returns to our Unitholders. The use of leverage involves significant risks. As a BDC, with certain limited exceptions, we are only permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, equals at least 200% after such borrowing (or 150% if certain requirements are met). As of December 31, 2018 and December 31, 2017, our asset coverage ratio based on the aggregate amount outstanding of our senior securities (which includes the Revolving Credit Facilities) was 239% and 227%, respectively. The Small Business Credit Availability Act modified the applicable provisions of the Investment Company Act to reduce the required asset coverage ratio applicable to BDCs to 150%, subject to certain approval and disclosure requirements and, in the case of BDCs without common equity listed on a national securities exchange, such as the Company, an offer to repurchase shares held by the BDC’s stockholders as of the date the requisite approval is obtained. As a result, BDCs are able to increase their leverage capacity if shareholders approve a proposal to do so. If a BDC receives shareholder approval, it would be allowed to increase its leverage capacity on the first day after such approval. Alternatively, the legislation allows the majority of the directors who are not “interested persons,” as defined in the Investment Company Act, of the BDC to approve an increase in its leverage capacity, and such approval would become effective after one year. Certain trading practices and investments, such as reverse repurchase agreements, may be considered borrowings or involve leverage and thus may be subject to Investment Company Act restrictions. In accordance with applicable SEC staff guidance and interpretations, when we engage in such transactions, instead of maintaining an asset coverage ratio of at least 200% (or 150% if the above referenced requirements are met), we may segregate or earmark liquid assets, or enter into an offsetting position, in an amount at least equal to our exposure, on amark-to-market basis, to such transactions (as calculated pursuant to requirements of the SEC). Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. Practices and investments that may involve leverage but are not considered borrowings are not subject to the Investment Company Act’s asset coverage requirement, and we will not otherwise segregate or earmark liquid assets or enter into offsetting positions for such transactions. The amount of leverage that we employ will depend on our Investment Adviser’s and our Board of Directors’ assessment of market conditions and other factors at the time of any proposed borrowing.

 

56


PORTFOLIO AND INVESTMENT ACTIVITY

As of December 31, 2018 and December 31, 2017, our portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc. of $0.00 million and $1.31 million, respectively) consisted of the following:

 

   As of 
   December 31, 2018  December 31, 2017 
   Amortized
Cost
   Fair
Value
   Percentage
of Total
Portfolio at
Fair Value
  Amortized
Cost
   Fair
Value
   Percentage
of Total
Portfolio at
Fair Value
 
   ($ in millions)      ($ in millions)     

First Lien/Senior Secured Debt

  $743.10   $741.44    53.0 $ 285.51   $ 285.25    32.6

FirstLien/Last-Out Unitranche

   165.26    163.25    11.7   112.51    112.96    13.0 

Second Lien/Senior Secured Debt

   473.20    466.79    33.3   465.33    466.97    53.3 

Unsecured Debt

   4.31    4.30    0.3   3.79    3.78    0.4 

Preferred Stock

   10.20    12.16    0.9   2.50    2.98    0.3 

Common Stock

   11.86    11.29    0.8   4.25    3.57    0.4 

Warrants

   0.10    0.13    0.0   0.10    0.10    0.0 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Total Investments

  $1,408.03   $1,399.36    100.0 $873.99   $875.61    100.0
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

As of December 31, 2018 and December 31, 2017, the weighted average yield on our portfolio by asset type (excluding our investment in a money market fund managed by an affiliate of Group Inc.), at amortized cost and fair value, was as follows:

 

   As of 
   December 31, 2018  December 31, 2017 
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
 

Weighted Average Yield(1)

     

First Lien/Senior Secured Debt(2)

   10.0  10.0  10.0  10.1

FirstLien/Last-Out Unitranche(2)(3)

   11.3  11.8  10.5  10.4

Second Lien/Senior Secured Debt(2)

   11.2  11.6  10.3  10.2

Unsecured Debt(2)

   13.6  13.8  13.7  13.8

Preferred Stock(4)

   0.0  0.0  0.0  0.0

Common Stock(4)

   0.0  0.0  0.0  0.0

Warrants(4)

   0.0  0.0  0.0  0.0

Total Portfolio

   10.4  10.6  10.2  10.1

 

 (1)  

The weighted average yield of our portfolio does not represent the total return to our Unitholders.

 (2)  

Computed based on (a) the annual actual interest rate or yield earned plus amortization of fees and discounts on the performing debt and other income producing investments as of the reporting date, divided by (b) the total investments (including investments onnon-accrual andnon-income producing investments) at amortized cost or fair value, respectively.

 (3)  

The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments.

 (4)  

Computed based on (a) the stated coupon rate, if any, for each income-producing investment, divided by (b) the total investments (including investments onnon-accrual andnon-income producing investments) at amortized cost or fair value, respectively.

As of December 31, 2018, the total portfolio weighted average yield at amortized cost and fair value was 10.4% and 10.6%, respectively, which increased from 10.2% and 10.1%, respectively, as of December 31, 2017. Within First Lien/Last-Out Unitranche and Second Lien/Senior Secured Debt, the increase in weighted average yield at amortized cost and fair value was primarily driven by the increase in LIBOR on our variable rate debt investments and repayments of lower yielding investments.

The following table presents certain selected information regarding our investment portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.) as of December 31, 2018 and December 31, 2017:

 

   As of 
   December 31,
2018
  December 31, 2017 

Number of portfolio companies

   59   38 

Percentage of performing debt bearing a floating rate(1)

   98.7  98.0

Percentage of performing debt bearing a fixed rate(1)(2)

   1.3  2.0

Weighted average leverage (net debt/EBITDA)(3)

   5.7x   5.4x 

Weighted average interest coverage(3)

   2.0x   2.5x 

Median EBITDA(3)(4)

  $    40.3 million  $41.8 million 

 

 (1)  

Measured on a fair value basis. Excludes investments, if any, placed onnon-accrual.

 (2)  

Includes income producing preferred stock investments, if applicable.

 (3)  

For a particular portfolio company, we calculate the level of contractual indebtedness net of cash (“net debt”) owed by the portfolio company and compare that amount to measures of cash flow available to service the net debt. To calculate net debt, we include debt that is both senior and pari passu to the tranche

 

57


 

of debt owned by us but exclude debt that is legally and contractually subordinated in ranking to the debt owned by us. We believe this calculation method assists in describing the risk of our portfolio investments, as it takes into consideration contractual rights of repayment of the tranche of debt owned by us relative to other senior and junior creditors of a portfolio company. We typically calculate cash flow available for debt service at a portfolio company by taking EBITDA for the trailing twelve month period. Weighted average net debt to EBITDA is weighted based on the fair value of our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

 

      

For a particular portfolio company, we also calculate the level of contractual interest expense owed by the portfolio company, and compare that amount to EBITDA (“interest coverage ratio”). We believe this calculation method assists in describing the risk of our portfolio investments, as it takes into consideration contractual interest obligations of the portfolio company. Weighted average interest coverage is weighted based on the fair value of our performing debt investments, excluding investments where interest coverage may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

 

      

Median EBITDA is based on our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as cash collateralized loans and investments that are underwritten and covenanted based on recurring revenue.

 

      

Portfolio company statistics are derived from the most recently available financial statements of each portfolio company as of the reported end date. Statistics of the portfolio companies have not been independently verified by us and may reflect a normalized or adjusted amount.

 

      

As of December 31, 2018 and December 31, 2017, investments where net debt to EBITDA may not be the appropriate measure of credit risk represented 28.9% and 22.2%, respectively, of total debt investments at fair value. Portfolio company statistics are derived from the most recently available financial statements of each portfolio company as of the respective reported end date. Portfolio company statistics have not been independently verified by us and may reflect a normalized or adjusted amount.

Floating rates are primarily LIBOR plus a spread.

Our Investment Adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if it is meeting its respective business plan and to assess the appropriate course of action for each company. Our Investment Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

 

  

assessment of success in adhering to the portfolio company’s business plan and compliance with covenants;

 

  

periodic or regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and accomplishments;

 

  

comparisons to our other portfolio companies in the industry, if any;

 

  

attendance at and participation in board meetings or presentations by portfolio companies; and

 

  

review of monthly and quarterly financial statements and financial projections of portfolio companies.

As part of the monitoring process, our Investment Adviser also employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Investment Adviser grades the credit risk of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account in certain circumstances the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The grading system is as follows:

 

  

investments with a grade of 1 involve the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit;

 

  

investments with a grade of 2 involve a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing as expected and the risk factors to our ability to ultimately recoup the cost of our investment are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a grade of 2;

 

  

investments with a grade of 3 indicate that the risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of factors such as declining performance andnon-compliance with debt covenants; however, payments are generally not more than 120 days past due; and

 

  

investments with a grade of 4 indicate that the risk to our ability to recoup the initial cost basis of such investment has substantially increased since origination or acquisition, and the portfolio company likely has materially declining performance. For debt investments with an investment grade of 4, in most cases, most or all of the debt covenants are out of compliance and payments are substantially delinquent. For investments graded 4, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit.

 

58


Our Investment Adviser grades the investments in our portfolio at least each quarter and it is possible that the grade of a portfolio investment may be reduced or increased over time. For investments with a grade of 3 or 4, the Investment Adviser enhances its level of scrutiny over the monitoring of such portfolio company. The following table shows the composition of our portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.) on the 1 to 4 grading scale as of December 31, 2018 and December 31, 2017:

 

   As of 
   December 31, 2018  December 31, 2017 

Investment

Performance Rating

  Fair Value   Percentage
of Total
Portfolio
at Fair
Value
  Fair Value   Percentage
of Total
Portfolio

at Fair
Value
 
   (in millions)      (in millions)     

Grade 1

  $–      –   $–      

Grade 2

   1,364.89    97.5   875.61    100.0 

Grade 3

   34.47    2.5        

Grade 4

   –      –          
  

 

 

   

 

 

  

 

 

   

 

 

 

Total Investments

  $1,399.36    100.0 $875.61    100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

The increase in the fair value of investments with a grade 2 investment performance rating as of December 31, 2018 compared to December 31, 2017 was driven by an increase in net investment activity. The increase in investments with a grade 3 investment performance rating as of December 31, 2018 compared to December 31, 2017 was driven by three investments with a fair value of $34.47 million being downgraded to grade 3 due to declining financial performance.

The following table shows the amortized cost of our performing andnon-accrual investments (excluding our investment in a money market fund managed by an affiliate of Group Inc.) as of December 31, 2018 and December 31, 2017:

 

   As of 
   December 31, 2018  December 31, 2017 
   Amortized
Cost
   Percentage
of Total
Portfolio
at
Amortized
Cost
  Amortized
Cost
   Percentage
of Total
Portfolio
at
Amortized
Cost
 
   (in millions)      (in millions)     

Performing

  $1,408.03    100.0 $873.99    100.0

Non-accrual

               
  

 

 

   

 

 

  

 

 

   

 

 

 

Total Investments

  $1,408.03    100.0 $873.99    100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

Investments are placed onnon-accrual status when it is probable that principal, interest or dividends will not be collected according to the contractual terms. Accrued interest or dividends generally are reversed when an investment is placed onnon-accrual status. Interest or dividend payments received onnon-accrual investments may be recognized as income or applied to principal depending upon management’s judgment.Non-accrual investments are restored to accrual status when past due principal and interest or dividends are paid and, in management’s judgment, principal and interest or dividend payments are likely to remain current. We may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection.

 

59


The following table shows our investment activity for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 by investment type:

 

   For the Year
Ended

December 31, 2018
  For the Year
Ended

December 31, 2017
  For the period
from June 9, 2016

(inception) to
December 31, 2016
 
   ($ in millions) 

New investments committed at cost:

    

Gross originations

  $827.60  $762.87  $209.65 

Less: Syndications(1)

          
  

 

 

  

 

 

  

 

 

 

Net amount of new investments committed at cost:

  $827.60  $762.87  $209.65 

Amount of investments committed at cost(2):

    

First Lien/Senior Secured Debt

  $569.16  $306.76  $54.19 

FirstLien/Last-Out Unitranche

   89.33   92.61   23.52 

Second Lien/Senior Secured Debt

   152.90   359.25   126.01 

Unsecured Debt

         3.33 

Preferred Stock

   7.70      2.50 

Common Stock

   8.51   4.25    

Warrants

         0.10 
  

 

 

  

 

 

  

 

 

 

Total

  $827.60  $762.87  $209.65 
  

 

 

  

 

 

  

 

 

 

Proceeds from investments sold or repaid(13):

    

First Lien/Senior Secured Debt

  $48.88  $46.38  $ 

FirstLien/Last-Out Unitranche

   29.63   4.05    

Second Lien/Senior Secured Debt

   134.89   15.00    

Unsecured Debt

          

Preferred Stock

          

Common Stock

   3.22       

Warrants

          
  

 

 

  

 

 

  

 

 

 

Total

  $216.62  $65.43  $ 
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in portfolio

  $610.98  $697.44  $209.65 
  

 

 

  

 

 

  

 

 

 

Number of new portfolio companies with new investment commitments(3)

   28   30   10 

Total new investment commitment amount in new portfolio companies(3)

  $630.58  $747.27  $209.65 

Average new investment commitment amount in new portfolio companies(3)

  $22.52  $24.91  $20.97 

Number of existing portfolio companies with new investment commitments(3)

   14   3    

Total new investment commitment amount in existing portfolio companies(3)

  $197.01  $15.60  $ 

Weighted average remaining term for new investment commitments (in years)(3)(4)

   5.1   5.8   5.7 

Percentage of new debt investment commitments at floating interest rates(3)(14)

   99.9  100.0  91.8

Percentage of new debt investment commitments at fixed interest rates(3)(14)

   0.1    8.2

Weighted average yield on new debt and income producing investment commitments(2) (3)

   9.8%(5)   10.0%(9)   10.2%(9) 

Weighted average yield on new investment commitments(2) (3)

   9.6%(6)   9.9%(10)   10.1%(10) 

Weighted average yield on debt and income producing investments sold or paid down(13)

   10.2%(7)   10.4%(11)   N/A 

Weighted average yield on investments sold or paid down(13)

   10.1%(8)   10.4%(12)   N/A 

 

(1)  

Only includes syndications, if any, that occurred at the initial close of the investment.

(2)  

Net of capitalized fees, expenses and OID that occurred at the initial close of the investment.

(3)  

May include positions originated during the period but not held at the reporting date.

(4)  

Calculated as of the end of the relevant period and the maturity date of the individual investments.

(5)  

Computed based on (a) the annual actual interest rate on new debt and income producing investment commitments, divided by (b) the total new debt and income producing investment commitments. The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments and excludes investments that arenon-accrual. The annual actual interest rate used is as of the respective quarter end date when the investment activity occurred.

(6)  

Computed based on (a) the annual actual interest rate on new investment commitments, divided by (b) the total new investment commitments (including investments onnon-accrual andnon-income producing investments). The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments. The annual actual interest rate used is as of the respective quarter end date when the investment activity occurred.

(7)  

Computed based on (a) the annual actual interest rate on debt and income producing investments sold or paid down, divided by (b) the total debt and income producing investments sold or paid down. The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments and excludes prepayment premiums earned on exited investments and investments that arenon-accrual.

(8)  

Computed based on (a) the annual actual interest rate on investments sold or paid down, divided by (b) the total investments sold or paid down (including investments onnon-accrual andnon-income producing investments). The calculation includes incremental yield earned on the“last-out” portion of the unitranche loan investments and excludes prepayment premiums earned on exited investments.

(9)  

Computed based on (a) the annual stated interest rate on new debt and income producing investment commitments, divided by (b) the total new debt and income producing investment commitments. The calculation includes incremental yield earned on the “last-out” portion of the unitranche loan investments and excludes investments that are non-accrual. For investments that are subject to a LIBOR floor, the calculation assumes the greater of the applicable LIBOR floor or 3 month LIBOR as of the respective period end date. The actual interest rate may vary.

(10)  

Computed based on (a) the annual stated interest rate on new investment commitments, divided by (b) the total new investment commitments (including investments on non-accrual and non-income producing investments). The calculation includes incremental yield earned on the “last-out” portion of the unitranche loan investments. For investments that are subject to a LIBOR floor, the calculation assumes the greater of the applicable LIBOR floor or 3 month LIBOR as of the respective period end date. The actual interest rate may vary.

(11)  

Computed based on (a) the annual stated interest rate on debt and income producing investments sold or paid down, divided by (b) the total debt and income producing investments sold or paid down. The calculation includes incremental yield earned on the “last-out” portion of the unitranche loan investments and excludes prepayment premiums earned on exited investments and investments that are non-accrual. For investments that are subject to a LIBOR floor, the calculation assumes the greater of the applicable LIBOR floor or 3 month LIBOR as of the respective period end date. The actual interest rate may vary.

(12)  

Computed based on (a) the annual stated interest rate on investments sold or paid down, divided by (b) the total investments sold or paid down (including investments on non-accrual and non-income producing investments). The calculation includes incremental yield earned on the “last-out” portion of the unitranche loan investments and excludes prepayment premiums earned on exited investments. For investments that are subject to a LIBOR floor, the calculation assumes the greater of the applicable LIBOR floor or 3 month LIBOR as of the respective period end date. The actual interest rate may vary.

(13)  

Excludes unfunded commitments that may have expired or otherwise been terminated without receipt of cash proceeds or other consideration.

(14)  

Computed based on amount of investments committed at cost.

 

60


RESULTS OF OPERATIONS

Our operating results for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 were as follows:

 

   For the Year Ended
December 31, 2018
  For the Year Ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Total investment income

  $123.77  $53.54  $5.79 
  

 

 

  

 

 

  

 

 

 

Total expenses

   (53.57  (24.03  (4.39

Management fee waiver

         0.39 
  

 

 

  

 

 

  

 

 

 

Net expenses

   (53.57  (24.03  (4.00
  

 

 

  

 

 

  

 

 

 

Net investment income (loss)

   70.20   29.51   1.79 
  

 

 

  

 

 

  

 

 

 

Net realized gain (loss) on investments

   2.30   (0.01   

Net realized gain (loss) on foreign currency forward contracts and transactions

   (0.27      

Net unrealized appreciation (depreciation) on investments

   (10.30  1.37   0.25 

Net unrealized appreciation (depreciation) on foreign currency forward contracts and translations

   1.14       

(Provision) benefit for taxes, realized and unrealized gain

   (1.08      
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in Members’ Capital resulting from operations

  $61.99  $30.87  $2.04 
  

 

 

  

 

 

  

 

 

 

Net increase in Members’ Capital resulting from operations can vary from period to period as a result of various factors, including acquisitions, the level of new investment commitments, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation on the investment portfolio. As a result, comparisons may not be meaningful.

Investment Income

 

   For the Year Ended
December 31, 2018
   For the Year Ended
December 31, 2017
   For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Interest

  $121.45   $52.68   $5.64 

Dividend income

   0.34    0.02    0.02 

Other income

   1.98    0.84    0.13 
  

 

 

   

 

 

   

 

 

 

Total investment income

  $123.77   $53.54   $5.79 
  

 

 

   

 

 

   

 

 

 

Interest

Interest from investments, which includes prepayment premiums and accelerated accretion of upfront loan origination fees and unamortized discounts, increased from $52.68 million for the year ended December 31, 2017 to $121.45 million for the year ended December 31, 2018, primarily due to an increase in the size of our portfolio. The amortized cost of the portfolio increased from $873.99 million as of December 31, 2017 to $1,408.03 million as of December 31, 2018. Included in interest for the year ended December 31, 2018 and 2017 is $1.55 million and $0.70 million, respectively, in prepayment premiums and $3.05 million and $0.59 million, respectively, in accelerated accretion of upfront loan origination fees and unamortized discounts.

Interest from investments, which includes prepayment premiums and accelerated accretion of upfront loan origination fees and unamortized discounts, increased from $5.64 million for the period from June 9, 2016 (inception) to December 31, 2016 to $52.68 million for the year ended December 31, 2017, primarily due to an increase in recurring interest income, which resulted primarily from an increase in the size of our portfolio during our first full year of operations, and an increase innon-recurring prepayment premiums. The amortized cost of the portfolio increased from $199.18 million as of December 31, 2016 to $873.99 million as of December 31, 2017. Included in interest for the year ended December 31, 2017 and for the period from June 9, 2016 (inception) to December 31, 2016 is $0.70 million and $0 million, respectively, in prepayment premiums and $0.59 million and $0 million, respectively, in accelerated accretion of upfront loan origination fees and unamortized discounts.

 

61


Expenses

 

   For the Year Ended
December 31, 2018
   For the Year Ended
December 31, 2017
   For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Interest and other debt expenses

  $28.48   $10.10   $0.88 

Management fees

   9.60    4.80    1.31 

Incentive fees

   11.32    5.86     

Offering costs

       0.95    0.87 

Professional fees

   1.75    1.18    0.55 

Administration, custodian and transfer agent fees

   0.97    0.62    0.17 

Directors’ fees

   0.37    0.14    0.16 

Organization costs

           0.37 

Other expenses

   1.08    0.38    0.08 
  

 

 

   

 

 

   

 

 

 

Total expenses

  $53.57   $24.03   $4.39 

Management fees waiver

  $   $   $(0.39
  

 

 

   

 

 

   

 

 

 

Net expenses

  $53.57   $24.03   $4.00 
  

 

 

   

 

 

   

 

 

 

Interest and other debt expenses

Interest and other debt expense increased from $10.10 million for the year ended December 31, 2017 to $28.48 million for the year ended December 31, 2018. This was primarily due to an increase in the average aggregate daily borrowings from $195.70 million to $486.14 million, which was driven by an increase in the size of our portfolio during our first full year of operations.

Interest and other debt expense increased from $0.88 million for the period from June 9, 2016 (inception) to December 31, 2016 to $10.10 million for the year ended December 31, 2017. This was primarily due to an increase in the average aggregate daily borrowings from $14.77 million to $195.70 million, which was driven by an increase in the size of our portfolio during our first full year of operations.

Management Fees and Incentive Fees

Management Fees increased from $4.80 million for the year ended December 31, 2017 to $9.60 million for the year ended December 31, 2018 as a result of an increase in the size of our portfolio, excluding cash and investments in a money market fund managed by an affiliate of Group Inc. The accrual for Incentive Fees increased from $5.86 million for the year ended December 31, 2017 to $11.32 million for the year ended December 31, 2018 as a result of an increase in net investment income.

Management Fees increased from $1.31 million for the period from June 9, 2016 (inception) to December 31, 2016 to $4.80 million for the year ended December 31, 2017 as a result of an increase in the size of our portfolio during our first full year of operations, which led to an increase in net assets, excluding cash and investments in a money market fund managed by an affiliate of Group Inc. The accrual for Incentive Fees increased from $0 million for the period from June 9, 2016 (inception) to December 31, 2016 to $5.86 million for the year ended December 31, 2017 as a result of an increase in net investment income from an increase in the size of our portfolio during our first full year of operations.

Professional fees and other general and administrative expenses

Professional fees and other general and administrative expenses increased from $1.18 million and $1.14 million, respectively, for the year ended December 31, 2017 to $1.75 million and $2.42 million, respectively, for the year ended December 31, 2018 due to an increase in the size of the portfolio and an increase in costs associated with servicing a larger investment portfolio.

Professional fees and other general and administrative expenses increased from $0.55 million and $0.41 million, respectively, for the period from June 9, 2016 (inception) to December 31, 2016 to $1.18 million and $1.14 million, respectively, for the year ended December 31, 2017 due to an increase in the size of the portfolio during our first full year of operations and an increase in costs associated with servicing a larger investment portfolio.

 

62


Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) on Investments

The realized gains and losses on fully exited and partially exited portfolio companies for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 consisted of the following:

 

   For the Year Ended
December 31, 2018
  For the Year Ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Continuum Managed Services, LLC

  $  $(0.01 $
 
 
 
 

MyON Holdings, LLC

   2.32       

Other, net

   (0.02      
  

 

 

  

 

 

  

 

 

 

Net realized gain (loss) on investments

  $2.30  $(0.01 $ 
  

 

 

  

 

 

  

 

 

 

In connection with the proceeds received from the exit of our equity investment in myON, LLC, we recorded an income tax provision on realized gains of $0.67 million for the year ended December 31, 2018.

Any changes in fair value are recorded in change in unrealized appreciation (depreciation) on investments. For further details on the valuation process, refer to “Critical Accounting Policies—Valuation of Portfolio Investments.” Net unrealized appreciation (depreciation) on investments for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 were as follows:

 

   For the Year Ended
December 31, 2018
  For the Year Ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Unrealized appreciation

  $3.66  $3.03  $0.40 

Unrealized depreciation

   (13.96  (1.66  (0.15
  

 

 

  

 

 

  

 

 

 

Net change in unrealized appreciation (depreciation) on investments

  $(10.30 $1.37  $0.25 
  

 

 

  

 

 

  

 

 

 

The change in unrealized appreciation (depreciation) on investments for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016 consisted of the following:

 

   For the Year Ended
December 31, 2018
  For the Year Ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31, 2016
 
   ($ in millions) 

Portfolio Company:

    

Accuity Delivery Systems, LLC

  $0.96  $  $ 

Continuum Managed Services LLC

   0.04   0.02    

Country Fresh Holdings, LLC

   (1.97  (0.15   

Datto, Inc.

   0.52   (0.01   

Fenergo Finance 3 Limited

   (0.59      

Genesis Acquisition Co.

   (0.47  0.49   (0.02

Market Track, LLC

   (0.75  (0.05   

Odyssey Logistics & Technology Corporation

   (0.60  0.40    

Vantage Mobility International, LLC

   (2.11  0.05   (0.02

Yasso, Inc.

   (0.78  (0.72   

Zep Inc.

   (3.03  0.60    

Other, net(1)

   (1.52  0.74   0.29 
  

 

 

  

 

 

  

 

 

 

Total

  $(10.30 $1.37  $0.25 
  

 

 

  

 

 

  

 

 

 

 

 (1)  

For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, other, net includes gross unrealized appreciation of $2.14 million, $1.47 million and $0.40 million, respectively, and gross unrealized depreciation of $(3.66) million, $(0.73) million and $(0.11) million, respectively.

Net change in unrealized appreciation (depreciation) in our investments for year ended December 31, 2018 was primarily driven by the unrealized depreciation in Zep, Inc., Vantage Mobility International, LLC, and Country Fresh Holdings, LLC due to financial underperformance.

 

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The primary use of existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our Unitholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities.

We expect to generate cash primarily from the net proceeds of any future offerings of securities, drawdowns of capital commitments, future borrowings and cash flows from operations. To the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our Board of Directors otherwise determines that leveraging our portfolio would be in our best interest and the best interests of our Unitholders, we may enter into credit facilities in addition to our Revolving Credit Facilities, or issue other senior securities. We would expect any such credit facilities may be secured by certain of our assets and may contain advance rates based upon pledged collateral. The pricing and other terms of any such facilities would depend upon market conditions when we enter into any such facilities as well as the performance of our business, among other factors. As a BDC, with certain limited exceptions, we are only permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, is at least 200% after such borrowing (or 150% if certain requirements are met). See “—Key Components of Operations—Leverage.” As of December 31, 2018 and December 31, 2017, our asset coverage ratio based on the aggregate amount outstanding of our senior securities (which includes the Revolving Credit Facilities) was 239% and 227%, respectively. We may also refinance or repay any of our indebtedness at any time based on our financial condition and market conditions.

We may enter into commitments either verbally or through signed commitment letters which may ultimately become investment transactions in the future. We regularly evaluate and carefully consider our unfunded commitments using GSAM proprietary risk management framework for the purpose of planning our capital resources and ongoing liquidity, including our financial leverage.

As of December 31, 2018, we had cash of approximately $25.55 million, an increase of $17.33 million from December 31, 2017. In addition, as of December 31, 2018, we had an investment in a money market fund managed by an affiliate of Group Inc. of $0.00 million. Cash used by operating activities for the year ended December 31, 2018 was approximately $441.44 million, primarily driven by net purchases of investments of $524.23 million, offset by other operating activities of $19.49 million, net sales of investments in the affiliated money market fund of $1.31 million and an increase in Members’ Capital resulting from operations of $61.99 million. Cash provided by financing activities for the year ended December 31, 2018 was approximately $458.77 million, primarily driven by proceeds from the issuance of common Units of $340.20 million and net borrowings on debt of $190.96 million, partially offset by distributions paid of $70.93 million and other financing activities of $1.46 million.

As of December 31, 2017, we had cash of approximately $8.22 million, an increase of $4.36 million from December 31, 2016. In addition, as of December 31, 2017, we had an investment in a money market fund managed by an affiliate of Group Inc. of $1.31 million. Cash used by operating activities for the year ended December 31, 2017 was approximately $502.88 million, primarily driven by net purchases of investments of $672.34 million, offset by other operating activities of $1.59 million, net sales of investments in the affiliated money market fund of $137.00 million and an increase in Members’ Capital resulting from operations of $30.87 million. Cash provided by financing activities for the year ended December 31, 2017 was approximately $507.24 million, primarily driven by proceeds from the issuance of common Units of $283.45 million and net borrowings on debt of $253.50 million, partially offset by distributions paid of $25.05 million and other financing activities of $4.66 million.

As of December 31, 2016, we had cash of approximately $3.86 million. In addition, as of December 31, 2016, we had an investment in a money market fund managed by an affiliate of Group Inc. of $138.31 million. Cash used by operating activities for the period from June 9, 2016 (inception) to December 31, 2016 was approximately $333.33 million, primarily driven by purchases of investments of $199.01 million, net purchase of investments in the affiliated money market fund of $138.31 million and an increase in Members’ Capital resulting from operations of $2.04 million, in addition to proceeds from other operating activities of $1.95 million. Cash provided by financing activities for the period from June 9, 2016 (inception) to December 31, 2016 was approximately $337.20 million, primarily driven by proceeds from the issuance of common Units of $210.40 million and net borrowings on debt of $130.00 million, partially offset by other financing activities of $3.20 million.

To the extent permissible under the risk retention rules and applicable provisions of the Investment Company Act, we may raise capital by securitizing certain of our investments, including through the formation of one or more collateralized loan obligations or asset based facilities, while retaining all or most of the exposure to the performance of these investments. This would involve contributing a pool of assets to a special purpose entity, and selling debt interests in such entity on anon-recourse or limited-recourse basis to purchasers. We may also pursue other forms of debt financing, including potentially from the Small Business Administration through a future SBIC subsidiary (subject to regulatory approvals).

The Initial Member, an affiliate of our Investment Adviser, made a capital contribution to us of $100 on June 9, 2016 and served as our sole initial member. We cancelled the Initial Member’s interest in the Company on July 14, 2016. On May 6, 2016, we began accepting subscription agreements from investors acquiring common Units in our private offering. Under the terms of the Subscription Agreements, investors are required to make capital contributions up to the amount of their undrawn capital commitment to purchase Units each time we deliver a drawdown notice.

 

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As of December 31, 2018 and December 31, 2017, we had aggregate capital commitments and undrawn capital commitments from investors as follows:

 

   December 31, 2018  December 31, 2017 
   Capital
Commitments
($ in millions)
   Unfunded
Capital
Commitments
($ in millions)
   % of Capital
Commitments
Funded
  Capital
Commitments
($ in millions)
   Unfunded
Capital
Commitments
($ in millions)
   % of Capital
Commitments
Funded
 

Common Units

  $    1,097.43   $    263.38    76 $    1,097.43   $    603.59    45

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2018:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

February 21, 2018

   335,966   $32.92 

March 28, 2018

   222,135    21.95 

April 27, 2018

   339,498    32.92 

June 28, 2018

   558,772    54.87 

August 27, 2018

   903,600    87.80 

September 27, 2018

   336,610    32.92 

November 13, 2018

   795,162    76.82 
  

 

 

   

 

 

 

Total capital drawdowns

   3,491,743   $340.20 
  

 

 

   

 

 

 

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the year ended December 31, 2017:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

April 27, 2017

   203,758   $20.01 

April 28, 2017

   535    0.05 

May 26, 2017

   444,153    43.90 

June 29, 2017

   441,837    43.90 

August 21, 2017

   557,806    54.87 

September 28, 2017

   332,027    32.92 

October 30, 2017

   900,334    87.79 
  

 

 

   

 

 

 

Total capital drawdowns

   2,880,450   $283.44 
  

 

 

   

 

 

 

The following table summarizes the total Units issued and proceeds received related to capital drawdowns for the period from June 9, 2016 (inception) to December 31, 2016:

 

Unit Issue Date

  Units Issued   Proceeds Received
($ in millions)
 

July 14, 2016

   310,360   $31.04 

July 15, 2016

   4,000    0.40 

August 23, 2016

   160,219    15.72 

September 15, 2016

   1,206,924    117.88 

November 28, 2016

   461,475    45.36 
  

 

 

   

 

 

 

Total capital drawdowns

   2,142,978   $210.40 
  

 

 

   

 

 

 

Contractual Obligations

We have entered into certain contracts under which we have future commitments. Payments under the Investment Advisory Agreement, pursuant to which GSAM has agreed to serve as our Investment Adviser, are equal to (1) a percentage of our average NAV and (2) an Incentive Fee based on investment performance. Under the Administration Agreement, pursuant to which State Street Bank and Trust Company has agreed to furnish us with the administrative services necessary to conduct ourday-to-day operations, we pay our administrator such fees as may be agreed between us and our administrator that we determine are commercially reasonable in our sole discretion. Generally, either party may terminate the Investment Advisory Agreement without penalty on at least 60 days’ written notice to the other party. Either party may terminate the Administration Agreement without penalty upon at least 30 days’ written notice to the other party.

 

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The following table shows our contractual obligations as of December 31, 2018:

 

   Payments Due by Period ($ in millions) 
   Total   Less Than
1 Year
   1 – 3 Years   3 – 5 Years   More Than
5 Years
 

BoA Revolving Credit Facility

  $110.50   $110.50   $   $   $ 

JPM Revolving Credit Facility

  $405.64   $   $   $405.64   $ 

JPM Revolving Credit Facility

  50.90         50.90    

BoA Revolving Credit Facility

We entered into the BoA Revolving Credit Facility on July 18, 2016 with Bank of America, N.A. as administrative agent (the “Administrative Agent”), lead arranger, letter of credit issuer and a lender. We amended the BoA Revolving Credit Facility on March 3, 2017, July 16, 2018 and August 1, 2018.

Subject to availability under the “Borrowing Base,” the maximum principal amount of the BoA Revolving Credit Facility was $130.00 million as of December 31, 2018. The maximum principal amount of the BoA Revolving Credit Facility will decrease on a monthly basis until the stated maturity date (unless reduced further at our discretion). The Borrowing Base is calculated based on the unfunded capital commitments of the investors meeting various eligibility requirements (subject to investor concentration limits) multiplied by specified advance rates. We have the ability to increase the maximum principal amount of the BoA Revolving Credit Facility up to $750.00 million, subject to increasing commitments of existing lenders and/or obtaining commitments of new lenders and certain other conditions. The stated maturity date of the BoA Revolving Credit Facility is May 31, 2019.

Under the BoA Revolving Credit Facility, we have the ability to elect either LIBOR or the alternative base rate at the time of draw-down, and loans may be converted from one rate to another at any time, subject to certain conditions. Interest rate on obligations under the BoA Revolving Credit Facility is the prevailing LIBOR for one, two, three or six months (the “Applicable LIBOR”) plus 2.50% per annum or (B) an alternate base rate (the greater of the prime rate of such commercial bank, the federal funds rate plus 0.50%, and LIBOR plus 1.00%) (“ABR”) plus 1.50% per annum. We pay a 0.25% annualized fee on a quarterly basis on committed but undrawn amounts under the BoA Revolving Credit Facility.

Amounts drawn under the BoA Revolving Credit Facility may be prepaid at any time without premium or penalty, subject to applicable breakage costs. Loans are subject to mandatory prepayment for amounts exceeding the Borrowing Base or the lenders’ aggregate commitment and to the extent required to comply with the Investment Company Act, as applied to BDCs. Transfers of interests in the Company by investors are subject to certain restrictions under the BoA Revolving Credit Facility and may trigger mandatory prepayment obligations.

The BoA Revolving Credit Facility is secured by a perfected first priority security interest in the unfunded capital commitments of our investors (with certain exceptions) and the proceeds thereof, including assignment of the right to make capital calls, receive and apply capital contributions, and enforce remedies and claims related thereto, and a pledge of the collateral account into which capital call proceeds are deposited. Additionally, under the BoA Revolving Credit Facility, the lenders can directly require investors to fund their capital commitments, but lenders cannot seek recourse against a unitholder in excess of such unitholder’s obligation to contribute capital to us.

The BoA Revolving Credit Facility contains customary representations, warranties, and affirmative and negative covenants, including without limitation, treatment as a RIC under the Code and as a BDC under the Investment Company Act and restrictions on certain operations, including without limitation, certain distributions. The BoA Revolving Credit Facility includes customary conditions precedent to draw-down of loans and customary events of default. We are in compliance with these covenants.

JPM Revolving Credit Facility

On November 21, 2017, Goldman Sachs Private Middle Market Credit SPV LLC (“SPV”), our wholly-owned subsidiary, entered into the JPM Revolving Credit Facility. JPMorgan Chase Bank, National Association (“JPM”) serves as administrative agent, State Street Bank and Trust Company serves as collateral agent, collateral administrator, bank and securities intermediary and we serve as portfolio manager under the JPM Revolving Credit Facility. State Street Bank and Trust Company also acts as our transfer agent, disbursing agent, custodian and administrator as well as SPV’s custodian.

Borrowings under the JPM Revolving Credit Facility bear interest (at SPV’s election) at a per annum rate equal to either (x) the three-month LIBOR (or other listed offered rate, depending upon the currency of borrowing) in effect or (y) a rate per annum equal to the greater of (i) the prime rate of JPM in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 0.50%; and, with respect to advances denominated in a currency other than USD, the annual rate of interest is the reference rate then in effect for determining interest rates on commercial loans made in the applicable jurisdiction of such currency, in all cases, in each case, plus the applicable margin. The applicable margin is 3.50% per annum. SPV initially paid a commitment fee of 1.00% per annum (or 0.50% per annum during the first nine months from the date the JPM Revolving Credit Facility was entered into) on the average daily unused amount of the financing commitments until the third anniversary of the JPM Revolving Credit Facility.

 

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On August 17, 2018, SPV entered into the first amendment of the JPM Revolving Credit Facility among SPV, as borrower, the Company, as portfolio manager, State Street Bank and Trust Company, as collateral agent, collateral administrator, bank and securities intermediary, the lenders party thereto and JPM, as administrative agent, pursuant to which, among other things, (i) the definition of theRamp-Up Period was amended to end on May 20, 2019 instead of August 21, 2018 (and consequently certain of the provisions of the JPM Revolving Credit Facility that begin to apply, cease to apply, or change at the end of theRamp-Up Period will not apply, cease to apply, or change, as the case may be, until such later date), (ii) the minimum amounts required to be borrowed under the JPM Revolving Credit Facility were modified to (x) 65% of the Financing Commitment (as defined in the JPM Revolving Credit Facility) between December 21, 2018 and March 20, 2019, (y) 75% of the Financing Commitment between March 21, 2019 and May 19, 2019, and (z) 85% of the Financing Commitment between May 20, 2019 and November 21, 2020, (iii) the commitment fee payable to lenders was modified to (x) 0.50% per annum until November 20, 2018, (y) 0.75% per annum from November 21, 2018 until May 19, 2019 and (z) 1.00% per annum thereafter, (iv) an affirmative covenant was added to require certain monthly reporting if the Unfunded Exposure Shortfall (defined as the amount by which SPV’s unfunded commitments exceeds the amount on deposit in an unfunded exposure account) exceeds certain amounts, and (v) an affirmative covenant was added which obligates the Company to maintain liquidity (the sum of cash, cash equivalents, uncalled capital commitments and borrowing capacity under the JPM Revolving Credit Facility, subject to certain limitations) at least equal to the Unfunded Exposure Shortfall.

On October 22, 2018, in connection with the JPM Revolving Credit Facility, SPV exercised its rights pursuant to the accordion option under the JPM Revolving Credit Facility to increase the aggregate commitments under the JPM Revolving Credit Facility by $60.00 million, to $460.00 million, which shall be effectuated in two installments, a $25.00 million increase effective on October 24, 2018 and a $35.00 million increase on October 31, 2018. Pursuant to the accordion option under the JPM Revolving Credit Facility, the aggregate commitments under the JPM Revolving Credit Facility may be increased to up to $750.00 million.

On November 13, 2018, the Company exercised its right under the accordion feature and increased the size of the JPM Revolving Credit Facility to $465.00 million on a committed basis.

On December 10, 2018, SPV entered into the second amendment of the JPM Revolving Credit Facility among SPV, as borrower, the Company, as portfolio manager, State Street Bank and Trust Company, as collateral agent, collateral administrator, securities intermediary and bank, the lenders party thereto and JPM, as administrative agent, pursuant to which, among other things, (i) the percentage, when multiplied by the net asset value of SPV’s portfolio investments, that determines the maximum borrowing base under the JPM Revolving Credit Facility was reduced to 41% from 45%, (ii) SPV is no longer required to borrow, under the JPM Revolving Credit Facility, 85% of the Financing Commitment (as defined in the JPM Revolving Credit Facility) following an increase in the Financing Commitment, (iii) the administrative agent may classify certain portfolio investments as “Specified Investments,” which are subject to a 17.5% aggregate concentration limit and certain additional eligibility criteria (including that, under such portfolio investment, (x) no financial covenant default has occurred and (y) no financial covenant has been waived and there has been no amendment that resulted in a reduction in rate or principal, postponement of payment, release of guarantees or collateral or changes in pro rata provisions or voting percentages), (iv) the threshold percentages of the net asset value of the portfolio investments securing the JPM Revolving Credit Facility as compared to the advances outstanding under the JPM Revolving Credit Facility (a) that would result in an event of default was increased from 151.51% to 166.66%, and (b) that would result in a market value event (as defined in the JPM Revolving Credit Facility) was increased from 185.185% to 203.25% and (c) that would cure a market value event was increased from 200% to 244%, and (v) SPV will be required to deliver a quarterly certificate certifying compliance with certain covenants and representations and warranties included in the JPM Revolving Credit Agreement and certain certifications about SPV’s quarterly and annual financial statements.

The JPM Revolving Credit Facility is a multicurrency facility. As of December 31, 2018, the total commitments under the JPM Revolving Credit Facility were $465.00 million. The JPM Revolving Credit Facility also has an accordion feature, subject to the satisfaction of various conditions, which could bring total commitments under the JPM Revolving Credit Facility to $750.00 million. All amounts outstanding under the JPM Revolving Credit Facility must be repaid by the fourth anniversary of the JPM Revolving Credit Facility, subject to a six month extension of the maturity date with the consent of the administrative agent at such time.

SPV’s obligations to the lenders under the JPM Revolving Credit Facility are secured by a first priority security interest in all of SPV’s portfolio of investments and cash. The obligations of SPV under the JPM Revolving Credit Facility arenon-recourse to us, and our exposure under the JPM Revolving Credit Facility is limited to the value of our investment in SPV.

In connection with the JPM Revolving Credit Facility, SPV has made certain customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. The JPM Revolving Credit Facility contains customary events of default for similar financing transactions, including if a change of control of SPV occurs or if we are no longer the portfolio manager of SPV. Upon the occurrence and during the continuation of an event of default, JPM may declare the outstanding advances and all other obligations under the JPM Revolving Credit Facility immediately due and payable.

 

67


HEDGING

Subject to applicable provisions of the Investment Company Act and applicable CFTC regulations, we may enter into hedging transactions in a manner consistent with SEC guidance. To the extent that any of our loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of futures, options, swaps and forward contracts. Costs incurred in entering into such contracts or in settling them, if any, will be borne by us. Our Investment Adviser has claimedno-action relief from CFTC registration and regulation as a commodity pool operator pursuant to the BDC CFTCNo-Action Letter with respect to our operations, with the result that we will be limited in our ability to use futures contracts or options on futures contracts or engage in swap transactions. Specifically, the BDC CFTCNo-Action Letter imposes strict limitations on using such derivatives other than for hedging purposes, whereby the use of derivatives not used solely for hedging purposes is generally limited to situations where (i) the aggregate initial margin and premiums required to establish such positions does not exceed five percent of the liquidation value of our portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; or (ii) the aggregate net notional value of such derivatives does not exceed 100% of the liquidation value of our portfolio. Moreover, we anticipate entering into transactions involving such derivatives to a very limited extent solely for hedging purposes or otherwise within the limitations of the BDC CFTCNo-Action Letter.

OFF-BALANCE SHEET ARRANGEMENTS

We may become a party to investment commitments and to financial instruments withoff-balance sheet risk in the normal course of our business to fund investments and to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of December 31, 2018, we believed that we had adequate financial resources to satisfy our unfunded commitments. As of December 31, 2018 and 2017, our unfunded commitments to provide funds to portfolio companies were as follows:

 

   As of 
   December 31,
2018
   December 31,
2017
 
   (in millions) 

Unfunded Commitments

    

First Lien/Senior Secured Debt

  $90.32   $29.94 

FirstLien/Last-Out Unitranche

   8.36     

Second Lien/Senior Secured Debt

   17.22    5.80 
  

 

 

   

 

 

 

Total

  $115.90   $    35.74 
  

 

 

   

 

 

 

As of December 31, 2018, we had aggregate Commitments and undrawn Commitments from investors as follows:

 

   December 31, 2018 
  

 

 

 
   Capital
Commitments
($ in millions)
   Unfunded
Capital
Commitments
($ in millions)
   % of Capital
Commitments
Funded
 

Common Units

  $    1,097.43   $    263.38    76

RECENT DEVELOPMENTS

On January 25, 2019, in connection with the JPM Revolving Credit Facility, SPV exercised its rights pursuant to the accordion option under the JPM Revolving Credit Facility to increase the aggregate commitments under the JPM Revolving Credit Facility by $50.00 million, to $515.00 million, effective January 25, 2019.

On February 14, 2019, the Company delivered a capital drawdown notice to its investors relating to the sale of 689,032 common Units for an aggregate offering price of approximately $65.85 million. The common Units were issued on February 22, 2019.

On February 20, 2019, our Board of Directors declared a distribution equal to an amount up to our taxable earnings per unit, including net investment income (if positive), for the period January 1, 2019 through March 31, 2019, payable on or about April 26, 2019 to Unitholders of record as of March 29, 2019.

On February 22, 2019, SPV amended the JPM Revolving Credit Facility to, among other things, increase the aggregate borrowing amount by $115.00 million to $630.00 million on a committed basis, permit SPV to reduce the aggregate commitments (without premium or penalty) prior to September 1, 2019 by up to $25.00 million, waive certain unused fees otherwise owed by SPV until May 20, 2019 and revise the calculation of SPV’s borrowing base, solely for the purpose of calculating the requirement to maintain sufficient “Available Liquidity” (as defined in the Revolving Credit Facility) to fund its unfunded exposure, such that the calculation will include the net asset value of delayed draw term loan commitments and revolving commitments.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our critical accounting policies are further described in the notes to the consolidated financial statements.

Valuation of Portfolio Investments

As a BDC, we conduct the valuation of our assets, pursuant to which our NAV is determined, consistent with GAAP and the Investment Company Act. Our Board of Directors, with the assistance of our Audit Committee, determines the fair value of our assets within the meaning of the Investment Company Act, on at least a quarterly basis, in accordance with the terms of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures (“ASC 820”).

 

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ASC 820 defines fair value 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. Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same—to estimate the price when an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

ASC 820 establishes a hierarchal disclosure framework which ranks the observability of inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instruments and their specific characteristics. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, generally will have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value. The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities.

The three-level hierarchy for fair value measurement is defined as follows:

Level 1—inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The types of financial instruments included in Level 1 include unrestricted securities, including equities and derivatives, listed in active markets.

Level 2—inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The type of financial instruments in this category includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certainover-the-counter derivatives where the fair value is based on observable inputs.

Level 3—inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately held entities and certainover-the-counter derivatives where the fair value is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the financial instrument.

Currently, the majority of our investments fall within Level 3 of the fair value hierarchy. We do not expect that there will be readily available market values for most of the investments which are in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our Board of Directors using a documented valuation policy, described below, and a consistently applied valuation process. The factors that may be taken into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, and the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. Available current market data are considered such as applicable market yields and multiples of publicly traded securities, comparison of financial ratios of peer companies, and changes in the interest rate environment and the credit markets that may affect the price at which similar investments would trade in their principal market, and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation.

With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, the valuation procedures adopted by our Board of Directors contemplates a multi-step valuation process each quarter, as described below:

 

 (1)

Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

 (2)

Our Board of Directors also engages independent valuation firms (the “Independent Valuation Advisors”) to provide independent valuations of the investments for which market quotations are not readily available, or are readily available but deemed not reflective of the fair value of an investment. The Independent Valuation Advisors independently value such investments using quantitative and qualitative information provided by the investment professionals of our Investment Adviser as well as any market quotations obtained from independent pricing services, brokers, dealers or market dealers. The Independent Valuation Advisors also provide analyses to support their valuation methodology and calculations. The Independent Valuation Advisors provide an opinion on a final range of values on such investments to our Board of Directors or the Audit Committee. The Independent Valuation Advisors define fair value in accordance with ASC 820 and utilize valuation approaches including the market approach, the income approach or both. A portion of the portfolio is reviewed on a quarterly basis, and all investments in the portfolio for which market quotations are not readily available, or are readily available, but deemed not reflective of the fair value of an investment, are reviewed at least annually by an Independent Valuation Advisor;

 

69


 (3)

The Independent Valuation Advisors’ preliminary valuations are reviewed by our Investment Adviser and the Valuation Oversight Group (“VOG”), a team that is part of the Controllers Department within the Finance Division of Goldman Sachs. The Independent Valuation Advisors’ ranges are compared to our Investment Adviser’s valuations to ensure our Investment Adviser’s valuations are reasonable. VOG presents the valuations to the Private Investment Valuation and Side PocketSub-Committee of the Investment Management Division Valuation Committee, which is comprised of representatives from GSAM who are independent of the investment making decision process;

 

 (4)

The Investment Management Division Valuation Committee ratifies fair valuations and makes recommendations to the Audit Committee of the Board of Directors;

 

 (5)

The Audit Committee of our Board of Directors reviews valuation information provided by the Investment Management Division Valuation Committee, our Investment Adviser and the Independent Valuation Advisors. The Audit Committee then assesses such valuation recommendations; and

 

 (6)

Our Board of Directors discusses the valuations and, within the meaning of the Investment Company Act, determines the fair value of our investments in good faith, based on the input of our Investment Adviser, the Independent Valuation Advisors and the Audit Committee.

When our NAV is determined other than on aquarter-end (such as in connection with issuances of Units on dates occurringmid-quarter), it is determined by our Investment Adviser, acting under delegated authority from, and subject to the supervision of, our Board of Directors and in accordance with procedures adopted by our Board of Directors.

Investment Transactions and Related Investment Income

We record our investment transactions on a trade date basis, which is the date when we assume the risks for gains and losses related to that instrument. Realized gains and losses are based on the specific identification method. Dividend income on common equity investments is recorded on the record date for private portfolio companies or on theex-dividend date for publicly traded portfolio companies. Interest income and dividend income are presented net of withholding tax, if any. Accretion of discounts and amortization of premiums, which are included in interest income and expense, are recorded over the life of the underlying instrument using the effective interest method.

Fair value generally is based on quoted market prices, broker or dealer quotations, or alternative price sources. In the absence of quoted market prices, broker or dealer quotations, or alternative price sources, investments in securities are measured at fair value as determined by our Investment Adviser and/or by one or more independent third parties.

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. For additional information, see Note 2 “Significant Accounting Policies” to our consolidated financial statements included in this report.

We may also invest in newly-issued debt securities that are sold by issuers with an OID to par value of 1% to 3%, although we do not expect OID securities to comprise a material portion of our portfolio. To the extent we purchase new issues with OID, the discounts will be accreted over the life of the securities, as required under GAAP. Loan origination fees, OID and market discounts or premiums are capitalized, and we accrete or amortize such amounts into income over the life of the loan. We record contractual prepayment premiums on loans and debt securities as interest income.

Non-Accrual Status

Investments are placed onnon-accrual status when it is probable that principal, interest or dividends will not be collected according to contractual terms. Accrued interest or dividends generally are reversed when an investment is placed onnon-accrual status. Interest or dividend payments received onnon-accrual investments may be recognized as income or applied to principal depending upon management’s judgment.Non-accrual investments are restored to accrual status when past due principal and interest or dividends are paid and, in management’s judgment, principal and interest or dividend payments are likely to remain current. We may make exceptions to this treatment if the investment has sufficient collateral value and is in the process of collection. As of December 31, 2018 and December 31, 2017, we had no investments onnon-accrual status.

Distribution Policy

We intend to pay quarterly distributions to our Unitholders out of assets legally available for distribution. Future quarterly distributions, if any, will be determined by our Board of Directors. All distributions will be subject to lawfully available funds therefor, and no assurance can be given that we will be able to declare distributions in future periods.

 

70


We have elected to be treated, and expect to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ended December 31, 2016. To maintain our tax treatment as a RIC, we must, among other things, timely distribute to our Unitholders at least 90% of our investment company taxable income for each taxable year. We intend to timely distribute to our Unitholders substantially all of our annual taxable income for each year, except that we may retain certain net capital gains for reinvestment and we may choose to carry forward taxable income for distribution in the following year and pay any applicable tax. The distributions we pay to our Unitholders in a year may exceed our net ordinary income and capital gains for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes. The specific tax characteristics of our distributions will be reported to Unitholders after the end of the calendar year. Unitholders should read carefully any written disclosure regarding a distribution from us and should not assume that the source of any distribution is our net ordinary income or capital gains.

Federal Income Taxes

As a RIC, we generally will not be required to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our Unitholders as dividends. To maintain our RIC status, we must meet specifiedsource-of-income and asset diversification requirements and timely distribute to our Unitholders at least 90% of our investment company taxable income for each year. Depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay any applicable tax. We generally will be required to pay a U.S. federal excise tax if our distributions during a calendar year do not exceed the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for theone-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

71


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, most significantly changes in interest rates. Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we expect to fund a portion of our investments with borrowings, our net investment income is expected to be affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

As of December 31, 2018 and 2017, on a fair value basis, approximately 1.3% and 2.0%, respectively, of our performing debt investments (including income-producing preferred stock) bore interest at a fixed rate and approximately 98.7% and 98.0%, respectively, of our performing debt investments bore interest at a floating rate. Our borrowings under the Revolving Credit Facilities bear interest at a floating rate.

We regularly measure our exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities.

Based on our December 31, 2018 balance sheet, the following table shows the annual impact on net income of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:

 

As of December 31, 2018

Basis Point Change

  Interest
Income
   Interest
Expense
   Net
Income
 
($ in millions)            

Up 300 basis points

  $36.35   $(15.99  $20.36 

Up 200 basis points

   24.23    (10.66   13.57 

Up 100 basis points

   12.12    (5.33   6.79 

Up 75 basis points

   9.09    (4.00   5.09 

Up 50 basis points

   6.06    (2.66   3.40 

Up 25 basis points

   3.03    (1.33   1.70 

Down 25 basis points

   (3.03   1.33    (1.70

Down 50 basis points

   (6.06   2.66    (3.40

Down 75 basis points

   (9.09   4.00    (5.09

Down 100 basis points

   (12.12   5.33    (6.79

Down 200 basis points

   (19.99   10.66    (9.33

Down 300 basis points

   (20.41   13.34    (7.07

We may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the Investment Company Act, applicable CFTC regulations and in a manner consistent with SEC guidance. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

 

72


ITEM 8.     CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GOLDMAN SACHS PRIVATE MIDDLE MARKET CREDIT LLC

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page 

Report of Independent Registered Public Accounting Firm

   74 

Consolidated Statements of Financial Condition as of December  31, 2018 and 2017

   75 

Consolidated Statements of Operations for the years ended December  31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016

   76 

Consolidated Statements of Changes in Members’ Capital for the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016

   77 

Consolidated Statements of Cash Flows for the years ended December  31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016

   78 

Consolidated Schedules of Investments as of December 31, 2018 and 2017

   79 

Notes to Consolidated Financial Statements

   87 

 

73


Report of Independent Registered Public Accounting Firm

To theBoard of Directors and Unitholders of Goldman Sachs Private Middle Market Credit LLC

Opinions on the Financial Statements

We have audited the accompanying consolidated statements of financial condition, including the consolidatedschedules of investments, of Goldman Sachs Private Middle Market Credit LLCand its subsidiaries (the “Company”)as of December 31, 2018 and 2017,and the related consolidated statements of operations, changes in members’ capital and cash flows for each of the two years in the period ended December 31, 2018 and for the period from June 9, 2016 (inception) to December 31, 2016, including the related notes (collectively referred to as the “consolidated financial statements”).In our opinion, the consolidatedfinancial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017,and the results of its operations, changes in its members’ capital and its cash flows for each of the two years in the period ended December 31, 2018 and for the period from June 9, 2016 (inception) to December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinions

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidatedfinancial statements 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 of these consolidated financial statements 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 consolidatedfinancial 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 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 consolidatedfinancial 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 consolidatedfinancial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our procedures included confirmation of securities owned as of December 31, 2018 and 2017 by correspondence with the custodian, agent banks, transfer agent and brokers;when replies were not received, we performed other auditing procedures. We believe that our audit provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 28, 2019

We have served as the auditor of one or more investment companies

in the following group of business development companies

since 2012 - Goldman Sachs Private Middle Market Credit LLC,

Goldman Sachs Middle Market Lending Corp.,

and Goldman Sachs BDC, Inc.

 

74


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Financial Condition

(in thousands, except unit and per unit amounts)

 

   December 31, 2018  December 31, 2017 

Assets

   

Investments, at fair value

   

Non-controlled/non-affiliated investments (cost of $1,369,835 and $873,989, respectively)

  $1,359,919  $875,610 

Non-controlled affiliated investments (cost of $38,199 and $0, respectively)

   39,442    

Investments in affiliated money market fund (cost of $0 and $1,313, respectively)

      1,313 

Cash

   25,548   8,220 

Receivable for investments sold

   70    

Interest and dividends receivable fromnon-controlled/affiliated investments andnon-controlled/non-affiliated investments

   7,127   5,189 

Deferred financing costs

   3,991   5,015 

Unrealized appreciation on foreign currency forward contracts

   105    

Other assets

   307   2 
  

 

 

  

 

 

 

Total assets

  $1,436,509  $895,349 
  

 

 

  

 

 

 

Liabilities

   

Debt

  $574,462  $383,500 

Interest and other debt expenses payable

   6,577   2,014 

Management fees payable

   2,910   1,675 

Incentive fees payable

   17,180   5,864 

Distribution payable

   25,500   14,194 

Directors’ fees payable

      5 

Accrued expenses and other liabilities

   2,419   591 
  

 

 

  

 

 

 

Total liabilities

  $629,048  $407,843 
  

 

 

  

 

 

 

Commitments and Contingencies (Note 8)

   

Members’ Capital

   

Preferred units (0 units issued and outstanding)

  $  $ 

Common units (8,515,171 and 5,023,428 units issued and outstanding as of December 31, 2018 and December 31, 2017, respectively)

   833,956   492,016 

Distributable earnings

   (26,495  (4,510
  

 

 

  

 

 

 

TOTAL MEMBERS’ CAPITAL

  $807,461  $ 487,506 
  

 

 

  

 

 

 

TOTAL LIABILITIES AND MEMBERS’ CAPITAL

  $1,436,509  $895,349 
  

 

 

  

 

 

 

Net asset value per unit

  $94.83  $97.05 

 

The accompanying notes are part of these consolidated financial statements.

 

75


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Operations

(in thousands, except unit and per unit amounts)

 

   For the year ended
December 31, 2018
  For the year ended
December 31, 2017
   For the period from
June 9, 2016
(inception) to
December 31, 2016
 

Investment Income:

     

Fromnon-controlled/non-affiliated investments:

     

Interest income

  $119,694  $52,681   $5,637 

Other income

   1,957   843    131 
  

 

 

  

 

 

   

 

 

 

Total investment income fromnon-controlled/non-affiliated investments

   121,651   53,524    5,768 

Fromnon-controlled affiliated investments:

     

Interest income

   1,757        

Dividend income

   340   18    25 

Other income

   18        
  

 

 

  

 

 

   

 

 

 

Total investment income fromnon-controlled affiliated investments

   2,115   18    25 
  

 

 

  

 

 

   

 

 

 

Total investment income

  $123,766  $53,542   $5,793 
  

 

 

  

 

 

   

 

 

 

Expenses:

     

Interest and other debt expenses

  $28,480  $10,099   $880 

Management fees

   9,604   4,803    1,309 

Incentive fees

   11,316   5,864     

Offering costs

      949    873 

Professional fees

   1,753   1,179    548 

Administration, custodian and transfer agent fees

   971   619    174 

Directors’ fees

   365   139    160 

Organization costs

          371 

Other expenses

   1,078   380    79 
  

 

 

  

 

 

   

 

 

 

Total expenses

  $53,567  $24,032   $4,394 
  

 

 

  

 

 

   

 

 

 

Management fees waiver

  $  $   $(391
  

 

 

  

 

 

   

 

 

 

Net expenses

  $53,567  $24,032   $4,003 
  

 

 

  

 

 

   

 

 

 

NET INVESTMENT INCOME (LOSS)

  $70,199  $29,510   $1,790 
  

 

 

  

 

 

   

 

 

 

Net realized and unrealized gains (losses):

     

Net realized gain (loss) from:

     

Non-controlled/non-affiliated investments

  $2,296  $(11)   $ 

Foreign currency forward contracts

   1        

Foreign currency transactions

   (274       

Net change in unrealized appreciation (depreciation) from:

     

Noncontrolled/non-affiliated investments

   (11,537  1,367    254 

Non-controlled affiliated investments

   1,243        

Foreign currency forward contracts

   105        

Foreign currency translations

   1,038        
  

 

 

  

 

 

   

 

 

 

Net realized and unrealized gains (losses)

  $(7,128)  $1,356   $254 
  

 

 

  

 

 

   

 

 

 

(Provision) benefit for taxes on realized gain/loss on investments

  $(670 $   $ 

(Provision) benefit for taxes on unrealized appreciation/depreciation on investments

   (411       
  

 

 

  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN MEMBERS’ CAPITAL RESULTING FROM OPERATIONS

  $61,990  $30,866   $2,044 
  

 

 

  

 

 

   

 

 

 

Net investment income (loss) per unit (basic and diluted)

  $10.78  $9.16   $1.67 

Earnings (loss) per unit (basic and diluted)

  $9.52  $9.58   $1.91 

Weighted average units outstanding

   6,509,809   3,220,281    1,071,739 

 

The accompanying notes are part of these consolidated financial statements.

 

76


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Changes in Members’ Capital

(in thousands, except unit and per unit amounts)

 

   For the year ended
December 31, 2018
  For the year ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31, 2016
 

Increase (decrease) in Members’ Capital resulting from operations:

    

Net investment income (loss)

  $70,199  $29,510  $1,790 

Net realized gain (loss)

   2,023   (11   

Net change in unrealized appreciation (depreciation)

   (9,151  1,367   254 

(Provision) benefit for taxes on realized gain/loss on investments

   (670      

(Provision) benefit for taxes on unrealized appreciation/depreciation on investments

   (411      
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in Members’ Capital resulting from operations

  $61,990  $30,866  $2,044 
  

 

 

  

 

 

  

 

 

 

Distributions to Unitholders from:

    

Distributable earnings

  $(82,239 $(36,250 $(2,998
  

 

 

  

 

 

  

 

 

 

Total distributions to Unitholders

  $(82,239 $(36,250 $(2,998
  

 

 

  

 

 

  

 

 

 

Capital transactions:

    

Issuance of units (3,491,743, 2,880,450, and 2,142,978 units, respectively)

  $340,204  $283,449  $210,395 
  

 

 

  

 

 

  

 

 

 

Net increase in Members’ Capital resulting from capital transactions

  $340,204  $283,449  $210,395 
  

 

 

  

 

 

  

 

 

 

TOTAL INCREASE (DECREASE) IN MEMBERS’ CAPITAL

  $319,955  $278,065  $209,441 
  

 

 

  

 

 

  

 

 

 

Members’ Capital at beginning of period

  $487,506  $209,441  $ 
  

 

 

  

 

 

  

 

 

 

Members’ Capital at end of period

  $807,461  $487,506  $209,441 
  

 

 

  

 

 

  

 

 

 

Distributions declared per unit

  $11.62  $9.67  $1.40 

 

The accompanying notes are part of these consolidated financial statements.

 

77


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Cash Flows

(in thousands, except unit and per unit amounts)

 

   For the year ended
December 31, 2018
  For the year ended
December 31, 2017
  For the period
from June 9, 2016
(inception) to
December 31,
2016
 

Cash flows from operating activities:

    

Net increase (decrease) in Members’ Capital resulting from operations:

  $61,990  $30,866  $2,044 

Adjustments to reconcile net increase (decrease) in Members’ Capital resulting from operations to net cash provided by (used for) operating activities:

    

Purchases of investments

   (741,996  (735,321  (199,011

Payment-in-kind capitalized

   (815  (451   

Investments in affiliated money market fund, net

   1,313   136,998   (138,311

Proceeds from sales of investments and principal repayments

   217,765   62,982    

Net realized (gain) loss on investments

   (2,296  11    

Net change in unrealized (appreciation) depreciation on investments

   10,294   (1,367  (254

Net change in unrealized (appreciation) depreciation on foreign currency forward contracts and transactions

   (108      

Amortization of premium and accretion of discount, net

   (6,703  (2,028  (171

Amortization of deferred financing costs

   1,898   1,275   400 

Amortization of deferred offering costs

      949   873 

Increase (decrease) in operating assets and liabilities:

    

(Increase) decrease in receivable for investments sold

   (70      

(Increase) decrease in interest and dividends receivable

   (1,938  (4,544  (645

(Increase) decrease in other assets

   (305  (2   

Increase (decrease) in interest and other debt expenses payable

   5,155   1,166   188 

Increase (decrease) in management fees payable

   1,235   977   698 

Increase (decrease) in incentive fees payable

   11,316   5,864    

Increase (decrease) in accrued organization costs

      (115  115 

Increase (decrease) in directors’ fees payable

   (5  5    

Increase (decrease) in accrued expenses and other liabilities

   1,828   (149  740 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used for) operating activities

  $(441,442 $(502,884 $(333,334
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common units

  $340,204  $283,449  $210,395 

Offering costs paid

      (375  (1,447

Distributions paid

   (70,933  (25,054   

Financing costs paid

   (1,466  (4,279  (1,751

Borrowings on debt

   605,712   823,500   267,500 

Repayments of debt

   (414,750  (570,000  (137,500
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used for) financing activities

  $458,767  $507,241  $337,197 
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash

   17,325   4,357   3,863 

Effect of foreign exchange rate changes on cash and cash equivalents

   3       

Cash, beginning of period

   8,220   3,863    
  

 

 

  

 

 

  

 

 

 

Cash, end of period

  $25,548  $8,220  $3,863 
  

 

 

  

 

 

  

 

 

 

Supplemental andnon-cash financing activities

    

Interest expense paid

  $20,445  $7,179  $174 

Accrued but unpaid deferred financing and debt issuance costs

  $68  $660  $ 

Accrued but unpaid offering costs

  $  $  $285 

Accrued but unpaid distributions

  $25,500  $14,194  $2,998 

Exchange of investments

  $1,054  $  $ 

 

The accompanying notes are part of these consolidated financial statements.

 

78


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2018

(in thousands, except unit and per unit amounts)

 

   Portfolio Company
 Industry Interest
Rate (+)
 

Reference Rate

and Spread (+)

 Maturity 

Par

Amount (++)

  Cost  Fair Value 
 Investments at Fair Value– 173.30% #

 

 Corporate Debt– 170.38%

 

 1st Lien/Senior Secured Debt– 91.82%

 

 Accuity Delivery Systems, LLC^ (1) (2) (3) Health Care Providers & Services 9.78% L + 7.00%; 1.00% Floor 06/13/2023 $15,350  $14,930  $14,928 
 Associations, Inc.(1) (2) (3) Real Estate Management & Development 9.40% L + 7.00% (incl. 3.00% PIK); 1.00% Floor 07/30/2024  17,807   17,597   17,629 
 Associations, Inc.(1) (2) (3) (4) Real Estate Management & Development 9.40% L + 7.00% (incl. 3.00% PIK); 1.00% Floor 07/30/2024  4,438   1,528   1,536 
 Associations, Inc.(1) (2) (3) (4) (5) Real Estate Management & Development  L + 4.00%; 1.00% Floor 07/30/2024  886   (10  (9
 Bullhorn, Inc.(1) (2) (3) Internet Software & Services 9.40% L + 6.75%; 1.00% Floor 11/21/2022  18,237   18,084   18,100 
 Bullhorn, Inc.(1) (2) (3) Internet Software & Services 9.40% L + 6.75%; 1.00% Floor 11/21/2022  4,825   4,785   4,789 
 Bullhorn, Inc.(1) (2) (3) Internet Software & Services 9.33% L + 6.75%; 1.00% Floor 11/21/2022  952   937   945 
 Businessolver.com, Inc.(1) (2) (3) Health Care Technology 10.12% L + 7.50%; 1.00% Floor 05/15/2023  31,875   31,302   31,238 
 Businessolver.com, Inc.(1) (2) (3) (4) Health Care Technology 12.00% P + 6.50%; 2.00% Floor 05/15/2023  3,984   1,524   1,514 
 Businessolver.com, Inc.(1) (2) (3) (4) Health Care Technology 10.12% L + 7.50%; 1.00% Floor 05/15/2023  4,781   1,142   1,100 
 Collaborative Imaging, LLC^^^ (1) (2) (3) Health Care Providers & Services 9.03% L + 6.50%; 1.00% Floor 03/28/2025  13,400   13,215   13,132 
 Continuum Managed Services LLC(1) (2) (3) IT Services 8.53% L + 6.00%; 1.00% Floor 06/08/2023  31,372   30,689   30,745 
 Continuum Managed Services LLC(1) (2)(3) IT Services 8.53% L + 6.00%; 1.00% Floor 06/08/2023  9,060   8,879   8,879 
 Continuum Managed Services LLC(1) (2)(3) IT Services 8.53% L + 6.00%; 1.00% Floor 06/08/2023  2,658   2,604   2,605 
 Continuum Managed Services LLC(1) (2) (3) (4) (5) IT Services  L + 6.00%; 1.00% Floor 06/08/2022  3,280   (63  (66
 Dade Paper & Bag, LLC(1) (2) (3) Distributors 10.02% L + 7.50%; 1.00% Floor 06/10/2024  16,154   15,886   15,912 
 Dade Paper & Bag, LLC(1) (2) (3) Distributors 9.52% L + 7.00%; 1.00% Floor 06/10/2024  2,060   2,042   1,983 
 Datacor Holdings, Inc.(2) (3) Chemicals 9.50%  08/12/2022  13,830   13,644   13,657 
 Datto, Inc.(1) (2) IT Services 10.46% L + 8.00%; 1.00% Floor 12/07/2022  55,556   54,659   55,139 
 Datto, Inc.(1) (2) (4) (5) IT Services  L + 8.00%; 1.00% Floor 12/07/2022  3,739   (58  (28
 DDS USA Holding, Inc.(1) (2) Health Care Equipment & Supplies 8.57% L + 5.75%; 1.00% Floor 06/30/2022  5,981   5,952   5,937 
 DDS USA Holding, Inc.(1) (2) Health Care Equipment & Supplies 8.57% L + 5.75%; 1.00% Floor 06/30/2022  5,789   5,762   5,745 
 DDS USA Holding, Inc.(1) (2) (4) (5) Health Care Equipment & Supplies  L + 5.75%; 1.00% Floor 06/30/2022  1,625   (8  (12
 Diligent Corporation(1) (2) (3) Professional Services 8.03% L + 5.50%; 1.00% Floor 04/14/2022 24,447   27,949   27,660 
 Diligent Corporation(1) (2) (3) Professional Services 8.03% L + 5.50%; 1.00% Floor 04/14/2022  774   764   765 
 Diligent Corporation(1) (2) (3) (4) Professional Services 8.28% L + 5.50%; 1.00% Floor 04/14/2022  1,900   718   736 
 Diligent Corporation(1) (2) (3) (4) (5) Professional Services  L + 5.50%; 1.00% Floor 04/14/2022  374   (5  (5
 Diligent Corporation(1) (2) (3) (4) (5) Professional Services  L + 5.50%; 1.00% Floor 04/14/2022  14,490   (179  (181
 Empirix, Inc.(1) (2) (3) Diversified Telecommunication Services 8.93% L + 6.25%; 1.00% Floor 09/25/2024  33,700   33,131   33,110 
 Empirix, Inc.(1) (2) (3) (4) (5) Diversified Telecommunication Services  L + 6.25%; 1.00% Floor 09/25/2023  1,900   (31  (33
 Fenergo Finance 3 Limited(1) (2) (3) (6) Diversified Financial Services 9.13% L + 6.25%; 1.00% Floor 09/05/2024 26,900   30,744   30,204 
 Fenergo Finance 3 Limited(1) (2) (3) (4) (5) (6) Diversified Financial Services  L + 6.25%; 1.00% Floor 09/05/2024  1,785   (30  (36
 Fenergo Finance 3 Limited(1) (2) (3) (4) (5) (6) Diversified Financial Services  L + 6.25%; 1.00% Floor 09/05/2024 2,300   (44  (91
 FWR Holding Corporation(2) (3) Hotels, Restaurants & Leisure 8.26% L + 5.75%; 1.00% Floor 08/21/2023  13,500   13,226   13,230 
 FWR Holding Corporation(2) (3) Hotels, Restaurants & Leisure 8.26% L + 5.75%; 1.00% Floor 08/21/2023  2,690   2,637   2,636 
 FWR Holding Corporation(2) (3) Hotels, Restaurants & Leisure 8.26% L + 5.75%; 1.00% Floor 08/21/2023  1,705   1,672   1,671 
 FWR Holding Corporation(2) (3) (4) Hotels, Restaurants & Leisure 10.25% P + 4.75%; 2.00% Floor 08/21/2023  1,764   626   626 
 Gastro Health Holdco, LLC(1) (2) (3) Health Care Providers & Services 8.74% L + 6.00%; 1.00% Floor 09/04/2024  15,300   15,007   14,994 
 Gastro Health Holdco, LLC(1) (2) (3) (4) (5) Health Care Providers & Services  L + 6.00%; 1.00% Floor 09/04/2023  3,100   (58  (62

 

The accompanying notes are part of these consolidated financial statements.

 

79


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2018 (continued)

(in thousands, except unit and per unit amounts)

 

   Portfolio Company
 Industry Interest
Rate (+)
 

Reference Rate

and Spread (+)

 Maturity  

Par

Amount (++)

  Cost  Fair Value 
 Gastro Health Holdco, LLC(1) (2) (3) (4) (5) Health Care Providers & Services  L + 6.00%; 1.00% Floor  09/04/2024  $7,700  $(91 $(154
 Hygiena Borrower LLC(2) Life Sciences Tools & Services 6.80% L + 4.00%; 1.00% Floor  08/26/2022   5,688   5,611   5,574 
 Hygiena Borrower LLC(2) (4) (5) Life Sciences Tools & Services  L + 4.00%; 1.00% Floor  08/26/2022   580   (8  (12
 Hygiena Borrower LLC(2) (4) (5) Life Sciences Tools & Services  L + 4.00%; 1.00% Floor  08/26/2022   863   (6  (17
 iCIMS, Inc.(1) (2) (3) Software 8.94% L + 6.50%; 1.00% Floor  09/12/2024   45,158   44,291   44,255 
 iCIMS, Inc.(1) (2) (3) (4) (5) Software  L + 6.50%; 1.00% Floor  09/12/2024   2,822   (54  (56
 Integral Ad Science, Inc.(1) (2) (3) Media 9.78% L + 7.25% (incl. 1.25% PIK); 1.00% Floor  07/19/2024   35,840   35,169   35,123 
 Integral Ad Science, Inc.(1) (2) (3) (4) (5) Media  L + 6.00%; 1.00% Floor  07/19/2023   2,741   (50  (55
 Lithium Technologies, Inc.(1) (2) (3) Internet Software & Services 10.39% L + 8.00%; 1.00% Floor  10/03/2022   58,727   57,564   57,553 
 Lithium Technologies, Inc.(1) (2) (3) (4) (5) Internet Software & Services  L + 8.00%; 1.00% Floor  10/03/2022   4,046   (76  (81
 Midwest Transport, Inc.(1) (2) Road & Rail 9.80% L + 7.00%; 1.00% Floor  10/02/2023   18,960   18,778   18,770 
 MMIT Holdings, LLC(1) (2) Health Care Technology 8.02% L + 5.50%; 1.00% Floor  11/15/2024   13,400   13,137   13,132 
 MMIT Holdings, LLC(1) (2) (4) (5) Health Care Technology  L + 5.50%; 1.00% Floor  11/15/2024   3,830   (75  (77
 Netvoyage Corporation(1) (2) (3) Software 11.53% L + 9.00%; 1.00% Floor  03/24/2022   13,729   13,531   13,557 
 Netvoyage Corporation(1) (2) (3) (4) (5) Software  L + 9.00%; 1.00% Floor  03/24/2022   1,044   (14  (13
 Picture Head Midco LLC(1) (2) (3) Media 9.27% L + 6.75%; 1.00% Floor  08/31/2023   34,930   34,270   34,231 
 Picture Head Midco LLC(1) (2) (3) (4) Media 9.27% L + 6.75%; 1.00% Floor  08/31/2023   3,840   1,116   1,075 
 Picture Head Midco LLC(1) (2) (3) (4) (5) Media  L + 6.75%; 1.00% Floor  08/31/2023   3,840   (72  (77
 Power Stop, LLC(1) (2) Auto Components 7.55% L + 4.75%  10/19/2025   11,500   11,472   11,443 
 SF Home Décor, LLC(1) (2) (3) Household Products 12.31% L + 9.50%; 1.00% Floor  07/13/2022   29,625   28,944   28,810 
 SPay, Inc.(1) (2) (3) Internet Software & Services 8.22% L + 5.75%; 1.00% Floor  06/17/2024   15,500   15,213   15,113 
 SPay, Inc.(1) (2) (3) (4) Internet Software & Services 8.34% L + 5.75%; 1.00% Floor  06/17/2024   1,730   1,237   1,225 
 SPay, Inc.(1) (2) (3) (4) (5) Internet Software & Services  L + 5.75%; 1.00% Floor  06/17/2024   8,630   (79  (216
 VRC Companies, LLC(2) (3) (4) Commercial Services & Supplies 9.03% L + 6.50%; 1.00% Floor  03/31/2023   5,546   4,181   4,178 
 VRC Companies, LLC(2)(3) Commercial Services & Supplies 9.02% L + 6.50%; 1.00% Floor  03/31/2023   2,826   2,802   2,798 
 VRC Companies, LLC(2) (3) (4) Commercial Services & Supplies 9.45% L + 6.50%; 1.00% Floor  03/31/2022   264   132   132 
 Wine.com, LLC(1) (2) Beverages 9.86% L + 7.00%; 1.00% Floor  11/14/2024   9,600   9,411   9,408 
 Wrike, Inc.(1) (2) Professional Services 9.28% L + 6.75%; 1.00% Floor  12/31/2024   29,687   29,094   29,094 
 Wrike, Inc.(1) (2) (4) (5) Professional Services  L + 6.75%; 1.00% Floor  12/31/2024   2,400   (48  (48
 Xactly Corporation(1) (2) (3) Internet Software & Services 9.78% L + 7.25%; 1.00% Floor  07/29/2022   34,390   33,854   33,874 
 Xactly Corporation(1) (2) (3) (4) (5) Internet Software & Services  L + 7.25%; 1.00% Floor  07/29/2022   2,554   (37  (38
 Yasso, Inc.(1) (2) (3) Food Products 10.27% L + 7.75%; 1.00% Floor  03/23/2022   12,937   12,757   12,323 
       

 

 

  

 

 

 
 

Total 1st Lien/Senior Secured Debt

     743,103   741,446 
 1st Lien/Last-Out Unitranche (7) – 20.22%     
 Intelligent Document Solutions, Inc.(1) (2) (3) Diversified Financial Services 8.80% L + 6.00%; 1.00% Floor  02/28/2024   30,800   29,907   29,876 
 Intelligent Document Solutions, Inc.(1) (2) (3) (4) Diversified Financial Services 8.79% L + 6.00%; 1.00% Floor  02/28/2024   21,100   12,144   12,111 
 RugsUSA, LLC(1) (2) (3) Household Products 9.31% L + 6.50%; 1.00% Floor  04/30/2023   8,830   8,752   8,742 
 Smarsh, Inc.(1) (2) (3) Software 10.41% L + 7.88%; 1.00% Floor  03/31/2021   56,641   55,887   56,075 
 Vantage Mobility International, LLC(2) (3) Health Care Equipment & Supplies 10.28% L + 7.75%; 1.00% Floor  09/09/2021   25,111   24,808   22,725 
 You Fit, LLC(2) (3) Diversified Consumer Services 9.55% L + 6.75%; 1.00% Floor  01/04/2022   34,500   33,758   33,724 
       

 

 

  

 

 

 
 

Total 1stLien/Last-Out Unitranche

    165,256   163,253 
 2nd Lien/Senior Secured Debt– 57.81%     
 American Dental Partners, Inc.(1) (2) (3) Health Care Providers & Services 11.30% L + 8.50%; 1.00% Floor  09/25/2023   9,180   9,000   8,996 
 Chase Industries, Inc.(1) (2) (3) Building Products 10.61% L + 8.00%; 1.00% Floor  05/11/2026   25,700   24,970   24,865 

 

The accompanying notes are part of these consolidated financial statements.

 

80


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2018 (continued)

(in thousands, except unit and per unit amounts)

 

   Portfolio Company
 Industry Interest
Rate (+)
 

Reference Rate

and Spread (+)

 Maturity  

Par

Amount (++)

  Cost  Fair Value 
 Chase Industries, Inc.(1) (2) (3) (4) (5) Building Products  L + 8.00%; 1.00% Floor  05/11/2026  $6,400  $(177 $(208
 Country Fresh Holdings, LLC(1) (2) (3) Food Products 11.20% L + 8.75%; 1.00% Floor  10/02/2023   13,800   13,573   11,454 
 DuBois Chemicals, Inc.(1) (2) Chemicals 10.52% L + 8.00%; 1.00% Floor  03/15/2025   25,330   24,900   24,823 
 ERC Finance, LLC(1) (2) (3) Health Care Providers & Services 10.74% L + 8.22%; 1.00% Floor  09/22/2025   29,800   29,204   29,204 
 Genesis Acquisition Co.(1) (2) (3) Diversified Financial Services 10.02% L + 7.50%  07/31/2025   10,500   10,248   10,211 
 Genesis Acquisition Co.(1) (2) (3) (4) (5) Diversified Financial Services  L + 7.50%  07/31/2025   2,700   (32  (74
 Granicus, Inc.(2) (3) Software 11.77% L + 9.00%; 1.00% Floor  09/07/2023   31,875   31,407   31,397 
 Hygiena Borrower LLC(2) (3) Life Sciences Tools & Services 10.55% L + 7.75%; 1.00% Floor  08/26/2023   2,810   2,758   2,761 
 Hygiena Borrower LLC(2) (3) (4) Life Sciences Tools & Services 10.55% L + 7.75%; 1.00% Floor  08/26/2023   1,030   136   129 
 ICP Industrial, Inc.(1) (2) (3) Chemicals 10.68% L + 8.25%; 1.00% Floor  05/03/2024   30,700   30,038   30,009 
 Institutional Shareholder Services Inc.(1) (2) Diversified Financial Services 10.55% L + 7.75%; 1.00% Floor  10/16/2025   7,700   7,666   7,546 
 Intelligent Medical Objects, Inc.(1) (2) (3) Health Care Technology 11.27% L + 8.50%; 1.00% Floor  12/22/2024   18,500   18,086   18,315 
 Market Track, LLC(1) (2) (3) Internet Catalog & Retail 10.18% L + 7.75%; 1.00% Floor  06/05/2025   32,800   31,955   31,160 
 National Spine and Pain Centers, LLC(1) (2) (3) Health Care Providers & Services 10.77% L + 8.25%; 1.00% Floor  12/02/2024   28,500   27,776   27,787 
 Odyssey Logistics & Technology Corporation(1) (2) Road & Rail 10.52% L + 8.00%; 1.00% Floor  10/12/2025   28,152   27,577   27,378 
 Recipe Acquisition Corp.(2) (3) Food Products 10.81% L + 8.00%; 1.00% Floor  12/01/2022   20,000   19,736   19,750 
 RSC Acquisition, Inc.(1) (2) (3) Insurance 10.53% L + 8.00%; 1.00% Floor  11/30/2023   12,900   12,786   12,771 
 RSC Acquisition, Inc.(1) (2) (3) Insurance 10.80% L + 8.00%; 1.00% Floor  11/30/2023   8,310   8,233   8,227 
 RSC Acquisition, Inc.(1) (2) (3) (4) (5) Insurance  L + 8.00%; 1.00% Floor  11/30/2023   6,400   (55  (64
 SMB Shipping Logistics, LLC(1) (2) Air Freight & Logistics 10.86% L + 8.00%; 1.00% Floor  02/03/2025   33,333   32,821   32,667 
 Spectrum Plastics Group, Inc.(1) (2) Containers & Packaging 9.52% L + 7.00%; 1.00% Floor  01/31/2026   9,975   9,930   9,676 
 USRP Holdings,
Inc.(1) (2) (3)
 Insurance 11.55% L + 8.75%; 1.00% Floor  09/29/2025   10,300   10,180   10,171 
 USRP Holdings,
Inc.(1) (2) (3) (4)
 Insurance 11.43% L + 8.75%; 1.00% Floor  09/29/2025   2,600   1,687   1,684 
 Viant Medical Holdings,
Inc.(1) (2)
 Health Care Equipment & Supplies 10.55% L + 7.75%  07/02/2026   12,470   12,350   12,096 
 Xcellence, Inc.(1) (2) (3) IT Services 11.57% L + 8.75%; 1.00% Floor  06/22/2024   19,600   19,159   19,208 
 YI, LLC(1) (2) (3) Health Care Equipment & Supplies 10.55% L + 7.75%; 1.00% Floor  11/07/2025   23,000   22,380   22,367 
 Zep Inc.(1) (2) Chemicals 11.05% L + 8.25%; 1.00% Floor  08/11/2025   35,700   34,910   32,487 
       

 

 

  

 

 

 
 

Total 2nd Lien/Senior Secured Debt

    473,202   466,793 
 Unsecured Debt– 0.53%     
 Recipe Acquisition Corp.(3) Food Products 13.25% PIK   12/21/2022   4,361   4,309   4,295 
 

Total Unsecured Debt

   4,309   4,295 
       

 

 

  

 

 

 
 

Total Corporate Debt

   1,385,870   1,375,787 
       

 

 

  

 

 

 
   Portfolio Company
 Industry    Coupon     Shares  Cost  Fair Value 
  Preferred Stock– 1.50%              
 Accuity Delivery Systems, LLC^ (1) (3) (8) (9) Health Care Providers & Services     145,695  $4,800  $5,760 
 Datacor Holdings, Inc.(3) (6) (8) (9) Chemicals  7.00% PIK   1,000,000   1,000   1,470 
 Recipe Acquisition Corp.(3) (8) (9) Food Products  11.00% PIK   1,600   1,496   2,029 
 Wine.com, LLC(1) (8) (9) Beverages     337,425   2,900   2,900 
       

 

 

  

 

 

 
 

Total Preferred Stock

     10,196   12,159 

 

The accompanying notes are part of these consolidated financial statements.

 

81


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2018 (continued)

(in thousands, except unit and per unit amounts)

 

   Portfolio Company Industry    Coupon     Shares  Cost  Fair Value 
 Common Stock– 1.40%

 

 Collaborative Imaging Holdco, LLC – Class B^^^ (1) (3) (8) Health Care Providers & Services     12,370   1,668   1,944 
 Collaborative Imaging Holdco, LLC – Class C^^^ (1) (3) (6) (8) (9) Health Care Providers & Services     11,675   232   324 
 Continuum Managed Services LLC – Class A(1) (3) (8) (9) IT Services     1,079   1,079   1,240 
 Continuum Managed Services LLC – Class B(1) (3) (8) (9) IT Services     731,623   11   395 
 Elah Holdings, Inc.^ (1) (3) (8) (9) Capital Markets     69,386   3,354   3,354 
 National Spine and Pain Centers, LLC(1) (3) (8) (9) Health Care Providers & Services     900   900   477 
 Wrike, Inc.(1) (8) (9) Professional Services     524,730   3,260   3,260 
 Yasso, Inc.(1) (3) (8) (9) Food Products     1,360   1,360   291 
       

 

 

  

 

 

 
 Total Common Stock     11,864   11,285 
   Portfolio Company Industry           Units  Cost  Fair Value 
 Warrants– 0.02%    
 Recipe Acquisition Corp.(3) (8) Food Products     44  $104  $130 
       

 

 

  

 

 

 
 

Total Warrants

      104   130 
       

 

 

  

 

 

 
 TOTAL INVESTMENTS – 173.30%

 

 $1,408,034  $1,399,361 
       

 

 

  

 

 

 
 LIABILITIES IN EXCESS OF OTHER ASSETS – (73.30%)

 

 $(591,900
        

 

 

 
 NET ASSETS – 100.00%

 

 $807,461 
        

 

 

 

 

(+) 

The Consolidated Schedule of Investments discloses the actual interest rate for partially or fully funded debt in effect as of the reporting date. Variable rate loans bear interest at a rate that may be determined by reference to either LIBOR (“L”) or alternate base rate (commonly based on the Prime Rate (“P”)), at the borrower’s option, which reset periodically based on the terms of the credit agreement. L loans are typically indexed to 12 month, 6 month, 3 month, 2 month, 1 month or 1 week L rates. As of December 31, 2018, rates for the 12 month, 6 month, 3 month, 2 month, 1 month and 1 week L are 3.01%, 2.88%, 2.81%, 2.61%, 2.50% and 2.41%, respectively. As of December 31, 2018, P was 5.50%. For investments with multiple reference rates or alternate base rates, the interest rate shown is the weighted average interest rate in effect at December 31, 2018.

(++) 

Par amount is denominated in U.S. Dollars (“$”) unless otherwise noted, Euro (“€”).

# 

Percentages are based on net assets.

^ 

As defined in the Investment Company Act of 1940, the investment is deemed to be an “affiliated person” of the Company because the Company owns, either directly or indirectly, 5% or more of the portfolio company’s outstanding voting securities. See Note 3 “Significant Agreements and Related Party Transactions”.

^^^ 

The portfolio company is otherwise deemed to be an “affiliated person” of the Company under the Investment Company Act of 1940. See Note 3 “Significant Agreements and Related Party Transactions”.

(1) 

Representco-investments made with the Company’s affiliates in accordance with the terms of the exemptive relief that the Company received from the U.S. Securities and Exchange Commission. See Note 3 “Significant Agreements and Related Party Transactions”.

(2) 

All, or a portion of, the assets are pledged as collateral for the revolving credit facility with JPMorgan Chase Bank, National Association (the “JPM Revolving Credit Facility”). See Note 6 “Debt”.

(3) 

The fair value of the investment was determined using significant unobservable inputs. See Note 5 “Fair Value Measurement”.

(4) 

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See Note 8 “Commitments and Contingencies”.

(5) 

The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value is the result of the capitalized discount on the loan.

(6) 

The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire anynon-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2018 the aggregate fair value of these securities is $31,871 or 2.22% of the Company’s total assets.

(7) 

In exchange for the greater risk of loss, the“last-out” portion of the Company’s unitranche loan investment generally earns a higher interest rate than the“first-out” portions. The“first-out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the“last-out” portion that the Company would continue to hold.

(8) 

Securities exempt from registration under the Securities Act of 1933 (the “Securities Act”), and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2018, the aggregate fair value of these securities is $23,574 or 2.92% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

Investment

  Acquisition Date

Accuity Delivery Systems, LLC – Preferred Stock

  06/13/2018

Collaborative Imaging Holdco, LLC – Class B – Common Stock

  03/30/2018

Collaborative Imaging Holdco, LLC – Class C – Common Stock

  03/30/2018

Continuum Managed Services LLC – Class A – Common Stock

  06/08/2017

Continuum Managed Services LLC – Class B – Common Stock

  06/08/2017

Datacor Holdings, Inc. – Preferred Stock

  08/12/2016

Elah Holdings, Inc. – Common Stock

  05/09/2018

National Spine and Pain Centers, LLC – Common Stock

  06/02/2017

Recipe Acquisition Corp. – Preferred Stock

  12/22/2016

Recipe Acquisition Corp. – Warrants

  12/22/2016

Wine.com, LLC – Preferred Stock

  11/14/2018

Wrike, Inc. – Common Stock

  12/31/2018

Yasso, Inc. – Common Stock

  03/23/2017

 

(9)  

Non-income producing security.

PIK – Payment-In-Kind

 

The accompanying notes are part of these consolidated financial statements.

 

82


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2018 (continued)

(in thousands, except unit and per unit amounts)

 

ADDITIONAL INFORMATION

Foreign currency forward contracts

 

Counterparty

  Currency
Purchased
   Currency
Sold
   Settlement   Unrealized
Appreciation
(Depreciation)
 

Bank of America, N.A.

   USD 411    EUR 351    01/04/2019   $9 

Bank of America, N.A.

   USD 327    EUR 278    02/05/2019    7 

Bank of America, N.A.

   USD 420    EUR 356    04/03/2019    9 

Bank of America, N.A.

   USD 357    EUR 301    05/06/2019    8 

Bank of America, N.A.

   USD 447    EUR 375    07/03/2019    10 

Bank of America, N.A.

   USD 360    EUR 301    08/05/2019    9 

Bank of America, N.A.

   USD 472    EUR 394    10/04/2019    10 

Bank of America, N.A.

   USD 378    EUR 314    11/05/2019    9 

Bank of America, N.A.

   USD 472    EUR 390    01/06/2020    11 

Bank of America, N.A.

   USD 479    EUR 393    04/06/2020    11 

Bank of America, N.A.

   USD 480    EUR 390    07/06/2020    12 
        

 

 

 
        $105 
        

 

 

 

Currency Abbreviations:

EUR – Euro

USD – U.S. Dollar

 

The accompanying notes are part of these consolidated financial statements.

 

83


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2017

(in thousands, except unit and per unit amounts)

 

   Portfolio Company Industry Interest(+) Maturity Par Amount  Cost  Fair Value 
 Investments at Fair Value – 179.61% #

 

 Corporate Debt – 178.25%

 

 1st Lien/Senior Secured Debt – 58.51%

 

 Bullhorn, Inc.(1) Internet Software & Services 8.20% (L + 6.75%; 1.00% Floor) 11/21/2022 $18,421  $18,235  $18,230 
 Bullhorn, Inc.(1) (2) Internet Software & Services 8.20% (L + 6.75%; 1.00% Floor) 11/21/2022  952   70   70 
 Bullhorn, Inc.( 1) (2) (3) Internet Software & Services (L + 6.75%; 1.00% Floor) 11/21/2022  6,352   (31  (32
 

Clinical Supplies Management Holdings,

Inc.(4) (5)

 Containers & Packaging 9.23% (L + 7.75%; 1.00% Floor) 10/12/2021  18,672   18,365   18,392 
 

Clinical Supplies Management Holdings,

Inc.(4) (5)

 Containers & Packaging 9.11% (L + 7.75%; 1.00% Floor) 10/12/2021  5,247   5,162   5,168 
 

Clinical Supplies Management Holdings,

Inc.(2) (3) (4) (5)

 Containers & Packaging (L + 7.75%; 1.00% Floor) 10/12/2021  2,000   (31  (30
 

Continuum Managed Services

LLC(1) (4) (5)

 IT Services 10.32% (L + 8.75%; 1.00% Floor) 06/08/2023  31,691   30,878   30,898 
 

Continuum Managed Services

LLC(1) (2) (3) (4) (5)

 IT Services (L + 8.75%; 1.00% Floor) 06/08/2023  2,658   (65  (66
 

Continuum Managed Services

LLC(1) (2) (3) (4) (5)

 IT Services (L + 8.75%; 1.00% Floor) 06/08/2022  3,280   (81  (82
 Dade Paper & Bag, LLC(1) (4) (5) Distributors 8.93% (L + 7.50%; 1.00% Floor) 06/10/2024  16,318   16,010   16,032 
 Datacor Holdings, Inc.(4) (5) Chemicals 9.50% 08/12/2022  14,000   13,770   13,790 
 Datto, Inc.(1) (4) IT Services 9.41% (L + 8.00%; 1.00% Floor) 12/07/2022  53,640   52,580   52,567 
 Datto, Inc.(1) (2) (3) (4) IT Services (L + 8.00%; 1.00% Floor) 12/07/2022  3,610   (71  (72
 FWR Holding Corporation(4) (5) Hotels, Restaurants & Leisure 7.66% (L + 6.00%; 1.00% Floor) 08/21/2023  13,637   13,312   13,296 
 FWR Holding Corporation(2) (4) (5) Hotels, Restaurants & Leisure 7.60% (L + 6.00%; 1.00% Floor) 08/21/2023  4,410   601   595 
 FWR Holding Corporation(2) (4) (5) Hotels, Restaurants & Leisure 7.57% (L + 6.00%; 1.00% Floor) 08/21/2023  1,764   178   176 
 Lithium Technologies, Inc.(1) (4) Internet Software & Services 9.39% (L + 8.00%; 1.00% Floor) 10/03/2022  31,800   31,109   31,085 
 Lithium Technologies, Inc.(1) (2) (3) (4) Internet Software & Services (L + 8.00%; 1.00% Floor) 10/03/2022  2,327   (50  (52
 Netvoyage Corporation(1) (4) (5) Software 11.07% (L + 9.50%; 1.00% Floor) 03/24/2022  12,527   12,306   12,308 
 Netvoyage Corporation(1) (2) (3) (4) (5) Software (L + 9.50%; 1.00% Floor) 03/24/2022  1,044   (18  (18
 SF Home Décor, LLC(1) (4) (5) Household Products 11.20% (L + 9.50%; 1.00% Floor) 07/13/2022  30,810   29,946   29,886 
 Xactly Corporation(1) (4) (5) Internet Software & Services 8.82% (L + 7.25%; 1.00% Floor) 07/29/2022  29,800   29,242   29,204 
 Xactly Corporation(1) (2) (3) (4) (5) Internet Software & Services (L + 7.25%; 1.00% Floor) 07/29/2022  2,554   (47  (51
 Yasso, Inc.(1) (4) (5) Food Products 9.44% (L + 7.75%; 1.00% Floor) 03/23/2022  14,391   14,139   13,960 
      

 

 

  

 

 

 
 

Total 1st Lien/Senior Secured Debt

 

  285,509   285,254 
 1stLien/Last-Out Unitranche(6) – 23.17%

 

 Intelligent Document Solutions, Inc.(1) (4) (5) Diversified Financial Services 9.95% (L + 8.25%; 1.00% Floor) 08/31/2022  17,900   17,475   17,632 
 myON, LLC(1) (4) (5) Internet Software & Services 10.07% (L + 8.50%; 1.00% Floor) 02/17/2022  11,300   11,104   11,102 
 Smarsh, Inc.(1) (4) (5) Software 9.45% (L + 7.88%; 1.00% Floor) 03/31/2021  26,069   25,664   25,678 
 Vantage Mobility International, LLC(4) (5) Health Care Equipment & Supplies 9.32% (L + 7.75%; 1.00% Floor) 09/09/2021  25,111   24,712   24,734 
 You Fit, LLC(4) (5) Diversified Consumer Services 8.44% (L + 6.75%; 1.00% Floor) 01/04/2022  34,500   33,551   33,810 
      

 

 

  

 

 

 
 

Total 1stLien/Last-Out Unitranche

 

  112,506   112,956 
 2nd Lien/Senior Secured Debt – 95.79%

 

 American Dental Partners, Inc.(1) (4) (5) Health Care Providers & Services 10.19% (L + 8.50%; 1.00% Floor) 09/25/2023  13,600   13,292   13,294 
 

Association Member Benefits Advisors,

LLC(4) (5)

 Insurance 10.31% (L + 8.75%; 1.00% Floor) 06/08/2023  28,000   27,507   27,510 
 Country Fresh Holdings, LLC(1) (4) (5) Food Products 10.11% (L + 8.75%; 1.00% Floor) 10/02/2023  13,800   13,538   13,386 
 DuBois Chemicals, Inc.(1) (4) (5) Chemicals 9.49% (L + 8.00%; 1.00% Floor) 03/15/2025  20,000   19,579   19,800 
 ERC Finance, LLC(1) (4) (5) Health Care Providers & Services 9.58% (L + 8.22%; 1.00% Floor) 09/21/2025  29,800   29,144   29,129 
 Granicus, Inc.(4) (5) Software 10.52% (L + 9.00%; 1.00% Floor) 09/07/2023  25,500   25,057   25,054 
 ICP Industrial, Inc.(1) Chemicals 9.62% (L + 8.25%; 1.00% Floor) 05/03/2024  24,900   24,289   24,277 
 ICP Industrial, Inc.(1) (2) (3) Chemicals (L + 8.25%; 1.00% Floor) 05/03/2024  5,800   (142  (145
 Institutional Shareholder Services Inc.(1) (4) Diversified Financial Services 9.11% (L + 7.75%; 1.00% Floor) 10/16/2025  7,700   7,662   7,719 
 Intelligent Medical Objects, Inc.(1) (4) Health Care Technology 10.16% (L + 8.50%; 1.00% Floor) 12/22/2024  18,500   18,039   18,038 
 Market Track, LLC(1) (4) (5) Internet Catalog & Retail 9.10% (L + 7.75%; 1.00% Floor) 06/05/2025  32,800   31,863   31,816 

 

The accompanying notes are part of these consolidated financial statements.

 

84


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2017 (continued)

(in thousands, except unit and per unit amounts)

 

   Portfolio Company Industry Interest(+) Maturity  Par Amount  Cost  Fair Value 
 National Spine and Pain Centers, LLC(1) (4) (5) Health Care Providers & Services 9.94% (L + 8.25%; 1.00% Floor)  12/02/2024  $28,500  $27,690  $27,716 
 Oasis Outsourcing Holdings, Inc.(1) (4) (5) Diversified Financial Services 8.82% (L + 7.25%; 1.00% Floor)  07/01/2024   33,580   33,101   33,076 
 

Odyssey Logistics & Technology

Corporation(1) (4)

 Road & Rail 9.57% (L + 8.00%; 1.00% Floor)  10/12/2025   20,300   19,801   20,199 
 PPC Industries Inc.(1) (4) Containers & Packaging 9.33% (L + 8.00%; 1.00% Floor)  05/08/2025   13,300   13,175   13,267 
 Procare Software, LLC(4) (5) Diversified Financial Services 10.44% (L + 8.75%; 1.00% Floor)  09/30/2022   35,000   34,355   34,825 
 Recipe Acquisition Corp.(4) (5) Food Products 10.69% (L + 9.00%; 1.00% Floor)  12/01/2022   20,000   19,683   19,700 
 Regulatory DataCorp, Inc.(4) (5) Diversified Financial Services 10.57% (L + 9.00%; 1.00% Floor)  09/21/2023   15,000   14,739   14,775 
 SMB Shipping Logistics, LLC(1) (4) (5) Air Freight & Logistics 10.20% (L + 8.75%; 1.00% Floor)  02/03/2025   20,000   19,723   19,700 
 Xcellence, Inc.(1) (4) IT Services 10.41% (L + 8.75%; 1.00% Floor)  06/22/2024   16,500   16,089   16,088 
 Young Innovations, Inc.(1) Health Care Equipment & Supplies 9.44% (L + 7.75%; 1.00% Floor)  11/07/2025   23,000   22,320   22,310 
 Zep Inc.(1) (4) Chemicals 9.63% (L + 8.25%; 1.00% Floor)  08/11/2025   35,700   34,830   35,432 
      

 

 

  

 

 

 
 

Total 2nd Lien/Senior Secured Debt

 

  465,334   466,966 
 Unsecured Debt – 0.78%

 

 Recipe Acquisition Corp.(5) Food Products 13.25% PIK  12/21/2022   3,851   3,790   3,783 
      

 

 

  

 

 

 
 

Total Unsecured Debt

 

  3,790   3,783 
      

 

 

  

 

 

 
 

Total Corporate Debt

 

  867,139   868,959 
      

 

 

  

 

 

 
   Portfolio Company Industry    Coupon  Shares  Cost  Fair Value 
 Preferred Stock – 0.61%

 

 

Datacor Holdings, Inc.(5) (7) (8) (11)

 Chemicals   7.00% PIK   1,000,000   $ 1,000  $1,290 
 

Recipe Acquisition Corp.(5) (7) (11)

 Food Products   11.00% PIK   1,600   1,496   1,689 
      

 

 

  

 

 

 
 

Total Preferred Stock

      2,496   2,979 
      

 

 

  

 

 

 
 Common Stock – 0.73%      
 

Continuum Managed Services LLC –

Class A(1) (5) (7) (11)

 IT Services    1,079   1,079   1,079 
 

Continuum Managed Services LLC –

Class B(1) (5) (7) (11)

 IT Services    731,623   11   11 
 

myON, LLC(1) (5) (7)(11)

 Internet Software & Services    24,131   900   900 
 

National Spine and Pain Centers,

LLC(1) (5) (7) (11)

 Health Care Providers & Services    900   900   765 
 

Yasso, Inc.(1) (5) (7) (11)

 Food Products    1,360   1,360   818 
      

 

 

�� 

 

 

 
 

Total Common Stock

      4,250   3,573 
      

 

 

  

 

 

 
   Portfolio Company Industry        Units  Cost  Fair Value 
 Warrants – 0.02%

 

 

Recipe Acquisition Corp.(5)(11)

 Food Products    44   $ 104  $99 
      

 

 

  

 

 

 
 

Total Warrants

      104   99 
      

 

 

  

 

 

 
            Yield  Shares  Cost  Fair Value 
 Investments in Affiliated Money Market Fund – 0.27% #

 

 

Goldman Sachs Financial Square Government Fund – Institutional Shares(10)

  1.21%(9)   1,312,925   $ 1,313  $1,313 
      

 

 

  

 

 

 
 

Total Investments in Affiliated Money Market Fund

 

   1,313   1,313 
      

 

 

  

 

 

 
 TOTAL INVESTMENTS – 179.88%

 

 $ 875,302  $876,923 
      

 

 

  

 

 

 
 LIABILITIES IN EXCESS OF OTHER ASSETS – (79.88%)

 

  $(389,417
       

 

 

 
 MEMBERS’ CAPITAL – 100.00%

 

  $487,506 
       

 

 

 

 

The accompanying notes are part of these consolidated financial statements.

 

85


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2017 (continued)

(in thousands, except unit and per unit amounts)

 

 

(+)  

The Consolidated Schedule of Investments discloses the actual interest rate for partially or fully funded debt in effect as of the reporting date. Variable rate loans bear interest at a rate that may be determined by reference to either L or alternate base rate (commonly based on the P), at the borrower’s option, which reset periodically based on the terms of the credit agreement. L loans are typically indexed to 12 month, 6 month, 3 month, 2 month, 1 month or 1 week L rates. As of December 31, 2017, rates for the 12 month, 6 month, 3 month, 2 month, 1 month and 1 week L were 2.11%, 1.84%, 1.69%, 1.62%, 1.56% and 1.48%, respectively. As of December 31, 2017, P was 4.50%. For investments with multiple reference rates or alternate base rates, the interest rate shown is the weighted average interest rate in effect at December 31, 2017.

#  

Percentages are based on Members’ Capital.

(1)  

Representco-investments made with the Company’s affiliates in accordance with the terms of the exemptive relief that the Company received from the SEC. See Note 3 “Significant Agreements and Related Party Transactions”.

(2)  

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See Note 8 “Commitments and Contingencies”.

(3)  

The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value is the result of the capitalized discount on the loan.

(4)  

Assets are pledged as collateral for the revolving credit facility with JPMorgan Chase Bank, National Association (the “JPM Revolving Credit Facility”). See Note 6 “Debt”.

(5)  

The fair value of the investment was determined using significant unobservable inputs. See Note 5 “Fair Value Measurement”.

(6)  

In exchange for the greater risk of loss, the“last-out” portion of the Company’s unitranche loan investment generally earns a higher interest rate than the“first-out” portions. The“first-out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the“last-out” portion that the Company would continue to hold.

(7)  

Non-income producing security.

(8)  

The investment is not a qualifying asset under Section 55(a) of the Investment Company Act. The Company may not acquire anynon-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2017 the aggregate fair value ofnon-qualifying assets was $1,290 or 0.14% of the Company’s total assets.

(9)  

The rate shown is the annualizedseven-day yield as of December 31, 2017.

(10)  

A portion of the assets are pledged as collateral for the JPM Revolving Credit Facility. See Note 6 “Debt”.

(11)  

Securities exempt from registration under the Securities Act, and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2017, the aggregate fair value of these securities is $6,651 or 1.36% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

Investment

  Acquisition Date

Continuum Managed Services LLC – Class A

  6/8/2017

Continuum Managed Services LLC – Class B

  6/8/2017

Datacor Holdings, Inc.

  8/12/2016

myON, LLC

  2/17/2017

National Spine and Pain Centers, LLC

  6/2/2017

Recipe Acquisition Corp. – Preferred

  12/22/2016

Recipe Acquisition Corp. – Warrants

  12/22/2016

Yasso, Inc.

  3/23/2017

PIK – Payment-In-Kind

 

The accompanying notes are part of these consolidated financial statements.

 

86


Goldman Sachs Private Middle Market Credit LLC

Notes to the Consolidated Financial Statements

(in thousands, except unit and per unit amounts)

 

1.

ORGANIZATION

Goldman Sachs Private Middle Market Credit LLC (the “Company”, which term refers to either Goldman Sachs Private Middle Market Credit LLC or Goldman Sachs Private Middle Market Credit LLC together with its consolidated subsidiaries, as the context may require), initially established on December 23, 2015 as Private Middle Market Credit LP, a Delaware limited partnership, converted to a Delaware limited liability company on April 4, 2016 and commenced investment operations on July 1, 2016. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). In addition, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2016.

The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments.

Goldman Sachs Asset Management, L.P. (“GSAM”), a Delaware limited partnership and an affiliate of Goldman Sachs & Co. LLC (including its predecessors, “GS & Co.”), is the investment adviser (the “Investment Adviser”) of the Company. The term “Goldman Sachs” refers to The Goldman Sachs Group, Inc. (“Group Inc.”), together with GS & Co., GSAM and its other subsidiaries.

On May 6, 2016 (the “Initial Closing Date”), the Company began accepting subscription agreements (“Subscription Agreements”) from investors acquiring common units of the Company’s limited liability company interests (“Units”) in the Company’s private offering. Under the terms of the Subscription Agreements, investors are required to make capital contributions up to the undrawn amount of their capital commitment to purchase Units each time the Company delivers a drawdown notice. On November 1, 2016, the Company’s board of directors (the “Board of Directors” or the “Board”) approved an amended and restated limited liability company agreement and approved an extension of the final date on which the Company would accept Subscription Agreements to May 5, 2017.

The investment period commenced on the Initial Closing Date and will continue until May 5, 2019, provided that it may be extended by the Board of Directors, in its discretion, for one additionalsix-month period, and, with the approval of amajority-in-interest of the Unitholders, for up to one additional year thereafter. In addition, the Board of Directors may terminate the investment period at any time in its discretion.

The term of the Company is until May 5, 2024, subject to the Board of Directors’ right to liquidate the Company at any time and to extend the term of the Company for up to two successiveone-year periods. Upon the request of the Board of Directors and the approval of amajority-in-interest of the Unitholders, the term of the Company may be further extended.

Credit Alternatives GP LLC (the “Initial Member”), an affiliate of the Investment Adviser, made a capital contribution to the Company of one hundred dollars on June 9, 2016 (inception) and served as the sole initial member of the Company. The Company cancelled the Initial Member’s interest in the Company on July 14, 2016, the first date on which investors (other than the Initial Member) made their initial capital contribution to purchase Units (the “Initial Drawdown Date”).

The Company has formed certain wholly owned subsidiaries, which are structured as Delaware limited liability companies, to hold certain investments, including equity or equity-like investments in portfolio companies and corporate debt of portfolio companies.

 

2.

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s functional currency is U.S. dollars (“USD”) and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to RegulationS-X. This requires the Company to make certain estimates and assumptions that may affect the amounts reported in the consolidated financial statements and accompanying notes. These consolidated financial statements reflect normal and recurring adjustments that in the opinion of the Company are necessary for the fair statement of the results for the periods presented. Actual results may differ from the estimates and assumptions included in the consolidated financial statements.

Certain prior period information has been reclassified to conform to the current period presentation. The reclassification has no effect on the Company’s consolidated financial position or the consolidated results of operations as previously reported.

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”).

Basis of Consolidation

As provided under ASC 946, the Company will not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the financial position and results of operations of its wholly owned subsidiaries, PMMC Blocker I, LLC (formerly known asMy-On PMMC Blocker, LLC), PMMC Blocker II, LLC, PMMC Wine I, LLC and Goldman Sachs Private Middle Market Credit SPV LLC (“SPV”). All significant intercompany transactions and balances have been eliminated in consolidation.

 

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Revenue Recognition

The Company records its investment transactions on a trade date basis, which is the date when the Company assumes the risks for gains and losses related to that instrument. Realized gains and losses are based on the specific identification method.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums to par value on investments purchased are accreted and amortized, respectively, into interest income over the life of the respective investment using the effective interest method. Loan origination fees, original issue discount (“OID”) and market discounts or premiums are capitalized and amortized into interest income using the effective interest method or straight-line method, as applicable. Exit fees that are receivable upon repayment of a loan or debt security are amortized into interest income over the life of the respective investment. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees and unamortized discounts are recorded as interest income. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company earned $1,555, $700, and $0 in prepayment premiums, respectively, and $3,053, $585, and $0 in accelerated accretion of upfront loan origination fees and unamortized discounts, respectively. Fees received from portfolio companies (directors’ fees, consulting fees, administrative fees, tax advisory fees and other similar compensation) are paid to the Company, unless, to the extent required by applicable law or exemptive relief, if any, therefrom, the Company only receives its allocable portion of such fees when invested in the same portfolio company as another account managed by the Investment Adviser.

Dividend income on preferred equity investments is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity investments is recorded on the record date for private portfolio companies and on theex-dividend date for publicly traded portfolio companies. Interest and dividend income are presented net of withholding tax, if any.

Certain investments may have contractualpayment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the principal amount or shares (if equity) of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity or upon the investment being called by the issuer. PIK is recorded as interest or dividend income, as applicable. If at any point the Company believes PIK is not expected to be realized, the investment generating PIK will be placed onnon-accrual status. When a PIK investment is placed onnon-accrual status, the accrued, uncapitalized interest or dividends are generally reversed through interest or dividend income, respectively.

Certain structuring fees, amendment fees and syndication fees are recorded as other income when earned. Administrative agent fees received by the Company are recorded as other income when the services are rendered over time.

Non-Accrual Investments

Investments are placed onnon-accrual status when it is probable that principal, interest, or dividends will not be collected according to contractual terms. Accrued interest or dividends generally are reversed when an investment is placed onnon-accrual status. Interest or dividend payments received onnon-accrual investments may be recognized as income or applied to principal depending upon management’s judgment.Non-accrual investments are restored to accrual status when past due principal and interest or dividends are paid and, in management’s judgment, principal and interest or dividend payments are likely to remain current. The Company may make exceptions to this treatment if an investment has sufficient collateral value and is in the process of collection. As of each of December 31, 2018 and December 31, 2017, the Company did not have any investments onnon-accrual status.

Investments

The Company carries its investments in accordance with ASC Topic 820,Fair Value Measurements and Disclosures (“ASC 820”), issued by FASB, which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Board of Directors within the meaning of the Investment Company Act.

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 5 “Fair Value Measurement.”

The Company generally invests in illiquid securities, including debt and equity investments, of middle-market companies. The Board of Directors has delegated to the Investment Adviserday-to-day responsibility for implementing and maintaining internal controls and procedures related to the valuation of the Company’s portfolio investments. Under valuation procedures adopted by the Board of Directors, market quotations are generally used to assess the value of the investments for which market quotations are readily available. The Investment Adviser obtains these market quotations from independent pricing services or at the bid prices obtained from at least two brokers or dealers, if available; otherwise from a principal market maker or a primary market dealer. To assess the continuing appropriateness of pricing sources and methodologies, the Investment Adviser regularly performs price verification procedures and issues challenges as necessary to independent pricing services or brokers, and any differences are reviewed in accordance with the valuation procedures. If the Board of Directors or Investment Adviser has a bona fide reason to believe any such market quotation does not reflect the fair value of an investment, it may independently value such investment in accordance with valuation procedures for investments for which market quotations are not readily available.

 

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With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, the valuation procedures adopted by the Board of Directors contemplate a multi-step valuation process each quarter, as described below:

 

 (1)

The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Investment Adviser responsible for the portfolio investment;

 

 (2)

The Board of Directors also engages independent valuation firms (the “Independent Valuation Advisors”) to provide independent valuations of the investments for which market quotations are not readily available, or are readily available but deemed not reflective of the fair value of an investment. The Independent Valuation Advisors independently value such investments using quantitative and qualitative information provided by the investment professionals of the Investment Adviser and the portfolio companies as well as any market quotations obtained from independent pricing services, brokers, dealers or market dealers. The Independent Valuation Advisors also provide analyses to support their valuation methodology and calculations. The Independent Valuation Advisors provide an opinion on a final range of values on such investments to the Board of Directors or the Audit Committee. The Independent Valuation Advisors define fair value in accordance with ASC 820 and utilize valuation approaches including the market approach, the income approach or both. A portion of the portfolio is reviewed on a quarterly basis, and all investments in the portfolio for which market quotations are not readily available, or are readily available, but deemed not reflective of the fair value of an investment, are reviewed at least annually by an Independent Valuation Advisor;

 

 (3)

The Independent Valuation Advisors’ preliminary valuations are reviewed by the Investment Adviser and the Valuation Oversight Group (“VOG”), a team that is part of the Controllers Department within the Finance Division of Goldman Sachs. The Independent Valuation Advisors’ valuation ranges are compared to the Investment Adviser’s valuations to ensure the Investment Adviser’s valuations are reasonable. VOG presents the valuations to the Private Investment Valuation and Side PocketSub-Committee of the Investment Management Division Valuation Committee, which is comprised of representatives from GSAM who are independent of the investment decision making process;

 

 (4)

The Investment Management Division Valuation Committee ratifies fair valuations and makes recommendations to the Audit Committee of the Board of Directors;

 

 (5)

The Audit Committee of the Board of Directors reviews valuation information provided by the Investment Management Division Valuation Committee, the Investment Adviser and the Independent Valuation Advisors. The Audit Committee then assesses such valuation recommendations; and

 

 (6)

The Board of Directors discusses the valuations and, within the meaning of the Investment Company Act, determines the fair value of the investments in good faith, based on the inputs of the Investment Adviser, the Independent Valuation Advisors and the Audit Committee.

Money Market Funds

Investments in money market funds are valued at net asset value (“NAV”) per share. See Note 3 “Significant Agreements and Related Party Transactions.”

Cash

Cash consists of deposits held at a custodian bank. As of December 31, 2018 and 2017, the Company held an aggregate cash balance of $25,548 and $8,220, respectively. Foreign currency of $553 (acquisition cost of $550) and $0 (acquisition cost of $0) is included in cash as of December 31, 2018 and December 31, 2017, respectively.

Foreign Currency Translation

Amounts denominated in foreign currencies are translated into USD on the following basis: (i) investments and other assets and liabilities denominated in foreign currencies are translated into USD based upon currency exchange rates effective on the last business day of the period; and (ii) purchases and sales of investments, borrowings and repayments of such borrowings, income, and expenses denominated in foreign currencies are translated into USD based upon currency exchange rates prevailing on the transaction dates.

The Company does not isolate the portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included within the net realized and unrealized gains or losses on investments. Fluctuations arising from the translation ofnon-investment assets and liabilities are included with the net change in unrealized gains (losses) on foreign currency translations on the Consolidated Statements of Operations.

Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

 

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Derivatives

Foreign currency forward contracts

The Company may enter into foreign currency forward contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations in the value of foreign currencies. In a foreign currency forward contract, the Company agrees to receive or deliver a fixed quantity of one currency for another, at apre-determined price at a future date. Forward foreign currency contracts aremarked-to-market at the applicable forward rate. Unrealized appreciation (depreciation) on foreign currency forward contracts are recorded on the Consolidated Statements of Financial Condition by counterparty on a net basis, not taking into account collateral posted which is recorded separately, if applicable. Notional amounts of foreign currency forward contract assets and liabilities are presented separately on the Consolidated Schedules of Investments. Purchases and settlements of foreign currency forward contracts having the same settlement date and counterparty are generally settled net and any realized gains or losses are recognized on the settlement date.

The Company does not utilize hedge accounting and as such, the Company recognizes its derivatives at fair value with changes in the net unrealized appreciation (depreciation) on foreign currency forward contracts recorded on the Consolidated Statements of Operations.

Income Taxes

The Company recognizes tax positions in its consolidated financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The Company reports any interest expense related to income tax matters in income tax expense, and any income tax penalties under expenses in the Consolidated Statements of Operations.

The Company’s tax positions have been reviewed based on applicable statutes of limitation for tax assessments, which may vary by jurisdiction, and based on such review, the Company has concluded that no additional provision for income tax is required in the consolidated financial statements. The Company is subject to potential examination by certain taxing authorities in various jurisdictions. The Company’s tax positions are subject to ongoing interpretation of laws and regulations by taxing authorities.

The Company has elected to be treated as a RIC commencing with its taxable year ended December 31, 2016. So long as the Company maintains its status as a RIC, it will generally not be required to pay corporate-level U.S. federal income tax on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. As a result, any U.S. federal income tax liability related to income earned and distributed by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.

To maintain our tax treatment as a RIC, the Company must meet specifiedsource-of-income and asset diversification requirements and timely distribute to its Unitholders for each taxable year at least 90% of its investment company taxable income (generally, its net ordinary income plus the excess of its realized net short-term capital gains over realized net long-term capital losses, determined without regard to the dividends paid deduction). In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for theone-year period ending on October 31 of the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income. If the Company chooses to do so, this generally would increase expenses and reduce the amount available to be distributed to Unitholders. The Company will accrue excise tax on estimated undistributed taxable income as required. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company accrued excise taxes of $0, $0, and $0, respectively.

Certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state corporate level income taxes. Income tax expense, if any, is included under the income category for which it applies in the Consolidated Statements of Operations. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company accrued provision for taxes on realized gains on investments of $670, $0, and $0, respectively. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company accrued provision for taxes on unrealized gains on investments of $411, $0, and $0, respectively. As of December 31, 2018, $1,081 of income taxes remained payable.

Distributions

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. The Company may pay distributions in excess of its taxable net investment income. This excess would be atax-free return of capital in the period and reduce the unitholder’s tax basis in its Units. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent they are charged or credited to common Units, accumulated undistributed net investment income or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income andnon-deductible expenses. These differences are generally determined in conjunction with the preparation of the Company’s annual RIC tax return. Distributions to common Unitholders are recorded on theex-dividend date. The amount to be paid out as a distribution is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by the Investment Adviser. The Company may pay distributions to its Unitholders in a year in excess of its net ordinary income and capital gains for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes. The Company intends to

 

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timely distribute to its Unitholders substantially all of its annual taxable income for each year, except that the Company may retain certain net capital gains for reinvestment and the Company may choose to carry forward taxable income for distribution in the following year and pay any applicable tax. The specific tax characteristics of the Company’s distributions will be reported to Unitholders after the end of the calendar year. All distributions will be subject to available funds, and no assurance can be given that the Company will be able to declare such distributions in future periods.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of, and amendments to, the JPM Revolving Credit Facility and the revolving credit facility between the Company and Bank of America, N.A. (the “BoA Revolving Credit Facility” and together with the JPM Revolving Credit Facility, the “Revolving Credit Facilities”). These costs are amortized using the straight-line method over the term of the Revolving Credit Facilities. Deferred financing costs related to the Revolving Credit Facilities are presented separately as an asset on the Company’s Consolidated Statements of Financial Condition.

Organization Costs

Organization costs include costs relating to the formation and organization of the Company. These costs are expensed as incurred. Upon the Initial Drawdown Date, Unitholders bore such costs. Unitholders that made capital commitments after the Initial Drawdown Date bore a pro rata portion of such costs at the time of their first investment in the Company.

Offering Costs

Offering costs consist primarily of fees and expenses incurred in connection with the continuous offering of Units, including legal, printing and other costs, as well as costs associated with the preparation and filing of the Company’s registration statement on Form 10. Offering costs were recognized as a deferred charge and were amortized on a straight line basis over 12 months beginning on the date of commencement of investment operations.

New Accounting Pronouncements

In October 2018, the SEC adopted the final rule under SEC releaseNo. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. Effective with the current reporting period, the Company is no longer required to present components of distributable earnings on the Consolidated Statements of Financial Condition or the sources of distributable earnings and the amount of undistributed net investment income on the Consolidated Statements of Changes in Members’ Capital. Prior period information has been reclassified to conform to the current period presentation and this had no effect on the Company’s consolidated financial position or the consolidated results of operations as previously reported. The following provides the prior period reclassifications.

Consolidated Statements of Financial Condition – The table below provides a reconciliation for previously disclosed components of distributable earnings on the Consolidated Statement of Financial Condition as of December 31, 2017 to total distributable earnings as of December 31, 2017 as disclosed in the current filing.

 

    December 31, 2017 

Accumulated net realized gain (loss)

  $69 

Accumulated undistributed (distributions in excess of) net investment income (loss)

   (6,200

Net unrealized appreciation (depreciation) on investments

   1,621 
  

 

 

 

Distributable earnings

  $ (4,510) 

Consolidated Statements of Changes in Members’ Capital – The table below provides a reconciliation for previously disclosed distributions from net investment income and realized gain for the year ended December 31, 2017 and for the period from June 9, 2016 (inception) to December 31, 2016 to distributions from distributable earnings as disclosed in the current filing.

 

Distributions to unitholders from:

  For the year ended
December 31, 2017
   For the period from June 9, 2016
(inception) to December 31, 2016
 

Net investment income

  $ (36,250)   $ (2,998) 
  

 

 

   

 

 

 

Total distributions to unitholders

  $ (36,250)   $ (2,998) 
  

 

 

   

 

 

 

 

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3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

Investment Advisory Agreement

The Company entered into an investment advisory agreement effective as of April 11, 2016 (the “Investment Advisory Agreement”) with the Investment Adviser, pursuant to which the Investment Adviser manages the Company’s investment program and related activities.

Management Fee

The Company pays the Investment Adviser a management fee (the “Management Fee”), payable quarterly in arrears, equal to 0.375% (i.e., an annual rate of 1.50%) of the average NAV of the Company (includingun-invested cash and cash equivalents) at the end of the then-current quarter and the prior calendar quarter (and, in the case of the Company’s first quarter, the NAV as of suchquarter-end). The Management Fee for any partial quarter will be appropriately prorated.

For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, Management Fees amounted to $9,604, $4,803 and $1,309, respectively. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Investment Adviser voluntarily agreed to waive $0, $0, and $391 of the Management Fees, respectively. As of December 31, 2018, $2,910 remained payable.

Incentive Fee

Pursuant to the Investment Advisory Agreement, the Company pays to the Investment Adviser an Incentive Fee (the “Incentive Fee”) as follows:

 

 a)

First, no Incentive Fee is payable to the Investment Adviser until the Company has made cumulative distributions pursuant to this clause (a) equal to aggregate Contributed Capital (as defined below);

 

 b)

Second, no Incentive Fee is payable to the Investment Adviser until the Company has made cumulative distributions pursuant to this clause (b) equal to a 7% return per annum, compounded annually, on aggregate unreturned Contributed Capital, from the date each capital contribution is made through the date such capital has been returned;

 

 c)

Third, subject to clauses (a) and (b), the Investment Adviser is entitled to an Incentive Fee equal to 100% of all amounts designated by the Company as proceeds intended for distribution and Incentive Fee payments, until such time as the cumulative Incentive Fee paid to the Investment Adviser pursuant to this clause (c) is equal to 15% of the amount by which the sum of (i) cumulative distributions to Unitholders pursuant to clauses (a) and (b) above and (ii) the cumulative Incentive Fee previously paid to the Investment Adviser pursuant to this clause exceeds Contributed Capital; and

 

 d)

Fourth, at any time that clause (c) has been satisfied, the Investment Adviser is entitled to an Incentive Fee equal to 15% of all amounts designated by the Company as proceeds intended for distribution and Incentive Fee payments.

The Incentive Fee is calculated on a cumulative basis and the amount of the Incentive Fee payable prior to a proposed distribution will be determined and, if applicable, paid in accordance with the foregoing formula each time amounts are to be distributed to the Unitholders. The Incentive Fee is a fee owed by the Company to the Investment Adviser and is not paid out of distributions made to Unitholders.

In no event will an amount be paid with respect to the Incentive Fee to the extent it would cause the aggregate amount of the Company’s capital gains paid in respect of the Incentive Fee to exceed 20% of the Company’s realized capital gains computed net of all realized capital losses and unrealized capital depreciation, in each case determined on a cumulative basis from inception of the Company through the date of the proposed payment (the “Incentive Fee Cap”).

“Contributed Capital” is the aggregate amount of capital contributions that have been made by all Unitholders in respect of their Units to the Company. All distributions (or deemed distributions), including investment income (i.e. proceeds received in respect of interest payments, dividends and fees) and proceeds attributable to the repayment or disposition of any Investment, to Unitholders will be considered a return of Contributed Capital. Unreturned Contributed Capital equals aggregate Contributed Capital minus cumulative distributions, but is never less than zero.

The term “proceeds intended for distribution and Incentive Fee payments” includes proceeds from the full or partial realization of the Company’s Investments and income from investing activities and may include return of capital, ordinary income and capital gains.

If, at the termination of the Company, the Investment Adviser has received aggregate payments of Incentive Fees in excess of the amount the Investment Adviser would have received had the Incentive Fees been determined upon such termination, then the Investment Adviser will reimburse the Company for the difference between the amount of Incentive Fees actually received and the amount determined at termination (the “Investment Adviser Reimbursement Obligation”). However, the Investment Adviser will not be required to reimburse the Company an amount greater than the aggregate Incentive Fees paid to the Investment Adviser, reduced by the excess (if any) of (a) the aggregate federal, state and local income tax liability the Investment Adviser incurred in connection with the payment of such Incentive Fees (assuming the

 

92


highest marginal applicable federal and New York city and state income tax rates applied to such payments), over (b) an amount equal to the U.S. federal and state tax benefits available to the Investment Adviser by virtue of the payment made by the Investment Adviser pursuant to its Investment Adviser Reimbursement Obligation (assuming that, to the extent such payments are deductible by the Investment Adviser, the benefit of such deductions will be computed using the then highest marginal applicable federal and New York city and state income tax rates).

If the Investment Advisory Agreement is terminated prior to the termination of the Company (other than the Investment Adviser voluntarily terminating the agreement), the Company will pay to the Investment Adviser a final Incentive Fee payment (the “Final Incentive Fee Payment”). The Final Incentive Fee Payment will be calculated as of the date the Investment Advisory Agreement is terminated and will equal the amount of Incentive Fee that would be payable to the Investment Adviser if (a) all Investments were liquidated for their current value (but without taking into account any unrealized appreciation of any Investment), and any unamortized deferred Investment-related fees would be deemed accelerated, (b) the proceeds from such liquidation were used to pay all of the Company’s outstanding liabilities, and (c) the remainder was distributed to Unitholders and paid as Incentive Fee in accordance with the Incentive Fee waterfall described above for determining the amount of the Incentive Fee, subject to the Incentive Fee Cap. The Company will make the Final Incentive Fee Payment in cash on or immediately following the date the Investment Advisory Agreement is so terminated. The Investment Adviser Reimbursement Obligation will be determined as of the date of the termination of the Investment Advisory Agreement for purposes of the Final Incentive Fee Payment.

For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company accrued unvested Incentive Fees of $11,316, $5,864 and $0, respectively. As of December 31, 2018, $17,180 remained payable in accordance with the terms of the Investment Advisory Agreement.

Expense Limitation

Pursuant to the Investment Advisory Agreement, Company expenses borne by the Company in the ordinary course on an annual basis (excluding Management Fee, Incentive Fee, organizational andstart-up expenses and leverage-related expenses) will not exceed an amount equal to 0.5% of the aggregate amount of commitments to the Company by holders of its common Units; provided, however, that expenses incurred outside of the ordinary course, including litigation and similar expenses, are not subject to such cap. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, there have been no reimbursements from the Investment Adviser pursuant to this provision.

Administration and Custodian Fees

The Company has entered into an administration agreement with State Street Bank and Trust Company (the “Administrator”) under which the Administrator provides various accounting and administrative services to the Company. The Company pays the Administrator fees for its services as it determines are commercially reasonable in its sole discretion. The Company also reimburses the Administrator for all reasonable expenses. To the extent that the Administrator outsources any of its functions, the Administrator pays any compensation associated with such functions. The Administrator also serves as the Company’s custodian (the “Custodian”).

For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company incurred expenses for services provided by the Administrator and the Custodian of $846, $499 and $145, respectively. As of December 31, 2018, $209 remained payable.

Transfer Agent Fees

State Street Bank and Trust Company serves as the Company’s transfer agent (“Transfer Agent”), registrar and disbursing agent. For the years ended December 31, 2018 and 2017, and for the period from June 9, 2016 (inception) to December 31, 2016, the Company incurred expenses for services provided by the Transfer Agent of $125, $120 and $29, respectively. As of December 31, 2018, $20 remained payable.

 

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Affiliates

The Company’s investments in affiliates for the year ended December 31, 2018 were as follows:

 

    

Fair Value as of

December 31,

2017

   

Gross

Additions(2)

   

Gross

Reductions(3)

   

Net Realized

Gains/(Losses)

   

Change in

Unrealized Gains/

(Losses)

   

Fair Value as of

December 31,

2018

   

Dividend,

Interest and

Other Income

 

Non-Controlled Affiliates

              

Goldman Sachs Financial Square Government Fund(1)

  $ 1,313   $ 563,297   $ (564,610)   $ –   $   $   $202 

Accuity Delivery Systems, LLC

       19,730            958    20,688    860 

Collaborative Imaging Holdco, LLC

       15,115            285    15,400    1,053 

Elah Holdings, Inc.

       3,354                3,354     

 

 

TotalNon-Controlled Affiliates

  $1,313   $601,496   $ (564,610)   $   $ 1,243   $ 39,442   $ 2,115 

 

 

 

(1)  

Fund advised by an affiliate of Goldman Sachs.

(2)  

Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the accretion of discounts, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)  

Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

The Company’s investments in affiliates for the year ended December 31, 2017 were as follows:

 

    

Fair Value as of

December 31,

2016

   

Gross

Additions(2)

   

Gross

Reductions(3) 

  

Net Realized

Gains/(Losses)

   

Change in

Unrealized Gains/

(Losses)

   

Fair Value as of

December 31,

2017

   

Dividend,

Interest and

Other Income

 

Non-Controlled Affiliates

             

Goldman Sachs Financial Square Government Fund(1)

  $ 138,311   $ 226,504   $  (363,502)  $ –   $ –   $ 1,313   $ 18 

 

 

TotalNon-Controlled Affiliates

  $138,311   $226,504   $  (363,502)  $   $   $1,313   $18 

 

 

 

(1)  

Fund advised by an affiliate of Goldman Sachs.

(2)  

Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the accretion of discounts, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)  

Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

Due To Affiliates

The Investment Adviser pays certain general and administrative expenses on behalf of the Company in the ordinary course of business. As of December 31, 2018 and December 31, 2017, there were $486 and $12, respectively, included within Accrued expenses and other liabilities, $68 and $208, respectively, included within Interest and other debt expense payable paid by the Investment Adviser and its affiliates on behalf of the Company.

 

94


Co-investment Activity

In certain circumstances, negotiatedco-investments by the Company and other funds managed by the Investment Adviser may be made only pursuant to an order from the SEC permitting the Company to do so. On January 4, 2017, the SEC granted GSAM, Goldman Sachs BDC, Inc. (“GS BDC”), Goldman Sachs Middle Market Lending Corp. (“GS MMLC”) and the Company exemptive relief (“Exemptive Relief”) that permits the Company toco-invest with GS BDC, GS MMLC and certain other funds that may be managed by GSAM, including the GSAM Credit Alternatives Team, in the future, subject to certain terms and conditions in the Exemptive Relief. The GSAM Credit Alternatives Team is comprised of investment professionals dedicated to the Company’s investment strategy and other funds that share a similar investment strategy with the Company, who are responsible for identifying investment opportunities, conducting research and due diligence on prospective investments, negotiating and structuring the Company’s investments and monitoring and servicing the Company’s investments, together with investment professionals who are primarily focused on investment strategies in syndicated, liquid credit. Under the terms of the Exemptive Relief, a “required majority” (as defined in Section 57(o) of the Investment Company Act) of the Company’s independent directors must make certain conclusions in connection with aco-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to the Company and the Company’s stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with the then-current investment objectives and strategies of the Company. As a result of the Exemptive Relief, there could be significant overlap in the Company’s investment portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds established by the GSAM Credit Alternatives Team that could avail themselves of the Exemptive Relief.

 

4.

INVESTMENTS

As of the dates indicated, the Company’s investments (excluding an investment in a money market fund managed by an affiliate of Group Inc. of $0 and $1,313, respectively) consisted of the following:

 

   December 31, 2018   December 31, 2017 
Investment Type  Cost   Fair Value   Cost   Fair Value 

1st Lien/Senior Secured Debt

  $743,103   $741,446   $285,509   $285,254 

1stLien/Last-Out Unitranche

   165,256    163,253    112,506    112,956 

2nd Lien/Senior Secured Debt

   473,202    466,793    465,334    466,966 

Unsecured Debt

   4,309    4,295    3,790    3,783 

Preferred Stock

   10,196    12,159    2,496    2,979 

Common Stock

   11,864    11,285    4,250    3,573 

Warrants

   104    130    104    99 

 

 

Total Investments

  $ 1,408,034   $ 1,399,361   $ 873,989   $ 875,610 

 

 

As of the dates indicated, the industry composition of the Company’s portfolio at fair value and net assets was as follows:

 

   December 31, 2018  December 31, 2017 
Industry  Fair Value  Net Assets  Fair Value  Net Assets 

Software

   10.4  18.0  7.2  12.9

Internet Software & Services

   9.4   16.3   10.3   18.6 

IT Services

   8.4   14.6   11.5   20.6 

Health Care Providers & Services

   8.4   14.5   8.1   14.5 

Chemicals

   7.3   12.7   10.8   19.4 

Diversified Financial Services

   6.4   11.1   12.3   22.2 

Media

   5.0   8.7       

Health Care Equipment & Supplies

   4.9   8.5   5.4   9.7 

Health Care Technology

   4.7   8.1   2.1   3.7 

Professional Services

   4.4   7.6       

Food Products

   3.6   6.2   6.1   11.0 

Road & Rail

   3.3   5.7   2.3   4.1 

Household Products

   2.7   4.7   3.4   6.1 

Diversified Consumer Services

   2.4   4.2   3.9   6.9 

Diversified Telecommunication Services

   2.4   4.1       

Insurance

   2.3   4.1   3.1   5.6 

Air Freight & Logistics

   2.3   4.0   2.3   4.0 

Internet Catalog & Retail

   2.2   3.9   3.6   6.5 

Building Products

   1.8   3.1       

Real Estate Management & Development

   1.4   2.4       

Hotels, Restaurants & Leisure

   1.3   2.2   1.6   2.9 

Distributors

   1.3   2.2   1.8   3.3 

Beverages

   0.9   1.5       

Auto Components

   0.8   1.4       

Containers & Packaging

   0.7   1.2   4.2   7.6 

Life Sciences Tools & Services

   0.6   1.0       

Commercial Services & Supplies

   0.5   0.9       

Capital Markets

   0.2   0.4       

 

 

Total

   100.0  173.3  100.0  179.6

 

 

 

95


As of the dates indicated, the geographic composition of the Company’s portfolio at fair value was as follows:

 

Geographic  December 31, 2018  December 31, 2017 

United States

   97.9  100.0

Ireland

   2.1    

 

 

Total

   100.0  100.0

 

 

 

5.

FAIR VALUE MEASUREMENT

The fair value of a financial instrument is the amount that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities. The three levels of the fair value hierarchy are as follows:

Basis of Fair Value Measurement

Level 1 – Inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The types of financial instruments included in Level 1 include unrestricted securities, including equities and derivatives, listed in active markets.

Level 2 – Inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The types of financial instruments in this category include less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities and certainover-the-counter derivatives where the fair value is based on observable inputs.

Level 3 – Inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately held entities and certainover-the-counter derivatives where the fair value is based on unobservable inputs.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Note 2 “Significant Accounting Policies” should be read in conjunction with the information outlined below.

 

96


The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 Instruments.

 

Level 2 Instruments  Valuation Techniques and Significant Inputs
Equity and Fixed Income  

The types of instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include commercial paper, most government agency obligations, most corporate debt securities, certain mortgage-backed securities, certain bank loans, less liquid publicly listed equities, certain state and municipal obligations, certain money market instruments and certain loan commitments.

 

Valuations of Level 2 Equity and Fixed Income instruments can be verified to quoted prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Derivative Contracts  

OTC derivatives (both centrally cleared and bilateral) are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, calibration to market-clearing transactions, broker or dealer quotations, or other alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, voluntary and involuntary prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment. OTC derivatives are classified within Level 2 of the fair value hierarchy when significant inputs are corroborated by market evidence.

The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 3 Instruments.

 

Level 3 Instruments  Valuation Techniques and Significant Inputs
Bank Loans, Corporate Debt, and Other Debt Obligations  

Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available. Other valuation methodologies are used as appropriate including market comparables, transactions in similar instruments and recovery/liquidation analysis.

Equity  

Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:

•  Transactions in similar instruments;

•  Discounted cash flow techniques;

•��� Third party appraisals; and

•  Industry multiples and public comparables.

Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:

•  Current financial performance as compared to projected performance;

•  Capitalization rates and multiples; and

•  Market yields implied by transactions of similar or related assets.

 

97


The tables below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets and liabilities as of December 31, 2018 and December 31, 2017. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien/Senior Secured Debt is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 assets and liabilities.

 

Level 3 Instruments 

Level 3 Assets as of

December 31, 2018(1)

 Significant
Unobservable Inputs
by Valuation
Techniques(2)
 Range(3) of Significant
Unobservable Inputs
(Weighted Average(4))
as of December 31, 2018
 
Bank Loans, Corporate Debt, and Other Debt Obligations 

1st Lien/Senior Secured

 Discounted cash flows:  
 

$587,398

 

•  Discount Rate

  8.4% - 13.0% (9.9%) 
 

1st Lien/Last-Out Unitranche

 Discounted cash flows:  
  

$163,253

 

•  Discount Rate

  9.3% - 15.0% (11.3%) 
  

2nd Lien/Senior Secured

 Discounted cash flows:  
  

$320,120

 

•  Discount Rate

  10.8% - 16.5% (11.5%) 
  

Unsecured Debt

 Discounted cash flows:  
  

$4,295

 

•  Discount Rate

  6.4% - 22.6% (13.7%) 
Equity 

Preferred Stock

 Comparable multiples:  
  

$9,259

 

•  EV/EBITDA(5)

  10.0x - 18.9x (16.2x) 
    
  

Common Stock

 

Discounted cash flows:

  
  

$8,025

 

•  Discount Rate

  14.6% - 31.0% (24.5%) 
   Comparable multiples:  
    

•  EV/EBITDA(5)

  8.4x - 13.0x (11.7x) 
    
  

Warrants

 

Comparable multiples:

  
  

$130

 

•  EV/EBITDA(5)

  10.0x - 22.3x (13.3x) 

 

(1)  

Included within Level 3 Assets of $1,339,496 is an amount of $247,016 for which the Investment Adviser did not develop the unobservable inputs (examples include single source broker quotations, third party pricing, and prior transactions).

(2)  

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(3)  

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(4)  

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

(5)  

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

98


Level 3 Instruments 

Level 3 Assets as of

December 31, 2017(1)

 

Significant Unobservable

Inputs by Valuation

Techniques(2)

 

Range(3) of Significant

Unobservable

Inputs (Weighted

Average(4))

as of

December 31, 2017

Bank Loans, Corporate Debt, and Other Debt Obligations 

1st Lien/Senior Secured Debt

 

Discounted cash flows:

  
 

$183,458

 

•  Discount Rate

 8.9% – 12.3% (10.6%)
 

1stLien/Last-Out Unitranche

 

Discounted cash flows:

  
  

$112,956

 

•  Discount Rate

 10.6% – 11.3% (10.8%)
  

2nd Lien/Senior Secured Debt

 

Discounted cash flows:

  
  

$309,781

 

•  Discount Rate

 9.9% – 12.7% (11.3%)
  

Unsecured Debt

 

Discounted cash flows:

  
  

$3,783

 

•  Discount Rate

 3.9% – 12.2% (13.6%)
Equity 

Preferred Stock

 

Discounted cash flows:

  
  

$2,979

 

•  Discount Rate

 3.9% – 12.2% (11.9%)
     

Comparable multiples:

   
    

•  EV/EBITDA(5)

 9.8x – 15.3x (10.0x)
  

Common Stock

 

Comparable multiples:

  
  

$3,573

 

•  EV/Revenue

 1.4x – 11.2x (2.7x)
     

Comparable multiples:

   
    

•  EV/EBITDA(5)

 8.4x – 15.3x (12.1x)
  

Warrants

 

Comparable multiples:

  
  

$99

 

•  EV/EBITDA(5)

 5.7x – 16.7x (13.3x)

 

(1)  

Included within Level 3 Assets of $812,260 is an amount of $195,631 for which the Investment Adviser did not develop the unobservable inputs (examples include single source broker quotations, third party pricing, and prior transactions).

(2)  

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(3)  

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(4)  

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

(5)  

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”).

As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of December 31, 2018 and December 31, 2017. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment, call provisions and comparable company investments. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market comparable transactions or market multiples would result in an increase or decrease, respectively, in the fair value.

 

99


The following is a summary of the Company’s assets categorized within the fair value hierarchy as of December 31, 2018:

 

Assets  Level 1   Level 2  Level 3   Total 

1st Lien/Senior Secured Debt

  $ –   $ –  $741,446   $741,446 

1stLien/Last-Out Unitranche

         163,253    163,253 

2nd Lien/Senior Secured Debt

      59,865   406,928    466,793 

Unsecured Debt

         4,295    4,295 

Preferred Stock

         12,159    12,159 

Common Stock

         11,285    11,285 

Warrants

         130    130 

Affiliated Money Market Fund

              

 

 

Total assets

  $ –   $ 59,865  $ 1,339,496   $ 1,399,361 

 

 
Derivatives  Level 1   Level 2  Level 3   Total 

Foreign currency forward contracts (asset)(1)

  $ –