CNL Strategic Capital LLC

11/07/2024 | Press release | Distributed by Public on 11/07/2024 13:18

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

cnl-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-Q
_______________________________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-56162
__________________________________________________________________________________________________________________________________
CNL STRATEGIC CAPITAL, LLC
(Exact name of registrant as specified in its charter)
__________________________________________________________________________________________________________________________________
Delaware 32-0503849
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 650-1000
________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
N/A N/A N/A
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 Regulation S-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 whether the registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 6, 2024, the Company had 4,039,518 Class FA shares, 8,104,716 Class A shares, 2,606,674 Class T shares, 3,107,922 Class D shares, 14,202,594 Class I shares and 1,721,750 Class S shares outstanding.
Table of Contents
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited):
2
Condensed Consolidated Statements of Assets and Liabilities
2
Condensed Consolidated Statements of Operations
3
Condensed Consolidated Statements of Changes in Net Assets
5
Condensed Consolidated Statements of Cash Flows
7
Condensed Consolidated Schedules of Investments
8
Notes to Condensed Consolidated Financial Statements
12
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
56
Item 4.
Controls and Procedures
57
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
58
Item 1A.
Risk Factors
58
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
58
Item 3.
Defaults Upon Senior Securities
58
Item 4.
Mine Safety Disclosures
58
Item 5.
Other Information
58
Item 6.
Exhibits
59
Exhibit Index
59
Signatures
60
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
September 30, 2024 (Unaudited) December 31, 2023
Assets
Portfolio company investments at fair value (amortized cost of $841,739 and $719,976, respectively)
$ 1,051,921 $ 876,843
Cash and cash equivalents 152,061 134,453
Receivable for shares sold - 1,411
Prepaid expenses and other assets 565 440
Total assets 1,204,547 1,013,147
Liabilities
Due to related parties, net (Note 5) 16,771 15,787
Payable for shares repurchased 11,767 8,224
Deferred tax liabilities, net 10,029 7,462
Accounts payable and other accrued expenses 2,060 2,325
Total liabilities 40,627 33,798
Commitments and contingencies (Note 11)
Members' Equity (Net Assets)
Preferred shares, $0.001 par value, 50,000 shares authorized and unissued
- -
Class FA Common shares, $0.001 par value, 7,400 shares authorized; 4,844 shares issued; 4,040 and 4,179 shares outstanding, respectively
4 4
Class A Common shares, $0.001 par value, 94,660 shares authorized; 7,703 and 5,328 shares issued, respectively; 7,413 and 5,152 shares outstanding, respectively
7 5
Class T Common shares, $0.001 par value, 558,620 shares authorized; 3,500 and 3,179 shares issued, respectively; 2,569 and 2,629 shares outstanding, respectively
3 3
Class D Common shares, $0.001 par value, 94,660 shares authorized; 3,232 and 2,714 shares issued, respectively; 3,089 and 2,632 shares outstanding, respectively
3 3
Class I Common shares, $0.001 par value, 94,660 shares authorized; 15,210 and 12,846 shares issued, respectively; 13,832 and 12,095 shares outstanding, respectively
14 12
Class S Common shares, $0.001 par value, 100,000 shares authorized; 1,770 shares issued; 1,721 and 1,748 shares outstanding, respectively
2 2
Capital in excess of par value 995,428 851,529
Distributable earnings 168,459 127,791
Total Members' Equity $ 1,163,920 $ 979,349
Net asset value per share:
Class FA $ 38.41 $ 36.67
Class A $ 34.78 $ 33.57
Class T $ 34.83 $ 33.64
Class D $ 34.53 $ 33.31
Class I $ 35.26 $ 34.06
Class S $ 38.96 $ 37.25
See notes to condensed consolidated financial statements.
2
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
Quarter Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Investment income
From portfolio company investments:
Interest income $ 10,333 $ 9,436 $ 30,221 $ 24,277
Dividend income 6,634 5,017 15,675 15,624
Payment-in-kind ("PIK") dividend income 1,490 - 1,490 -
From U.S. Treasury bills and cash accounts
Interest and dividend income 1,221 1,468 4,367 3,844
Total investment income 19,678 15,921 51,753 43,745
Operating expenses
Total return incentive fees 5,174 3,743 14,932 8,710
Base management fees 4,802 3,505 13,028 9,342
Offering expenses 338 1,071 879 3,022
Professional services 851 490 2,435 1,501
Pursuit costs (159) 682 843 1,228
Distribution and shareholder servicing fees 334 310 971 873
Custodian and accounting fees 127 142 394 420
Insurance expense 56 51 159 157
Director fees and expenses 52 50 159 151
General and administrative expenses 104 115 325 423
Total operating expenses 11,679 10,159 34,125 25,827
Expense support 353 - - -
Reimbursement of expense support - - - 644
Net operating expenses 12,032 10,159 34,125 26,471
Net investment income before taxes 7,646 5,762 17,628 17,274
Income tax expense (15) - (10) -
Net investment income 7,631 5,762 17,618 17,274
Realized and unrealized gain (loss) on investments and foreign currency
Net realized gain on investments:
U.S. Treasury bills
- - - 4
Total net realized gain on investments - - - 4
Net change in unrealized appreciation on investments, including unrealized foreign currency gain:
Portfolio company investments 16,845 14,069 53,314 28,836
U.S. Treasury bills
- (15) - (22)
Provision for deferred taxes on investments (1,300) (2,088) (2,567) (4,242)
Total net change in unrealized appreciation on investments, including unrealized foreign currency gain 15,545 11,966 50,747 24,572
Net gain on investments 15,545 11,966 50,747 24,576
Net increase in net assets resulting from operations $ 23,176 $ 17,728 $ 68,365 $ 41,850
See notes to condensed consolidated financial statements.
3
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
Quarter Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Net increase in net assets resulting from operations per share
Class FA $ 0.88 $ 0.83 $ 2.68 $ 2.07
Class A $ 0.74 $ 0.65 $ 2.15 $ 1.62
Class T $ 0.64 $ 0.57 $ 1.94 $ 1.47
Class D $ 0.66 $ 0.63 $ 2.06 $ 1.59
Class I $ 0.69 $ 0.65 $ 2.14 $ 1.66
Class S $ 0.87 $ 0.82 $ 2.65 $ 2.17
Weighted average shares
Class FA 4,069 4,219 4,118 4,230
Class A 6,897 3,794 6,130 2,972
Class T 2,562 2,712 2,590 2,605
Class D 2,999 2,388 2,822 2,197
Class I 13,544 11,107 12,974 10,124
Class S 1,728 1,763 1,741 1,764
See notes to condensed consolidated financial statements.
4
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
(in thousands)
Common Shares Capital in Excess of Par Value Distributable Earnings Total Net Assets
Number of Shares Par Value
Balance as of June 30, 2024 31,093 $ 31 $ 941,319 $ 154,959 $ 1,096,309
Net investment income - - - 7,631 7,631
Net change in unrealized appreciation on investments - - - 15,545 15,545
Distributions to shareholders - - - (9,676) (9,676)
Issuance of common shares through the Public Offerings 1,770 2 61,183 - 61,185
Issuance of common shares through distribution reinvestment plan 136 - 4,693 - 4,693
Repurchase of common shares pursuant to share repurchase program (335) - (11,767) - (11,767)
Balance as of September 30, 2024 32,664 $ 33 $ 995,428 $ 168,459 $ 1,163,920
Common Shares Capital in Excess of Par Value Distributable Earnings Total Net Assets
Number of Shares Par Value
Balance as of December 31, 2023 28,435 $ 29 $ 851,529 $ 127,791 $ 979,349
Net investment income - - - 17,618 17,618
Net change in unrealized appreciation on investments - - - 50,747 50,747
Distributions to shareholders - - - (27,697) (27,697)
Issuance of common shares through the Public Offerings 4,948 5 169,128 - 169,133
Issuance of common shares through distribution reinvestment plan 383 - 13,093 - 13,093
Repurchase of common shares pursuant to share repurchase program (1,102) (1) (38,322) - (38,323)
Balance as of September 30, 2024 32,664 $ 33 $ 995,428 $ 168,459 $ 1,163,920
See notes to condensed consolidated financial statements.
5
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(in thousands)
Common Shares Capital in Excess of Par Value Distributable Earnings Total Net Assets
Number of Shares Par Value
Balance as of June 30, 2023 25,079 $ 25 $ 740,458 $ 104,021 $ 844,504
Net investment income - - - 5,762 5,762
Net change in unrealized appreciation on investments - - - 11,966 11,966
Distributions to shareholders - - - (7,865) (7,865)
Issuance of common shares through the Public Offerings 2,125 1 70,278 - 70,279
Issuance of common shares through distribution reinvestment plan 103 - 3,401 - 3,401
Repurchase of common shares pursuant to share repurchase program (200) - (6,767) - (6,767)
Balance as of September 30, 2023 27,107 $ 26 $ 807,370 $ 113,884 $ 921,280
Common Shares Capital in Excess of Par Value Distributable Earnings Total Net Assets
Number of Shares Par Value
Balance as of December 31, 2022 21,276 $ 21 $ 615,383 $ 93,695 $ 709,099
Net investment income - - - 17,274 17,274
Net realized gain on investments - - - 4 4
Net change in unrealized appreciation on investments - - - 24,572 24,572
Distributions to shareholders - - - (21,661) (21,661)
Issuance of common shares through the Public Offerings 6,024 5 198,601 - 198,606
Issuance of common shares through distribution reinvestment plan 272 - 8,967 - 8,967
Repurchase of common shares pursuant to share repurchase program (465) - (15,581) - (15,581)
Balance as of September 30, 2023 27,107 $ 26 $ 807,370 $ 113,884 $ 921,280
See notes to condensed consolidated financial statements.
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended September 30,
2024 2023
Operating Activities:
Net increase in net assets resulting from operations $ 68,365 $ 41,850
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Purchases of portfolio company investments (122,719) (161,517)
Proceeds from return of capital on portfolio company investments 2,445 165
Purchases of investments in U.S. Treasury bills
- (754,978)
Proceeds from redemptions/sales of U.S. Treasury bills
- 813,660
Net realized gain on investments - (4)
Net change in unrealized appreciation on investments and foreign currency transactions, excluding deferred taxes (53,314) (28,814)
Accretion of discounts - (2,476)
PIK dividends (1,490) -
Increase (decrease) in due to related parties 984 (4,764)
(Decrease) increase in accounts payable and other accrued expenses (265) 163
Increase in deferred tax liabilities, net 2,567 4,242
Increase in prepaid expenses and other assets
(64) (35)
Other operating activities 102 209
Net cash used in operating activities (103,389) (92,299)
Financing Activities:
Proceeds from issuance of common shares 170,544 198,606
Payment on repurchases of common shares (34,780) (11,182)
Distributions paid, net of distributions reinvested (14,604) (12,694)
Deferred financing costs (163) (125)
Net cash provided by financing activities 120,997 174,605
Net increase in cash and cash equivalents 17,608 82,306
Cash and cash equivalents, beginning of period 134,453 36,837
Cash and cash equivalents, end of period $ 152,061 $ 119,143
Supplemental disclosure of cash flow information and non-cash financing activities:
Distributions reinvested $ 13,093 $ 8,967
Amounts incurred but not paid (including amounts due to related parties):
Offering costs $ 121 $ 230
Payable for shares repurchased $ 11,767 $ 6,767
See notes to condensed consolidated financial statements.
7
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 2024
(in thousands except share data)
Company (1)(2)(3)
Industry Interest
Rate 		Maturity
Date 		Principal Amount /
No. Shares 		Amortized Cost Fair Value
Senior Secured Note - First Lien - 5.1%
Clarion Safety Systems, LLC Visual Safety Solutions 15.0% 12/9/2028 22,500 $ 22,500 $ 22,500
Lawn Doctor, Inc. Commercial and Professional Services
(4)
8/6/2029 29,490 29,490 29,490
Madison Retirement Holdings TopCo, LLC Business Services 15.0% 7/18/2031 8,000 8,000 8,000
Total Senior Secured Notes - First Lien 59,990 59,990
Senior Secured Note -12.8%
ATA Holding Company, LLC(5)
Real Estate Services 15.0% 4/1/2027 37,000 $ 37,000 $ 37,000
Auriemma Consulting Group, Inc.(5)
Information Services and Advisory Solutions 8.0% 6/1/2025 2,000 2,000 2,000
Healthcare Safety Holdings, LLC(5)
Healthcare Supplies 15.0% 7/16/2027 24,400 24,400 24,400
Polyform Products, Co.(5)
Hobby Goods and Supplies 16.0% 2/7/2026 15,700 15,700 15,700
Sill Holdings, LLC(5)
Business Services 14.0% 10/20/2030 15,851 15,851 15,851
Tacmed Holdings, LLC(5)
Healthcare Supplies 16.0% 3/24/2030 29,000 29,000 29,000
Vektek Holdings, LLC(5)
Engineered Products
(4)
5/6/2029 24,813 24,687 24,687
Total Senior Secured Note 148,638 148,638
Senior Secured Notes - Second Lien - 6.6%
Auriemma U.S. Roundtables Information Services and Advisory Solutions 16.0% 7/1/2028 12,114 $ 12,114 $ 12,114
Blue Ridge ESOP Associates Business Services 15.0% 12/28/2028 2,641 2,641 2,641
Douglas Machines Corp. Sanitation Products 16.0% 10/7/2028 15,000 15,000 15,000
Lawn Doctor, Inc. Commercial and Professional Services 16.0% 2/7/2030 15,000 15,000 15,000
Milton Industries Inc. Engineered Products 15.0% 12/19/2027 3,353 3,353 3,353
Resolution Economics, LLC Business Services 15.0% 12/30/2027 2,834 2,834 2,834
USA Water Intermediate Holdings, LLC Commercial and Professional Services 16.0% 8/20/2031 1,376 1,376 1,376
Vektek Holdings, LLC Engineered Products 15.0% 11/6/2029 24,400 24,400 24,400
Total Senior Secured Notes - Second Lien 76,718 76,718
Total Senior Secured Notes $ 285,346 $ 285,346
See notes to condensed consolidated financial statements.
8
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 2024 (CONTINUED)
(in thousands except share data)
Company (1)(2)(3)
Industry Interest
Rate 		Maturity
Date 		Principal Amount /
No. Shares 		Amortized Cost Fair Value
Preferred Equity - 5.5%
LOCI Topco Limited(6)
Information Services and Advisory Solutions
8.5% PIK(7)
46,597,751 $ 60,804 $ 63,900
Total Preferred Equity 60,804 63,900
Common Equity - 60.4%
ATA Holding Company, LLC(8)
Real Estate Services 37,985 $ 37,125 $ 34,443
Auriemma U.S. Roundtables(8)
Information Services and Advisory Solutions 33,094 33,476 59,323
Blue Ridge ESOP Associates Business Services 11,489 10,940 34,995
Clarion Safety Systems, LLC(8)
Visual Safety Solutions 57,368 56,816 63,284
Douglas Machines Corp.(8)
Sanitation Products 35,500 35,500 36,784
Healthcare Safety Holdings, LLC(8)
Healthcare Supplies 17,320 17,320 44,613
LOCI Topco Limited(6)
Information Services and Advisory Solutions 73,215 93 528
Lawn Doctor, Inc.(8)
Commercial and Professional Services 7,746 27,610 86,127
Madison Retirement Holdings TopCo, LLC(8)
Business Services 21,500 21,500 21,500
Milton Industries Inc. Engineered Products 6,647 6,647 20,164
Polyform Products, Co.(8)
Hobby Goods and Supplies 10,820 15,599 12,737
Resolution Economics, LLC Business Services 7,666 8,118 18,500
Sill Holdings, LLC(8)
Business Services 77,521 82,549 104,022
Tacmed Holdings, LLC(8)
Healthcare Supplies 77,000 76,744 80,255
USA Water Intermediate Holdings, LLC Commercial and Professional Services 86,245 8,624 10,191
Vektek Holdings, LLC(8)
Engineered Products 56,928 56,928 75,209
Total Common Equity 495,589 702,675
Total Equity $ 556,393 $ 766,575
TOTAL INVESTMENTS - 90.4%
$ 841,739 $ 1,051,921
OTHER ASSETS IN EXCESS OF LIABILITIES - 9.6%
111,999
NET ASSETS - 100.0%
$ 1,163,920
FOOTNOTES:
(1) Security may be an obligation of one or more entities affiliated with the named company.
(2) Percentages represent fair value as a percentage of net assets for each investment category.
(3) All investments are US based unless otherwise noted.
(4) As of September 30, 2024, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60%. SOFR at September 30, 2024 was 5.16%.
(5) The Company has a first lien on this portfolio company's assets, except in cases when the portfolio company has a revolving line of credit provided by a third party lender. In some instances the revolving lender has a first priority lien on all assets, whereas, in others, the revolving lender has a first priority lien on only accounts receivable and inventory, if applicable, and a second lien on all other assets.
(6) LBR is headquartered in the United Kingdom. LBR investment represents 5.5% of net assets based on fair value as of September 30, 2024.
(7) PIK dividend income is computed at the contractual rate in each applicable agreement and is accrued and recorded as dividend income and capitalized to the principal balance.
(8) As of September 30, 2024, the Company owned a controlling interest in this portfolio company.
See notes to condensed consolidated financial statements.
9
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 2023
(in thousands except share data)
Company (1)(2)
Industry Interest
Rate 		Maturity
Date 		Principal
Amount /
No. Shares 		Amortized Cost Fair Value
Senior Secured Note - First Lien - 20.5%
ATA Holding Company, LLC Real Estate Services 15.0% 4/1/2027 37,000 $ 37,000 $ 37,000
Auriemma U.S. Roundtables Information Services and Advisory Solutions 8.0% 8/1/2024 2,000 2,000 2,000
Clarion Safety Systems, LLC Visual Safety Solutions 15.0% 12/9/2028 22,500 22,500 22,500
Healthcare Safety Holdings, LLC Healthcare Supplies 15.0% 7/16/2027 24,400 24,400 24,400
Lawn Doctor, Inc. Commercial and Professional Services
(3)
2/7/2025 29,490 29,490 29,490
Polyform Products, Co. Hobby Goods and Supplies 16.0% 2/7/2026 15,700 15,700 15,700
Sill Holdings, LLC Business Services 14.0% 10/20/2030 15,851 15,851 15,851
Tacmed Holdings, LLC Healthcare Supplies 16.0% 3/24/2030 29,000 29,000 29,000
Vektek Holdings, LLC Engineered Products
(3)
5/6/2029 24,875 24,875 24,875
Total Senior Secured Notes - First Lien 200,816 200,816
Senior Secured Note - Second Lien - 7.7%
Auriemma U.S. Roundtables Information Services and Advisory Solutions 16.0% 8/1/2025 12,114 $ 12,114 $ 12,114
Blue Ridge ESOP Associates Business Services 15.0% 12/28/2028 2,641 2,641 2,641
Douglas Machines Corp. Sanitation Products 16.0% 10/7/2028 15,000 15,000 15,000
Lawn Doctor, Inc. Commercial and Professional Services 16.0% 7/7/2026 15,000 15,000 15,000
Milton Industries Inc. Engineered Products 15.0% 12/19/2027 3,353 3,353 3,353
Resolution Economics, LLC Business Services 15.0% 1/2/2026 2,834 2,834 2,834
Vektek Holdings, LLC Engineered Products 15.0% 11/6/2029 24,400 24,400 24,400
Total Senior Secured Notes - Second Lien 75,342 75,342
Total Senior Secured Notes $ 276,158 $ 276,158
See notes to condensed consolidated financial statements.
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CNL STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 2023 (CONTINUED)
(in thousands except share data)
Company (1)(2)
Industry Interest
Rate 		Maturity
Date 		Principal
Amount /
No. Shares 		Amortized Cost Fair Value
Equity - 61.3%
ATA Holding Company, LLC(4)
Real Estate Services 37,985 $ 37,125 $ 32,376
Auriemma U.S. Roundtables(4)
Information Services and Advisory Solutions 33,094 33,476 58,964
Blue Ridge ESOP Associates Business Services 11,489 12,793 22,926
Clarion Safety Systems, LLC(4)
Visual Safety Solutions 57,368 57,189 60,451
Douglas Machines Corp.(4)
Sanitation Products 35,500 35,500 43,379
Healthcare Safety Holdings, LLC(4)
Healthcare Supplies 17,320 17,320 44,988
Lawn Doctor, Inc.(4)
Commercial and Professional Services 7,746 27,611 75,165
Milton Industries, Inc. Engineered Products 6,647 6,647 20,982
Polyform Products, Co.(4)
Hobby Goods and Supplies 10,820 15,599 15,964
Resolution Economics, LLC Business Services 7,666 8,081 15,189
Sill Holdings, LLC (4)
Business Services 58,549 58,549 58,549
Tacmed Holdings, LLC (4)
Healthcare Supplies 77,000 77,000 77,000
Vektek Holdings, LLC (4)
Engineered Products 56,928 56,928 74,752
Total Equity $ 443,818 $ 600,685
TOTAL INVESTMENTS - 89.5%
$ 719,976 $ 876,843
OTHER ASSETS IN EXCESS OF LIABILITIES - 10.5%
102,506
NET ASSETS - 100.0%
$ 979,349
FOOTNOTES:
(1) Security may be an obligation of one or more entities affiliated with the named company.
(2) Percentages represent fair value as a percentage of net assets for each investment category.
(3) As of December 31, 2023, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60% and SOFR + 4.35%, respectively. SOFR at December 31, 2023 was 5.34%.
(4) As of December 31, 2023, the Company owned a controlling interest in this portfolio company.
See notes to condensed consolidated financial statements.
11
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
1. Principal Business and Organization
CNL Strategic Capital, LLC (the "Company") is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. The Company is externally managed by CNL Strategic Capital Management, LLC (the "Manager") and sub-managed by Levine Leichtman Strategic Capital, LLC (the "Sub-Manager"). The Manager is responsible for the overall management of the Company's activities and the Sub-Manager is responsible for the day-to-day management of the Company's assets. The Manager and the Sub-Manager are each registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Company conducts and intends to continue its operations so that the Company and each of its subsidiaries do not fall within, or are excluded from, the definition of an "investment company" under the Investment Company Act of 1940, as amended (the "Investment Company Act").
The Company intends to target businesses that are highly cash flow generative, with annual revenues primarily between $15 million and $250 million and whose management teams seek an ownership stake in the company. The Company's business strategy is to acquire controlling equity interests in combination with debt positions and in doing so, provide long-term capital appreciation and current income while protecting invested capital. The Company seeks to structure its investments with limited, if any, third-party senior leverage.
The Company intends for a significant majority of its total assets to be comprised of long-term controlling equity interests and debt positions in the businesses it acquires. In addition, and to a lesser extent, the Company may acquire other debt and minority equity positions. The Company intends to acquire, directly or through syndication, various types of debt including secured and senior unsecured debt, notes and other instruments. The Company may also acquire minority equity interests as a standalone investment and as a co-investment in combination with other funds and partnerships managed by Levine Leichtman Capital Partners, LLC or its affiliates. The Company expects that these positions will comprise a minority of its total assets.
The Company commenced its initial public offering of up to $1.1 billion of its limited liability company interests ("shares") on March 7, 2018 (the "Initial Public Offering"), which included up to $100.0 million of shares being offered through its distribution reinvestment plan, pursuant to a registration statement on Form S-1, as amended (the "Initial Registration Statement"). On November 1, 2021, the Company commenced a follow-on public offering of up to $1.1 billion of shares (the "Follow-On Public Offering" and together with the Initial Public Offering, the "Public Offerings"), which included up to $100.0 million of shares being offered through its distribution reinvestment plan, pursuant to a registration statement on Form S-1 (the "Follow-On Registration Statement") filed with the Securities and Exchange Commission (the "SEC"). On February 15, 2024, the Company filed a registration statement on Form S-1 (the "Second Follow-On Registration Statement") with the SEC in connection with the proposed offering of shares of our limited liability company interest (the "Second Follow-On Public Offering") which share amounts may be adjusted. As permitted under applicable securities laws, the Company will continue to offer its common shares in the Follow-On Public Offering until the effective date of the Second Follow-On Registration Statement, upon which the Follow-On Registration Statement will be deemed terminated.
Through the Follow-On Public Offering, the Company is offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, the "Non-founder shares"). There are differing selling fees and commissions and dealer manager fees for each share class. The Company also pays distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Follow-On Public Offering (excluding sales pursuant to its distribution reinvestment plan). See Note 7. "Capital Transactions" and Note 13. "Subsequent Events" for additional information related to the Public Offerings.
2. Significant Accounting Policies
Basis of Presentation
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as contained in the Financial Accounting Standards Board Accounting Standards Codification ("ASC"), which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties. In the opinion of management, the condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and necessary for the fair presentation of financial results as of and for the periods presented.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Although the Company is organized and intends to conduct its business in a manner so that it is not required to register as an investment company under the Investment Company Act, its financial statements are prepared using the specialized accounting principles of ASC Topic 946, "Financial Services-Investment Companies" ("ASC Topic 946") to utilize investment company accounting. The Company obtains funds through the issuance of equity interests to multiple unrelated investors, and provides such investors with investment management services. Further, the Company's business strategy is to acquire interests in middle-market U.S. businesses to provide current income and long term capital appreciation, while protecting invested capital.
Overall, the Company believes that the use of investment company accounting on a fair value basis is consistent with the management of its assets on a fair value basis, and makes the Company's financial statements more useful to investors and other financial statement users in facilitating the evaluation of an investment in the Company as compared to other investment products in the marketplace.
Principles of Consolidation
Under ASC Topic 946 the Company is precluded from consolidating any entity other than an investment company or an operating company which provides substantially all of its services to benefit the Company. In accordance therewith, the Company has consolidated the results of its wholly owned subsidiaries which provide services to the Company in its condensed consolidated financial statements. However, the Company has not consolidated the results of its subsidiaries in which the Company holds debt and equity investments. All intercompany account balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market funds at commercial banks. Demand deposits are carried at cost plus accrued interest, which approximates fair value. The Company deposits its cash with highly-rated banking corporations and, at times, cash deposits may exceed the insured limits under applicable law.
As of September 30, 2024, the Company held no cash equivalents. As of December 31, 2023, the Company held cash equivalents in the form of money market fund shares held in Fidelity Government Money Market with a fair value of approximately $73.1 million which represented 7.2% of total assets. Cash equivalents in the form of money market fund shares are valued at their reported net asset value on the measurement date, and are categorized within Level 1 of the fair value hierarchy under ASC Topic 820, as inputs in the valuation are observable.
Use of Estimates
Management makes estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the financial statements in conformity with GAAP. The uncertainty of future events may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and actual results could differ from those estimates.
Valuation of Investments
ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC Topic 820") clarifies that fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.
In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:
Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is defined as a market in which transactions for the asset or liability occur with sufficient pricing information on an ongoing basis. Publicly listed equity and debt securities and listed derivatives that are traded on major securities exchanges and publicly traded equity options are generally valued using Level 1 inputs. If a price for an asset cannot be determined based upon this established process, it shall then be valued as a Level 2 or Level 3 asset.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following: (i) quoted prices for similar assets in active markets; (ii) quoted prices for identical or similar assets in markets that are not active; (iii) inputs that are derived principally from or corroborated by observable market data by correlation or other means; and (iv) inputs other than quoted prices that are observable for the assets. Fixed income and derivative assets, where there is an observable secondary trading market and through which pricing inputs are available through pricing services or broker quotes, are generally valued using Level 2 inputs. If a price for an asset cannot be determined based upon this established process, it shall then be valued as a Level 3 asset.
Level 3- Unobservable inputs for the asset or liability being valued. Unobservable inputs will be used to measure fair value to the extent that observable inputs are not available and such inputs will be based on the best information available in the circumstances, which under certain circumstances might include the Manager's or the Sub-Manager's own data. Level 3 inputs may include, but are not limited to, capitalization and discount rates and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. Certain assets may be valued based upon estimated value of underlying collateral and include adjustments deemed necessary for estimates of costs to obtain control and liquidate available collateral. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. Debt and equity investments in private companies or assets valued using the market or income approach are generally valued using Level 3 inputs.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls will be determined based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each asset. U.S. Treasury securities are classified as Level 1 assets and are recorded at fair value based on the average of the bid and ask quotes for identical instruments.
The Company's board of directors is responsible for determining in good faith the fair value of the Company's Level 3 investments in accordance with the Company's valuation policy and procedures approved by the board of directors, based on, among other factors, the input of the Manager, the Sub-Manager, its audit committee, and the independent third-party valuation firm. The determination of the fair value of the Company's Level 3 assets requires judgment, which include assets for which market prices are not available. For most of the Company's assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of the Company's net asset value is based, in part, on the fair value of its assets, the Company's calculation of net asset value is subjective and could be adversely affected if the determinations regarding the fair value of its assets were materially higher than the values that the Company ultimately realizes upon the disposal of such assets. Furthermore, through the valuation process, the Company's board of directors may determine that the fair value of the Company's Level 3 assets differs materially from the values that were provided by the independent valuation firm.
The Company may also look to private merger and acquisition statistics, public trading multiples adjusted for illiquidity and other factors, valuations implied by third-party investments in the businesses or industry practices in determining fair value. The Company may also consider the size and scope of a business and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments
The Company will measure realized gains or losses as the difference between the net proceeds from the sale, repayment, or disposal of an asset and the amortized cost basis of the asset, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation on investments will reflect the change in asset values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Foreign Securities
The accounting records of the Company are maintained in U.S. dollars. Investment securities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies on the respective dates of the transactions. The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with "Net change in unrealized appreciation on investments" in the Company's condensed consolidated statements of operations.
Income Recognition
Interest Income- Interest income from loans and debt securities is recorded on an accrual basis to the extent that the Company expects to collect such amounts. The Company does not accrue as a receivable interest on loans and debt securities for accounting purposes if it has reason to doubt its ability to collect such interest. The Company places loans on non-accrual status when principal and interest are past due 90 days or more or when there is a reasonable doubt that the Company will collect principal or interest. Accrued interest is generally reversed when a loan is placed on non-accrual. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment. Non-accrual loans are generally restored to accrual status when past due principal and interest amounts are paid and, in management's judgment, are likely to remain current. Since inception, the Company has not experienced any past due payments on any of its loan investments.
Original issue discounts ("OID") on U.S. Treasury securities are reflected in the initial cost basis and the Company accretes such amounts as interest income over the term of the respective security using the effective interest method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts.
Dividend Income - Dividend income is recorded on the record date for privately issued securities, but excludes any portion of distributions that are treated as a return of capital. Each distribution received from an equity investment is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments as dividend income unless there are sufficient current or accumulated earnings prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
PIK Dividend Income- PIK dividend income is computed at the contractual rate specified in each applicable agreement and is accrued and recorded as dividend income and capitalized to the principal balance of the preferred equity. Such income is accrued only to the extent that the Company believes that the PIK dividend income is probable of being collected. PIK dividends capitalized to the principal balance are generally collected upon redemption of the equity.
Paid in Capital
The Company records the proceeds from the sale of its common shares on a net basis to (i) capital shares at par value and (ii) paid in capital in excess of par value, excluding upfront selling commissions and dealer manager fees.
Share Repurchases
Under the Company's share repurchase program (the "Share Repurchase Program"), shares are redeemed as of the repurchase date, which will generally be the last business day of the month of a calendar quarter. Shares redeemed are retired and not available for reissue. See Note 7. "Capital Transactions" for additional information.
Offering Expenses
Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the Public Offerings, are capitalized on the Company's condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to the Company's condensed consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Distribution and Shareholder Servicing Fees
The Company pays distribution and shareholder servicing fees with respect to its Class T and Class D shares, as described further below in Note 5. "Related Party Transactions." The Company records the distribution and shareholder servicing fees, which accrue daily, in the Company's condensed consolidated statements of operations as they are incurred.
Deferred Financing Costs
Financing costs, including upfront fees, commitment fees and legal fees related to borrowings (as further described in Note 8. "Borrowings") are deferred and amortized over the life of the related financing instrument using the effective yield method. The amortization of deferred financing costs is included in general and administrative expense in the Company's condensed consolidated statements of operations.
Allocation of Profit and Loss
Class-specific expenses, including base management fees, total return incentive fees, offering expenses, expense support (reimbursement), distribution and shareholder servicing fees and certain transfer agent fees, are allocated to each share class of common shares in accordance with how such expenses are attributable to the particular share classes, as determined by the Company's board of directors, the Company's governing agreements and, in certain cases, expenses which are specifically identifiable to a share class.
The following table reflects class-specific expenses by share class during the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended September 30, 2024
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
Base management fees $ 269 $ 1,186 $ 414 $ 499 $ 2,301 $ 133
Total return incentive fees 399 1,268 410 584 2,345 168
Offering expenses - 147 22 32 137 -
Expense support - - - - 335 18
Other class-specific expenses (1)
8 34 224 134 51 5
Nine Months Ended September 30, 2024
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
Base management fees $ 788 $ 3,001 $ 1,204 $ 1,343 $ 6,307 $ 385
Total return incentive fees 1,217 3,435 1,249 1,479 7,041 511
Offering expenses - 359 52 83 385 -
Expense support - - - - (1) 1
Other class-specific expenses (1)
26 103 672 375 157 17
Quarter Ended September 30, 2023
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
Base management fees $ 267 $ 587 $ 414 $ 366 $ 1,743 $ 128
Total return incentive fees 390 614 389 373 1,816 161
Offering expenses - 463 73 87 448 -
Expense reimbursement
- - - - - -
Other class-specific expenses (1)
53 139 300 161 294 36
16
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Nine Months Ended September 30, 2023
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
Base management fees $ 792 $ 1,338 $ 1,174 $ 990 $ 4,670 $ 378
Total return incentive fees 961 1,232 961 884 4,247 425
Offering expenses - 1,008 293 253 1,468 -
Expense reimbursement 610 - - - 34 -
Other class-specific expenses(1)
32 85 666 297 176 22
(1) Other class-specific expenses consist of distribution and shareholder servicing fees and certain transfer agent fees.
Income and expenses which are not class-specific are allocated monthly pro rata among the share classes based on shares outstanding as of the end of the month.
Net Investment Income per Share and Net Increase in Net Assets Resulting from Operations per Share
Net investment income per share and net increase in net assets resulting from operations per share are calculated for each share class of common shares based upon the weighted average number of common shares outstanding during the reporting period.
Distributions
The Company's board of directors has declared and intends to continue to declare distributions based on monthly record dates. The Company's distributions are paid in the same month as the declared record date. Distributions are made on all classes of the Company's shares at the same time.
The Company has adopted a distribution reinvestment plan that provides for reinvestment of distributions on behalf of shareholders. Non-founder shareholders participating in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable at a price per share equivalent to the then current public offering price, net of up-front selling commissions and dealer manager fees. Cash distributions paid on Class FA shares participating in the distribution reinvestment plan are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.
Income Taxes
Under GAAP, the Company is subject to the provisions of ASC 740, "Income Taxes." The Company follows the authoritative guidance on accounting for uncertainty in income taxes and concluded it has no material uncertain tax positions to be recognized at this time. If applicable, the Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense in the Company's condensed consolidated statements of operations.
The Company has operated and expects to continue to operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. Generally, if the Company were otherwise treated as a publicly traded partnership, the Company would not be taxable as a corporation if 90% or more of its gross income for each taxable year consists of "qualifying income" (generally, interest (other than interest generated from a financial business), dividends, real property rents, gain from the sale of assets that produce qualifying income and certain other items) and the Company is not required to register under the Investment Company Act (the "qualifying income exception"). As a partnership, the individual shareholders are responsible for their proportionate share of the Company's taxable income.
The Company holds certain equity investments in taxable subsidiaries (the "Taxable Subsidiaries"). The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies which are "pass through" entities for tax purposes. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of the Taxable Subsidiaries' ownership of certain portfolio investments. The income tax expense, or benefit, and related tax assets and liabilities are reflected in the Company's condensed consolidated financial statements. See Note 9. "Income Taxes" for additional information.
During the quarter and nine months ended September 30, 2024 and 2023, the Company did not incur any material interest or penalties. Tax years ending December 31, 2020 and forward remain subject to examination by taxing authorities.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Recently Issued Accounting Standards Updates
In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provide new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods with fiscal years beginning after December 15, 2024. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. We are currently assessing the impact this guidance will have on our consolidated financial statements; however, we do not expect a material impact to our consolidated financial statements as ASU 2023-07 results in additional disclosure only.
In December 2023, the FASB issued ASU 2023-09 "Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 intends to improve the transparency of income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with the option to apply retrospectively. We are currently assessing the impact of this guidance; however, we do not expect a material impact to our consolidated financial statements.
3. Investments
In February 2024, the Company, through its wholly-owned subsidiaries, USAW Strategic Capital EquityCo, LLC and USAW Strategic Capital DebtCo, LLC, made a co-investment in USA Water Intermediate Holdings, LLC ("USAW") of approximately $10.0 million. The Company's co-investment is comprised of a minority common equity position of approximately $8.6 million and $1.4 million of senior secured subordinated notes.
In June 2024, the Company, through its wholly-owned subsidiary, LBR Strategic Capital EquityCo, LLC, made a co-investment in LOCI Topco Limited ("LBR") of approximately $59.4 million. The Company's co-investment is comprised of a minority common equity position of approximately $0.1 million and $59.3 million of preferred equity.
In June 2024, the Company made an additional equity investment in Sill of approximately $24.0 million.
In July 2024, the Company, through its wholly-owned subsidiary, MAP Strategic Capital EquityCo, LLC, acquired an approximately 50.5% indirect equity ownership interest in Madison Retirement Holdings TopCo, LLC ("MAP"). The Company's total investment of $29.5 million in MAP is comprised of an indirect common equity interest investment of approximately $21.5 million and a concurrent debt investment of $8.0 million made through its wholly-owned subsidiary, MAP Strategic Capital DebtCo, LLC, in the form of a senior secured note issued by MAP.
The Company's investment portfolio is summarized as follows as of September 30, 2024 and December 31, 2023 (in thousands):
As of September 30, 2024
Asset Category
Amortized Cost(1)
Fair Value Fair Value
Percentage of
Investment
Portfolio 		Fair Value
Percentage of
Net Assets
Senior secured debt
First lien $ 59,990 $ 59,990 5.7 % 5.1 %
Secured
148,638 148,638 14.1 12.8
Second lien 76,718 76,718 7.3 6.6
Total senior secured debt 285,346 285,346 27.1 24.5
Equity
Preferred 60,804 63,900 6.1 5.5
Common 495,589 702,675 66.8 60.4
Total equity 556,393 766,575 72.9 65.9
Total investments $ 841,739 $ 1,051,921 100.0 % 90.4 %
(1) The amortized cost represents the original cost adjusted for PIK dividends.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of December 31, 2023
Asset Category Cost Fair Value Fair Value
Percentage of
Investment
Portfolio 		Fair Value
Percentage of
Net Assets
Senior secured debt
First lien $ 200,816 $ 200,816 22.9 % 20.5 %
Second lien 75,342 75,342 8.6 7.7
Total senior secured debt 276,158 276,158 31.5 28.2
Equity 443,818 600,685 68.5 61.3
Total investments $ 719,976 $ 876,843 100.0 % 89.5 %
Collectively, the Company's debt investments accrue interest at a weighted average per annum rate of 14.2% and have weighted average remaining years to maturity of 4.2 years as of September 30, 2024. The note purchase agreements contain customary covenants and events of default. As of September 30, 2024, all of the Company's portfolio companies were in compliance with their respective debt covenants. As of September 30, 2024 and December 31, 2023, none of the Company's debt investments were on non-accrual status.
The industry dispersion of the Company's portfolio company investments, based on fair value, as of September 30, 2024 and December 31, 2023 were as follows:
Industry September 30, 2024 December 31, 2023
Business Services 19.8 % 13.5 %
Healthcare Supplies 16.9 20.0
Engineered Products 14.1 16.9
Commercial and Professional Services 13.5 13.6
Information Services and Advisory Solutions 13.1 8.3
Visual Safety Solutions 8.2 9.5
Real Estate Services 6.8 7.9
Sanitation Products 4.9 6.7
Hobby Goods and Supplies 2.7 3.6
Total 100.0 % 100.0 %
Summarized Portfolio Company Financial Information
The Company had three significant portfolio companies in which it owned a controlling equity interest during the quarter and nine months ended September 30, 2024 and 2023. The following tables present unaudited summarized operating data for the quarter and nine months ended September 30, 2024 and 2023, and summarized balance sheet data as of September 30, 2024 (unaudited) and December 31, 2023 for these portfolio companies (in thousands):
Polyform
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 4,594 $ 4,236 $ 13,138 $ 12,355
Expenses (4,682) (4,546) (13,840) (13,220)
Loss before taxes (88) (310) (702) (865)
Income tax benefit 15 88 189 246
Net loss $ (73) $ (222) $ (513) $ (619)
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of September 30, 2024 As of December 31, 2023
Current assets $ 7,708 $ 7,601
Non-current assets 24,140 25,515
Current liabilities 1,640 1,111
Non-current liabilities 20,473 20,830
Stockholders' equity 9,735 11,175
Ownership percentage(1)
87 % 87 %
FOOTNOTE:
(1)Represents the Company's undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
Vektek
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 9,232 $ 9,898 $ 27,051 $ 29,684
Expenses (8,844) (9,405) (26,264) (28,453)
Income before taxes 388 493 787 1,231
Income tax expense (48) (4) (76) (18)
Net income $ 340 $ 489 $ 711 $ 1,213
As of September 30, 2024 As of December 31, 2023
Current assets $ 14,858 $ 14,846
Non-current assets 97,495 99,254
Current liabilities 2,741 2,182
Non-current liabilities 49,438 49,625
Stockholders' equity 60,174 62,293
Ownership percentage(1)
84 % 84 %
FOOTNOTE:
(1)Represents the Company's undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
Sill
The Company made its initial investment in Sill in October 2023.
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2024
Revenues $ 6,391 $ 14,636
Expenses (5,846) (15,515)
Income (loss) before taxes 545 (879)
Income tax expense (1,718) (1,038)
Net loss $ (1,173) $ (1,917)
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of September 30, 2024 As of December 31, 2023
Current assets $ 10,005 $ 5,157
Non-current assets 99,924 71,762
Current liabilities 5,673 2,129
Non-current liabilities 18,113 16,668
Stockholders' equity 86,143 58,122
Ownership percentage(1)
94 % 99 %
FOOTNOTE:
(1)Represents the Company's undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
4. Fair Value of Financial Instruments
The Company's investments were categorized in the fair value hierarchy described in Note 2. "Significant Accounting Policies," as follows as of September 30, 2024 and December 31, 2023 (in thousands):
As of September 30, 2024 As of December 31, 2023
Description Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Senior Debt $ - $ - $ 285,346 $ 285,346 $ - $ - $ 276,158 $ 276,158
Equity - - 766,575 766,575 - - 600,685 600,685
Total Investments $ - $ - $ 1,051,921 $ 1,051,921 $ - $ - $ 876,843 $ 876,843
The ranges of unobservable inputs used in the fair value measurement of the Company's Level 3 investments as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
As of September 30, 2024
Asset Group Fair Value Valuation Techniques Unobservable Inputs
Range
(Weighted Average)(1)
Impact to Valuation from an Increase in
Input(2)
Senior Debt $ 285,346 Discounted Cash Flow
Market Comparables
Transaction Method 		Discount Rate
EBITDA Multiple
10.8% - 15.5% (13.1%)
6.3x - 21.6x (12.6x)
Decrease
Increase
Equity 766,575 Discounted Cash Flow
Market Comparables
Transaction Method 		Discount Rate
EBITDA Multiple
10.8% - 15.5% (13.1%)
6.3x - 21.6x (12.6x)
Decrease
Increase
Total $ 1,051,921
As of December 31, 2023
Asset Group Fair Value Valuation Techniques Unobservable Inputs
Range
(Weighted Average)(1)
Impact to Valuation from an Increase in
Input(2)
Senior Debt $ 276,158 Discounted Cash Flow
Market Comparables
Transaction Method 		Discount Rate
EBITDA Multiple
EBITDA Multiple
10.5% - 14.5% (12.5%)
6.9x - 15.1x (10.8x)
6.3x - 16.0x (11.9x)
Decrease
Increase
Increase
Equity 600,685 Discounted Cash Flow
Market Comparables
Transaction Method 		Discount Rate
EBITDA Multiple
EBITDA Multiple
10.5% - 14.5% (12.5%)
6.9x - 15.1x (10.8x)
6.3x - 16.0x (11.9x)
Decrease
Increase
Increase
Total $ 876,843
FOOTNOTES:
(1) Discount rates are relative to the enterprise value of the portfolio companies and are not the market yields on the associated debt investments. Unobservable inputs were weighted by the relative fair value of the investments.
(2) This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.
21
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The preceding tables include the significant unobservable inputs as they relate to the Company's determination of fair values for its investments categorized within Level 3 as of September 30, 2024 and December 31, 2023. In addition to the techniques and inputs noted in the tables above, according to the Company's valuation policy, the Company may also use other valuation techniques and methodologies when determining the fair value estimates for the Company's investments. Any significant increases or decreases in the unobservable inputs would result in significant increases or decreases in the fair value of the Company's investments.
Investments that do not have a readily available market value are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), a transaction approach, or a combination of such approaches, as appropriate. The market approach uses prices, including third party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The transaction approach uses pricing indications derived from recent precedent merger and acquisition transactions involving comparable target companies. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a present value amount range. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security's issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.
The following tables provide a reconciliation of investments for which Level 3 inputs were used in determining fair value for the nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended September 30, 2024
Senior Debt Equity Total
Fair value balance as of January 1, 2024
$ 276,158 $ 600,685 $ 876,843
Additions 9,376 113,531 122,907
Principal repayment (188) - (188)
PIK dividends - 1,490 1,490
Return of capital(1)
- (2,445) (2,445)
Net change in unrealized appreciation, including unrealized foreign currency gain(2)
- 53,314 53,314
Fair value balance as of September 30, 2024 $ 285,346 $ 766,575 $ 1,051,921
Change in net unrealized appreciation on investments held as of September 30, 2024(2)
$ - $ 53,314 $ 53,314
Nine Months Ended September 30, 2023
Senior Debt Equity Total
Fair value balance as of January 1, 2023
$ 176,942 $ 411,895 $ 588,837
Additions 83,490 78,090 161,580
Principal repayment (63) - (63)
Return of capital(1)
- (165) (165)
Net change in unrealized appreciation(2)
- 28,836 28,836
Fair value balance as of September 30, 2023 $ 260,369 $ 518,656 $ 779,025
Change in net unrealized appreciation on investments held as of September 30, 2023(2)
$ - $ 28,836 $ 28,836
FOOTNOTES:
(1) Represents portion of distributions received which were accounted for as a return of capital. See Note 2. "Significant Accounting Policies" for information on the accounting treatment of distributions from portfolio companies.
(2) Included in net change in unrealized appreciation on investments in the condensed consolidated statements of operations.
22
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
5. Related Party Transactions
The Manager and Sub-Manager, along with certain affiliates of the Manager or Sub-Manager, receive fees and compensation in connection with the Public Offerings, as well as the acquisition, management and sale of the assets of the Company, as follows:
Managing Dealer
Commissions- The Company pays CNL Securities Corp. (the "Managing Dealer"), an affiliate of the Manager, a selling commission up to 6.00% of the sale price for each Class A share and 3.00% of the sale price for each Class T share sold in the Follow-On Public Offering (excluding sales pursuant to the Company's distribution reinvestment plan). The Managing Dealer may reallow all or a portion of the selling commissions to participating broker-dealers.
Dealer Manager Fee- The Company pays the Managing Dealer a dealer manager fee of up to 2.50% of the price of each Class A share and 1.75% of the price of each Class T share sold in the Follow-On Public Offering (excluding sales pursuant to the Company's distribution reinvestment plan). The Managing Dealer may reallow all or a portion of such dealer manager fees to participating broker-dealers.
Distribution and Shareholder Servicing Fee- The Company pays the Managing Dealer a distribution and shareholder servicing fee, subject to certain limits, with respect to its Class T and Class D shares sold in the Public Offerings (excluding Class T shares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of its current net asset value per share, as disclosed in its periodic or current reports, payable on a monthly basis. The distribution and shareholder servicing fee accrues daily and is paid monthly in arrears. The Managing Dealer may reallow all or a portion of the distribution and shareholder servicing fee to the broker-dealer who sold the Class T or Class D shares or, if applicable, to a servicing broker-dealer of the Class T or Class D shares or a fund supermarket platform featuring Class D shares, so long as the broker-dealer or financial intermediary has entered into a contractual agreement with the Managing Dealer that provides for such reallowance. The distribution and shareholder servicing fee is an ongoing fee, subject to certain limits, that is allocated among all Class T and Class D shares, respectively, and is not paid at the time of purchase.
Manager and/or Sub-Manager
Offering Costs- The Company reimburses the Manager and the Sub-Manager, along with their respective affiliates, for the offering costs (other than selling commissions and dealer manager fees) they have incurred on the Company's behalf only to the extent that such expenses do not exceed 1.5% of the cumulative gross proceeds from the Public Offerings. The Company incurred an obligation to reimburse the Manager and Sub-Manager for offering costs based on actual amounts raised through the Public Offerings of approximately $0.3 million and $1.1 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $0.9 million and $3.0 million during the nine months ended September 30, 2024 and 2023, respectively.
Base Management Fee to Manager and Sub-Manager- The Company pays each of the Manager and the Sub-Manager 50% of the total base management fee for their services under the Management Agreement and the Sub-Management Agreement, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement described below. The Company incurred base management fees of approximately $4.8 million and $3.5 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $13.0 million and $9.3 million during the nine months ended September 30, 2024 and 2023, respectively.
23
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares of a particular class, 2% of the product of (x) the Company's average gross assets and (y) the ratio of Non-founder shares Average Adjusted Capital (as defined below), for a particular class to total Average Adjusted Capital and (ii) for the Founder shares of a particular class, 1% of the product of (x) the Company's average gross assets and (y) the ratio of outstanding Founder shares Average Adjusted Capital for a particular class to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears. The management fee for a certain month is calculated based on the average value of the Company's gross assets at the end of that month and the immediately preceding calendar month. The determination of gross assets reflects changes in the fair market value of the Company's assets, which does not necessarily equal their notional value, reflecting both realized and unrealized capital appreciation or depreciation. The base management fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, "Average Adjusted Capital" for an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable month. "Adjusted Capital" is defined as cumulative proceeds generated from sales of the Company's shares of a particular share class (including proceeds from the sale of shares pursuant to the distribution reinvestment plan, if any), net of upfront selling commissions and dealer manager fees ("sales load"), if any, reduced for the full amounts paid for share repurchases pursuant to any share repurchase program, if any, and adjusted for share conversions, if any, for such class.
Total Return Incentive Fee on Income to the Manager and Sub-Manager- The Company also pays each of the Manager and the Sub-Manager 50% of the total return incentive fee for their services under the Management Agreement and the Sub-Management Agreement. The Company recorded total return incentive fees of approximately $5.2 million and $3.7 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $14.9 million and $8.7 million during the nine months ended September 30, 2024 and 2023, respectively.
The total return incentive fee is based on the Total Return to Shareholders (as defined below) for each share class in any calendar year, payable annually in arrears. The Company accrues (but does not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and performs a final reconciliation and makes required payments at completion of each calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, "Total Return to Shareholders" for any calendar quarter is calculated for each share class as the change in the net asset value for such share class plus total distributions for such share class calculated based on the Average Adjusted Capital for such class as of such calendar quarter end. The terms "Total Return to Non-founder Shareholders" and "Total Return to Founder Shareholders" means the Total Return to Shareholders specifically attributable to each particular share class of Non-founder shares or Founder shares, as applicable.
The total return incentive fee for each share class is calculated as follows:
•No total return incentive fee will be payable in any calendar year in which the annual Total Return to Shareholders of a particular share class does not exceed 7% (the "Annual Preferred Return").
•As it relates to the Non-founder shares, all of the Total Return to Shareholders with respect to each particular share class of Non-founder shares, if any, that exceeds the annual preferred return, but is less than or equal to 8.75%, or the "Non-founder breakpoint," in any calendar year, will be payable to the Manager ("Non-founder Catch Up"). The Non-Founder Catch Up is intended to provide an incentive fee of 20% of the Total Return to Non-founder Shareholders of a particular share class once the Total Return to Non-founder Shareholders of a particular class exceeds 8.75% in any calendar year.
•As it relates to Founder shares, all of the Total Return to Founder Shareholders with respect to each particular share class of Founder shares, if any, that exceeds the annual preferred return, but is less than or equal to 7.777%, or the "founder breakpoint," in any calendar year, will be payable to the Manager ("Founder Catch Up"). The Founder Catch Up is intended to provide an incentive fee of 10% of the Total Return to Founder Shareholders of a particular share class once the Total Return to Founder Shareholders of a particular class exceeds 7.777% in any calendar year.
•For any quarter in which the Total Return to Shareholders of a particular share class exceeds the relevant breakpoint, the total return incentive fee of a particular share class shall equal, for Non-founder shares, 20% of the Total Return to Non-founder Shareholders of a particular class, and for Founder shares, 10% of the Total Return to Founder Shareholders of a particular class, in each case because the annual preferred and relevant catch ups will have been achieved.
24
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
•For purposes of calculating the Total Return to Shareholders, the change in the Company's net asset value is subject to a High Water Mark. The "High Water Mark" is equal to the highest year-end net asset value, for each share class of the Company since inception, adjusted for any special distributions resulting from the sale of the Company's assets, provided such adjustment is approved by the Company's board of directors. If, as of each calendar year end, the Company's net asset value for the applicable share class is (A) above the High Water Mark, then, for such calendar year, the Total Return to Shareholders calculation will include the increase in the Company's net asset value for such share class in excess of the High Water Mark, and (B) if the Company's net asset value for the applicable share class is below the High Water Mark, for such calendar year, (i) any increase in the Company's per share net asset value will be disregarded in the calculation of Total Return to Shareholders for such share class while (ii) any decrease in the Company's per share net asset value will be included in the calculation of Total Return to Shareholders for such share class. With respect to the calculation of Total Return to Shareholders, the following tables provides the applicable High Water Marks for the years ended December 31, 2024 and 2023:
For the year ended: Class FA Class A Class T Class D Class I Class S
December 31, 2024
$ 36.67 $ 33.57 $ 33.64 $ 33.31 $ 34.06 $ 37.25
December 31, 2023
34.90 32.45 32.46 32.11 32.88 35.39
For purposes of this calculation, "Average Adjusted Capital" for an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable quarter. The annual preferred return of 7% and the relevant breakpoints of 8.75% and 7.777%, respectively, are also adjusted for the actual number of days in each calendar year, measured as of each calendar quarter end.
Reimbursement to Manager and Sub-Manager for Operating Expenses and Pursuit Costs - The Company reimburses the Manager and the Sub-Manager and their respective affiliates for certain third party operating expenses and pursuit costs incurred in connection with their provision of services to the Company, including fees, costs, expenses, liabilities and obligations relating to the Company's activities, acquisitions, dispositions, financings and business, subject to the terms of the Company's limited liability company agreement, the Management Agreement, the Sub-Management Agreement and the Expense Support and Conditional Reimbursement Agreement (as defined below). The Company does not reimburse the Manager and Sub-Manager for administrative services performed by the Manager or Sub-Manager for the benefit of the Company.
Expense Support and Conditional Reimbursement Agreement- The Company entered into an expense support and conditional reimbursement agreement with the Manager and the Sub-Manager, as amended, (the "Expense Support and Conditional Reimbursement Agreement"), which became effective on February 7, 2018, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that the Company's annual regular cash distributions exceed its annual net income (with certain adjustments). The amount of such expense support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of the Company's distribution reinvestment plan) to shareholders minus (b) the available operating funds, as defined in the Expense Support and Conditional Reimbursement Agreement (the "Expense Support").
The Expense Support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. Until the Expense Support and Conditional Reimbursement Agreement is terminated, the Manager and Sub-Manager shall equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable, to the Manager or the Sub-Manager. Expense support is paid by the Manager and Sub-Manager annually in arrears.
25
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
If, on the last business day of the calendar year, the annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the "Excess Operating Funds"), the Company uses such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to certain conditions (the "Conditional Reimbursements") as described further in the Expense Support and Conditional Reimbursement Agreement. The Company's obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.
Since inception, the Company has received cumulative Expense Support of approximately $5.1 million. Of the Expense Support received through September 30, 2024, approximately $4.9 million had been reimbursed and approximately $0.2 million was no longer eligible for reimbursement. As of September 30, 2024, there was no remaining amount of Expense Support collected from the Manager and Sub-Manager subject to reimbursement.
Distributions
Individuals and entities affiliated with the Manager and Sub-Manager owned approximately 0.4 million shares as of September 30, 2024 and 2023. These individuals and entities received distributions from the Company of approximately $0.1 million for each of the quarters ended September 30, 2024 and 2023 and approximately $0.4 million and $0.3 million during each of the nine months ended September 30, 2024 and 2023, respectively.
Related party fees and expenses incurred for the quarter and nine months ended September 30, 2024 and 2023 are summarized below (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
Related Party Source Agreement & Description 2024 2023 2024 2023
Managing Dealer
Managing Dealer Agreement:
Commissions(1)
$ 692 $ 824 $ 1,734 $ 2,160
Dealer manager fees(1)
107 271 266 687
Distribution and shareholder servicing fees 334 310 971 873
Manager and Sub-Manager
Management Agreement and Sub-Management Agreement:
Offering expense reimbursement(2)(3)
338 1,071 879 3,022
Base management fees(2)
4,802 3,505 13,028 9,342
Total return incentive fees(2)
5,174 3,743 14,932 8,710
Manager and Sub-Manager
Expense Support and Conditional Reimbursement Agreement:
Expense Support
353 - - -
Expense Support and Condition Reimbursement Agreement:
Reimbursement of Expense Support
- - - 644
Manager
Administrative Services Agreement:
Reimbursement of third-party operating expenses(2)(4)
131 26 378 74
Sub-Manager
Sub-Management Agreement:
Reimbursement of third-party pursuit costs(2)(5)
(159) 682 843 1,228
FOOTNOTES:
(1)Included in "Issuance of common shares through the Public Offerings" in the Company's condensed consolidated statements of changes in net assets.
(2)Expenses subject to Expense Support, if applicable.
(3)Offering expense reimbursements are capitalized on the Company's condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to the Company's condensed consolidated statements of operations over the lesser of the offering period or 12 months.
(4)Included in "Professional services" in the Company's condensed consolidated statements of operations.
(5)Includes reimbursement of third-party fees incurred for investments that did not close, including fees and expenses associated with performing due diligence reviews.
26
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The following table presents amounts due to related parties net as of September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024 December 31, 2023
Due to related parties:
Total return incentive fees $ (14,932) $ (13,506)
Reimbursement of Expense Support - (644)
Base management fees (1,586) (1,338)
Offering expenses (121) (92)
Distribution and shareholder servicing fees (111) (106)
Reimbursement of third-party operating expenses and pursuit costs (21) (101)
Due to related parties, net $ (16,771) $ (15,787)
Other Related Party Transactions
Prior to the Company's co-investment in LBR as described in Note 3. "Investments," LBR was a majority owned subsidiary of an affiliate of the Sub-Manager.
6. Distributions
The Company's board of directors declared distributions on a monthly basis in each of the nine months ended September 30, 2024 and 2023 (nine record dates). The Company's distributions are paid in the same month as the declared record date. The following table reflects the total distributions declared during the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Nine Months Ended September 30,
2024 2023
Distribution Period
Distributions Declared(1)
Distributions Reinvested(2)
Cash Distributions Net of Distributions Reinvested(2)
Distributions Declared(1)(2)
Distributions Reinvested(2)
Cash Distributions Net of Distributions Reinvested(2)
First Quarter $ 8,807 $ 4,056 $ 4,751 $ 6,601 $ 2,590 $ 4,011
Second Quarter 9,214 4,344 4,870 7,195 2,976 4,219
Third Quarter 9,676 4,693 4,983 7,865 3,401 4,464
$ 27,697 $ 13,093 $ 14,604 $ 21,661 $ 8,967 $ 12,694
FOOTNOTES:
(1) The Company's board of directors declared distributions per share on a monthly basis. See Note 12. "Financial Highlights" for distributions declared by share class. Monthly distributions declared per share for each share class were as follows:
Record Date Period Class FA Class A Class T Class D Class I Class S
January 1, 2024 - September 30, 2024 $ 0.104167 $ 0.104167 $ 0.083333 $ 0.093750 $ 0.104167 $ 0.104167
January 1, 2023 - September 30, 2023
0.104167 0.104167 0.083333 0.093750 0.104167 0.104167
(2) Amounts based on distribution record date.
27
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The sources of declared distributions on a GAAP basis were as follows (in thousands):
Nine Months Ended September 30,
2024 2023
Amount % of Distributions Declared Amount % of Distributions Declared
Net investment income(1)
$ 17,618 63.6 % $ 17,274 79.7 %
Distributions in excess of net investment income(2)
10,079 36.4 4,387 20.3
Total distributions declared $ 27,697 100.0 % $ 21,661 100.0 %
FOOTNOTES:
(1) Net investment income includes Expense Support (reimbursement), net of $0 and $(644) for the nine months ended September 30, 2024 and 2023, respectively. See Note 5. "Related Party Transactions" for additional information.
(2) Consists of distributions made from offering proceeds for the periods presented.
In September 2024, the Company's board of directors declared a monthly cash distribution on the outstanding shares of all classes of common shares of record on October 28, 2024 of $0.104167 per share for Class FA shares, $0.104167 per share for Class A shares, $0.083333 per share for Class T shares, $0.093750 per share for Class D shares, $0.104167 per share for Class I shares and $0.104167 per share for Class S shares.
7. Capital Transactions
Public Offerings
Under the Follow-On Public Offering, the Company is offering up to $1.0 billion of shares, on a best efforts basis, which means that CNL Securities Corp., as the Managing Dealer of the Follow-On Public Offering, uses its best effort but is not required to sell any specific amount of shares. The Company is offering, in any combination, four classes of shares in the Follow-On Public Offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in shares. There are differing selling fees and commissions for each share class. The Company also pays distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public Offerings (excluding sales pursuant to the Company's distribution reinvestment plan). The public offering price, selling commissions and dealer manager fees per share class are determined monthly as approved by the Company's board of directors. As of September 30, 2024, the public offering price was $37.60 per Class A share, $36.16 per Class T share, $34.14 per Class D share and $34.90 per Class I share.
The Company is also offering, in any combination, up to $100.0 million of Class A shares, Class T shares, Class D shares and Class I shares to be issued pursuant to its distribution reinvestment plan.
See Note 13. "Subsequent Events" for additional information related to the Follow-On Public Offering and the Second Follow-On Public Offering.
The following tables summarize the total shares issued and proceeds received by share class in connection with the Public Offerings, excluding shares repurchased through the Share Repurchase Program described further below, for the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Nine Months Ended September 30, 2024
Proceeds from Public Offerings Distributions Reinvested Total
Share Class Shares Issued Gross Proceeds
Sales
Load(1)
Net Proceeds to Company Shares Issued Proceeds to Company Shares Issued Net Proceeds to Company Average Net Proceeds per Share
Class A 2,013 $ 69,980 $ (1,542) $ 68,438 115 $ 3,920 2,128 $ 72,358 $ 34.00
Class T 282 10,061 (458) 9,603 39 1,320 321 10,923 34.05
Class D 476 16,070 - 16,070 42 1,415 518 17,485 33.76
Class I 2,177 75,022 - 75,022 187 6,438 2,364 81,460 34.46
4,948 $ 171,133 $ (2,000) $ 169,133 383 $ 13,093 5,331 $ 182,226 $ 34.18
28
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Nine Months Ended September 30, 2023
Proceeds from Public Offerings Distributions Reinvested Total
Share Class Shares Issued Gross Proceeds
Sales
Load(1)
Net Proceeds to Company Shares Issued Proceeds to Company Shares Issued Net Proceeds to Company Average Net Proceeds per Share
Class A 1,989 $ 67,210 $ (1,944) $ 65,266 59 $ 1,920 2,048 $ 67,186 $ 32.81
Class T 569 19,526 (903) 18,623 40 1,299 609 19,922 32.74
Class D 521 16,897 - 16,897 34 1,089 555 17,986 32.45
Class I 2,945 97,820 - 97,820 139 4,659 3,084 102,479 33.22
6,024 $ 201,453 $ (2,847) $ 198,606 272 $ 8,967 6,296 $ 207,573 $ 32.98
FOOTNOTES:
(1)The Company incurs selling commissions and dealer manager fees on the sale of Class A and Class T shares sold through the Public Offerings. See Note 5. "Related Party Transactions" for additional information regarding up-front selling commissions and dealer manager fees.
Share Repurchase Program
In accordance with the Share Repurchase Program, the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares is limited to up to 2.5% of the aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of the aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of the Company's trailing four quarters). At the sole discretion of the Company's board of directors, the Company may use sources, including, but not limited to, offering proceeds and borrowings to repurchase shares.
During the nine months ended September 30, 2024 and 2023, the Company received requests for the repurchase of approximately $38.3 million and $15.6 million, respectively, of the Company's common shares. The Company's board of directors approved the repurchase requests.
The following table summarizes the shares repurchased during the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Shares Repurchased Total Consideration Average Price Paid per Share
Class FA 139 $ 5,199 $ 37.19
Class A 114 3,890 34.01
Class T 134 4,505 33.86
Class D 61 2,051 33.70
Class I 627 21,675 34.53
Class S 27 1,003 38.03
Nine Months Ended September 30, 2024 1,102 $ 38,323 $ 34.77
Shares Repurchased Total Consideration Average Price Paid per Share
Class FA 42 $ 1,480 $ 35.57
Class A 55 1,811 32.78
Class T 57 1,844 33.05
Class D 31 1,003 32.65
Class I 266 8,909 33.33
Class S 14 534 36.42
Nine Months Ended September 30, 2023 465 $ 15,581 $ 33.48
As of September 30, 2024 and December 31, 2023, the Company had a payable for shares repurchased of approximately $11.8 million and $8.2 million, respectively, which were paid in October and January 2024, respectively.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Share Conversions
Class T and Class D shares are converted into Class A shares once the maximum amount of distribution and shareholder servicing fees for those particular shares has been met. The shares to be converted are multiplied by the applicable conversion rate, the numerator of which is the net asset value per share of the share class being converted and the denominator of which is the net asset value per Class A share.
During the nine months ended September 30, 2024, approximately 247,000 Class T shares were converted to approximately 247,000 Class A shares at an average conversion rate of 1.00. During the nine months ended September 30, 2023, approximately 301,000 Class T shares were converted to approximately 301,000 Class A shares at an average conversion rate of 1.00.
8. Borrowings
In August 2022, the Company entered into a loan agreement (the "2022 Loan Agreement") and related promissory note with First Horizon Bank for a $50.0 million revolving line of credit (the "2022 Line of Credit"). In connection with the 2022 Loan Agreement, the Company was required to pay a total commitment fee to First Horizon Bank of $0.25 million, of which $0.13 million was paid during the nine months ended September 30, 2023.
The Company is required to pay a fee to First Horizon with each advance under the 2022 Line of Credit in the amount equal to 0.05% of the amount of each borrowing. The Company is also required to pay interest on the borrowed amount at a rate per year equal to the 30-day Secured Overnight Financing Rate ("SOFR") plus 2.75%. Interest payments are due monthly in arrears. Furthermore, the Company is required to pay a quarterly unused line fee when the average outstanding balance of the 2022 Line of Credit is less than $25.0 million. Unused line fees are due quarterly in arrears.
The Company may prepay, without penalty, all or any part of the borrowings under the 2022 Loan Agreement at any time and such borrowings are required to be repaid within 180 days of the borrowing date. Under the 2022 Loan Agreement, the Company is required to comply with certain covenants including the provision of financial statements on a quarterly basis, a restriction from incurring any debt, and restrictions on the transfer and sale of assets held by certain subsidiaries. Additionally, the Company has a covenant related to its fair market value of investments as a multiple of borrowings outstanding.
In connection with the 2022 Loan Agreement, the Company entered into a pledge and security agreement ("Pledge Agreement") in favor of the lender under the 2022 Line of Credit. Under the Pledge Agreement, the Company is required to contribute proceeds from the Follow-On Public Offering to pay down the outstanding debt to the extent there are any borrowings outstanding under the 2022 Loan Agreement.
The 2022 Line of Credit was available for advances through August 2023 and the Company extended the 2022 Line of Credit through December 2023. The 2022 Line of Credit was expired as of December 31, 2023.
In February 2024, CNL Strategic Capital B, Inc. ("Borrower"), a wholly-owned subsidiary of the Company, and Valley National Bank, entered into a Revolving Loan Agreement (the "2024 Loan Agreement") for a $50.0 million revolving line of credit (the "2024 Line of Credit"). Unless extended, the Line of Credit has a maturity date of February 15, 2025. In connection with the 2024 Line of Credit, the Borrower paid a total commitment fee and Valley National Bank expenses of $0.16 million. The Borrower is required to pay interest on any borrowed amounts under the 2024 Line of Credit at a rate per year equal to the 1-Month Term SOFR plus 2.75%. Interest payments are due on the first calendar day of the month in arrears. Furthermore, the Borrower is required to pay a quarterly unused borrowing fee at an annual rate of 0.15% on the difference between (i) total 2024 Line of Credit amount and (ii) the aggregate average daily balance of outstanding borrowings under the 2024 Line of Credit during such quarter. The Borrower may prepay, without penalty, all or any part of the borrowings under the 2024 Loan Agreement at any time and such borrowings are required to be repaid within 180 days of the borrowing date. Under the 2024 Loan Agreement, the Company is required to comply with certain covenants including the requirement to provide certain financial and compliance reports to Valley National Bank and restrictions on incurring certain levels of additional debt by the Company.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
In February 2024, the Company entered into a Guaranty agreement to act as a guarantor of the Borrower's outstanding borrowings under the 2024 Loan Agreement (the "Guaranty Agreement"). On February 15, 2024, the Borrower and the Company also entered into a pledge and assignment of bank and deposit accounts ("2024 Pledge Agreement") in favor of Valley National Bank. Under the 2024 Pledge Agreement, the Company is required to maintain accounts with Valley National Bank, including to contribute proceeds from the Company's offering, as a pledge of collateral to pay down the outstanding debt to the extent there are any borrowings outstanding under the 2024 Loan Agreement.
The Company had not borrowed any amounts under the 2024 Line of Credit as of September 30, 2024.
9. Income Taxes
The Company incurs income tax expense related to its Taxable Subsidiaries. The components of income tax expense were as follows during the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
Current tax expense $ 15 $ - $ 10 $ -
Deferred tax expense 1,300 2,088 2,567 4,242
Total income tax expense $ 1,315 $ 2,088 $ 2,577 $ 4,242
The effective tax rate for the nine months ended September 30, 2024 and 2023 was 3.6% and 9.2%, respectively. The primary items giving rise to the difference between the 21.0% federal statutory rate applicable to corporations and the effective tax rates are due to state taxes and the benefits of the partnership structure.
Significant components of the Company's deferred tax assets and liabilities as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
September 30, 2024 December 31, 2023
Deferred tax assets:
Carryforwards of net operating loss $ 1,221 $ 1,249
Unrealized depreciation on investments
271 913
Other 32 -
Valuation allowance (723) (1,324)
Total deferred tax assets 801 838
Deferred tax liabilities:
Unrealized appreciation on investments (10,830) (8,300)
Total deferred tax liabilities (10,830) (8,300)
Deferred tax liabilities, net $ (10,029) $ (7,462)
10. Concentrations of Risk
The Company had three portfolio companies which met at least one of the significance tests under Rule 10-01(b) of Regulation S-X for at least one of the periods presented in the condensed consolidated financial statements.
The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on the Company's results of operations and cash flows from operations, which would impact its ability to make distributions to shareholders.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
11. Commitments & Contingencies
See Note 5. "Related Party Transactions" for information on contingent amounts due to the Manager and Sub-Manager for the reimbursement of offering costs under the Public Offerings and for the reimbursement of Expense Support.
From time to time, the Company and officers or directors of the Company may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company's rights under contracts with its businesses. As of September 30, 2024, the Company was not involved in any legal proceedings.
In addition, in the normal course of business, the Company enters into contracts with its vendors and others that provide for general indemnifications. The Company's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company. However, based on experience, the Company expects that risk of loss to be remote.
12. Financial Highlights
The following are schedules of financial highlights of the Company attributed to each class of shares for the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Nine Months Ended September 30, 2024
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
OPERATING PERFORMANCE PER SHARE
Net Asset Value, Beginning of Period $ 36.67 $ 33.57 $ 33.64 $ 33.31 $ 34.06 $ 37.25
Net investment income, before Expense Support (reimbursement)(1)
1.04 0.51 0.30 0.42 0.50 1.01
Expense Support (reimbursement)(1)(2)
- - - - - -
Net investment income(1)
1.04 0.51 0.30 0.42 0.50 1.01
Net realized and unrealized gains, net of taxes(1)(3)
1.64 1.64 1.64 1.64 1.64 1.64
Net increase resulting from investment operations 2.68 2.15 1.94 2.06 2.14 2.65
Distributions to shareholders(4)
(0.94) (0.94) (0.75) (0.84) (0.94) (0.94)
Net decrease resulting from distributions to shareholders (0.94) (0.94) (0.75) (0.84) (0.94) (0.94)
Net Asset Value, End of Period $ 38.41 $ 34.78 $ 34.83 $ 34.53 $ 35.26 $ 38.96
Net assets, end of period $ 155,153 $ 257,844 $ 89,487 $ 106,647 $ 487,709 $ 67,080
Average net assets(5)
$ 153,495 $ 208,435 $ 88,129 $ 95,173 $ 447,371 $ 65,922
Shares outstanding, end of period 4,040 7,413 2,569 3,089 13,832 1,721
Distributions declared $ 3,861 $ 5,733 $ 1,943 $ 2,378 $ 12,150 $ 1,632
Total investment return based on net asset value before total return incentive fee(6)
8.18 % 7.91 % 7.31 % 7.76 % 7.91 % 8.02 %
Total investment return based on net asset value after total return incentive fee(6)
7.20 % 6.50 % 5.84 % 6.29 % 6.37 % 7.21 %
RATIOS/SUPPLEMENTAL DATA (not annualized):
Ratios to average net assets:(5)(7)
Total operating expenses before total return incentive fee 0.87 % 2.05 % 2.57 % 2.28 % 1.91 % 0.95 %
Total operating expenses
1.67 % 3.69 % 3.98 % 3.83 % 3.48 % 1.72 %
Net investment income before total return incentive fee(8)
3.57 % 3.14 % 2.31 % 2.80 % 3.03 % 3.45 %
Net investment income 2.78 % 1.49 % 0.90 % 1.24 % 1.45 % 2.67 %
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Nine Months Ended September 30, 2023
Class FA
Shares 		Class A
Shares 		Class T
Shares 		Class D
Shares 		Class I
Shares 		Class S
Shares
OPERATING PERFORMANCE PER SHARE
Net Asset Value, Beginning of Period $ 34.90 $ 32.45 $ 32.46 $ 32.11 $ 32.88 $ 35.39
Net investment income before Expense Support (reimbursement)(1)
1.21 0.58 0.46 0.58 0.65 1.16
Expense Support (reimbursement)(1)(2)
(0.15) - - - - -
Net investment income(1)
1.06 0.58 0.46 0.58 0.65 1.16
Net realized and unrealized gains, net of taxes(1)(3)
1.01 1.04 1.01 1.01 1.01 1.01
Net increase resulting from investment operations 2.07 1.62 1.47 1.59 1.66 2.17
Distributions to shareholders(4)
(0.94) (0.94) (0.75) (0.84) (0.94) (0.94)
Net decrease resulting from distributions to shareholders (0.94) (0.94) (0.75) (0.84) (0.94) (0.94)
Net Asset Value, End of Period $ 36.03 $ 33.13 $ 33.18 $ 32.86 $ 33.60 $ 36.62
Net assets, end of period $ 151,426 $ 148,708 $ 86,091 $ 81,512 $ 389,435 $ 64,108
Average net assets(5)
$ 149,822 $ 97,541 $ 85,440 $ 71,323 $ 336,616 $ 63,431
Shares outstanding, end of period 4,202 4,489 2,594 2,481 11,590 1,751
Distributions declared $ 3,965 $ 2,770 $ 1,953 $ 1,851 $ 9,470 $ 1,652
Total investment return based on net asset value before total return incentive fee(6)
6.51 % 5.92 % 5.75 % 6.17 % 6.25 % 6.91 %
Total investment return based on net asset value after total return incentive fee(6)
5.80 % 5.06 % 4.58 % 5.03 % 5.11 % 6.21 %
RATIOS/SUPPLEMENTAL DATA (not annualized):
Ratios to average net assets:(5)(7)
Total operating expenses before total return incentive fee 0.95 % 2.97 % 2.93 % 2.61 % 2.31 % 1.02 %
Total operating expenses before Expense Support (reimbursement) 1.59 % 4.23 % 4.06 % 3.85 % 3.58 % 1.69 %
Total operating expenses after Expense Support (reimbursement) 2.00 % 4.23 % 4.06 % 3.85 % 3.59 % 1.69 %
Net investment income before total return incentive fee(8)
3.64 % 3.02 % 2.53 % 3.03 % 3.21 % 3.90 %
Net investment income 3.00 % 1.75 % 1.41 % 1.79 % 1.95 % 3.23 %
FOOTNOTES:
(1)The per share amounts presented are based on weighted average shares outstanding.
(2)Expense Support (reimbursement) is accrued throughout the year and is subject to a final calculation as of the last business day of the calendar year.
(3)The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio investments for the period because of the timing of sales and repurchases of the Company's shares in relation to fluctuating fair values for the portfolio investments.
(4)The per share data for distributions is the actual amount of distributions paid or payable per common share outstanding during the entire period; distributions per share are rounded to the nearest $0.01.
(5)The computation of average net assets during the period is based on net assets measured at each month end, adjusted for capital contributions or withdrawals during the month.
(6)Total investment return is calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other share classes assume distributions are reinvested in the same share class, including Class S shares which do not participate in the distribution reinvestment plan. Amounts are not annualized and are not representative of total return as calculated for purposes of the total return incentive fee described in Note 5. "Related Party Transactions." See footnote (8) below for information regarding the percentage of total incentive fees covered by expense support by share class for all periods presented. Since there is no public market for the Company's shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company's performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company's shares.
(7)Actual results may not be indicative of future results. Additionally, an individual investor's ratios may vary from the ratios presented for a share class as a whole.
(8)Amounts represent net investment income before total return incentive fee and related expense support as a percentage of average net assets. For the nine months ended September 30, 2024 and 2023, none of the total return incentive fees were covered by Expense Support.
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CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2024
13. Subsequent Events
Distributions
In October 2024, the Company's board of directors declared a monthly cash distribution on the outstanding shares of all classes of common shares of record on November 26, 2024 of $0.104167 per share for Class FA shares, $0.104167 per share for Class A shares, $0.083333 per share for Class T shares, $0.093750 per share for Class D shares, $0.104167 per share for Class I shares and $0.104167 per share for Class S shares.
Follow-On Public Offering
In October 2024, the Company's board of directors approved new per share offering prices for each share class in the Follow-On Public Offering. The new offering prices are effective as of October 31, 2024. The following table provides the new offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the Follow-On Public Offering:
Class A Class T Class D Class I
Effective October 31, 2024:
Offering Price, Per Share $ 38.01 $ 36.57 $ 34.53 $ 35.26
Selling Commissions, Per Share 2.28 1.10 - -
Dealer Manager Fees, Per Share 0.95 0.64 - -
Second Follow-On Public Offering
On November 1, 2024, the Second Follow-On Public Offering was declared effective by the SEC and the Follow-On Public Offering was terminated.
Capital Transactions
During the period October 1, 2024 through November 6, 2024, the Company received additional net proceeds from the Follow-On Public Offering and distribution reinvestment plan of the following (in thousands except per share data):
Proceeds from Follow-On Public Offering Distribution Reinvestment Plan Total
Share Class Shares Gross Proceeds Sales Load Net Proceeds to Company Shares Gross Proceeds Shares Net Proceeds to Company Average Net Proceeds per Share
Class A 674 $ 23,920 $ (482) $ 23,438 16 $ 536 690 $ 23,974 $ 34.78
Class T 35 1,297 (59) 1,238 4 142 39 1,380 34.83
Class D 14 477 - 477 5 176 19 653 34.53
Class I 349 12,303 - 12,303 22 776 371 13,079 35.26
1,072 $ 37,997 $ (541) $ 37,456 47 $ 1,630 1,119 $ 39,086 $ 34.94
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is based on the unaudited condensed consolidated financial statements as of September 30, 2024 and December 31, 2023, and for the quarter and nine months ended September 30, 2024 and 2023. Amounts as of December 31, 2023 included in the unaudited condensed consolidated statements of assets and liabilities have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management's discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2023 (our "Form 10-K"). Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed financial statements unless otherwise defined herein.
Statement Regarding Forward-Looking Information
Certain statements in this quarterly report on Form 10-Q for the quarterly period ended September 30, 2024 (this "Quarterly Report") constitute "forward-looking statements." Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management's current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of our business and its performance, the economy and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as "believes," "expects," "anticipates," "intends," "estimates," "plans," "continues," "pro forma," "may," "will," "seeks," "should" and "could," and words and terms of similar substance, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties, including statements as to:
•our future operating results;
•our business prospects and the prospects of our businesses and other assets;
•unanticipated costs, delays and other difficulties in executing our business strategy;
•performance of our businesses and other assets relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these assets;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with the Manager, the Sub-Manager and their respective affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we target, including rising interest rates, inflationary pressures, recessionary concerns or global supply chain issues;
•events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, pandemics or threatened or actual armed conflicts;
•the use, adequacy and availability of proceeds from our current public offering ("Second Follow-On Public Offering"), financing sources, working capital or borrowed money to finance a portion of our business strategy and to service our outstanding indebtedness;
•the timing of cash flows, if any, from our businesses and other assets;
•the ability of the Manager and the Sub-Manager to locate suitable acquisition opportunities for us and to manage and operate our businesses and other assets;
•the ability of the Manager, the Sub-Manager and their respective affiliates to attract and retain highly talented professionals;
•the ability to operate our business efficiently, manage costs (including general and administrative expenses) effectively and generate cash flow;
•the lack of a public trading market for our shares;
•the ability to make and the amount and timing of anticipated future distributions;
•estimated net asset value per share of our shares;
•the loss of our exemption from the definition of an "investment company" under the Investment Company Act of 1940, as amended (the "Investment Company Act");
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•fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S economy;
•the degree and nature of our competition; or
•the effect of changes to government regulations, accounting rules or tax legislation.
Our forward-looking statements are not guarantees of our future performance and shareholders are cautioned not to place undue reliance on any forward-looking statements. While we believe our forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. Our forward-looking statements are based on our current expectations and a variety of risks, uncertainties and other factors, many of which are beyond our ability to control or accurately predict.
Important factors that could cause our actual results to vary materially from those expressed or implied in our forward-looking statements include, but are not limited to, the factors listed and described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Risk Factors" sections of the Company's documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Form 10-K and this Quarterly Report.
All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made; we undertake no obligation to, and expressly disclaim any obligation to, update or revise forward-looking statements to reflect new information, changed assumptions, the occurrence of subsequent events, or changes to future operating results over time unless otherwise required by law.
Overview
CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We are externally managed by the Manager, CNL Strategic Capital Management, LLC, an entity that is registered as an investment adviser under the Advisers Act. The Manager is controlled by CNL Financial Group, LLC, a private investment management firm specializing in alternative investment products. We have engaged the Manager under the Management Agreement pursuant to which the Manager is responsible for the overall management of our activities and sub-managed by the Sub-Manager, Levine Leichtman Strategic Capital, LLC, a registered investment adviser, under the Sub-Management Agreement pursuant to which the Sub-Manager is responsible for the day-to-day management of our assets. The Sub-Manager is an affiliate of Levine Leichtman Capital Partners, LLC.
The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisitions and debt financing opportunities, subject to approval by the Manager's management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions.
Since we commenced operations on February 7, 2018, we have acquired equity and debt investments in 16 middle market U.S. businesses. Our businesses generally have a track record of stable and predictable operating performance, are highly cash flow generative and have management teams who have a meaningful ownership stake in their respective company. As of September 30, 2024, we had eleven investments structured as controlling equity interests in combination with debt positions, four investments structured as minority equity interests in combination with debt positions and one investment structured as a minority equity interest. All of our debt investments were current as of September 30, 2024.
We were formed as a Delaware limited liability company on August 9, 2016 and we operate and intend to continue to operate our business in a manner that will permit us to avoid registration under the Investment Company Act. We are not a "blank check" company within the meaning of Rule 419 of the Securities Act. We commenced operations on February 7, 2018.
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Our Common Shares Offerings
Public Offerings
On March 7, 2018, we commenced the Initial Public Offering of up to $1.1 billion of shares, which included up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Initial Registration Statement. On November 1, 2021, we commenced the Follow-On Public Offering of up to $1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Follow-On Registration Statement, upon which the Initial Registration Statement was deemed terminated. On November 1, 2024, we commenced the Second Follow-On Public Offering of up to $1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Second Follow-On Registration Statement upon which the Follow-On Registration Statement was deemed terminated.
Through September 30, 2024, we had received net proceeds from the Initial Public Offering and the Follow-On Offering of approximately $916.3 million, including approximately $41.3 million received through our distribution reinvestment plan. As of September 30, 2024, the public offering price was $37.60 per Class A share, $36.16 per Class T share, $34.14 per Class D share and $34.90 per Class I share. See Note 7. "Capital Transactions" and Note 13. "Subsequent Events" in Item 1. "Financial Statements" for additional information regarding the Public Offerings.
Through September 30, 2024, we had incurred selling commissions and dealer manager fees of approximately $13.6 million from the sale of Class A shares and Class T shares in the Initial Public Offering and the Follow-On Offering. The Class D shares and Class I shares sold through September 30, 2024, were not subject to selling commissions and dealer manager fees. We also incurred obligations to reimburse the Manager and Sub-Manager for offering costs of approximately $11.3 million based on actual amounts raised through the Initial Public Offering and the Follow-On Offering through September 30, 2024. These offering costs related to the Public Offerings were advanced by the Manager and Sub-Manager, as described further in Note 5. "Related Party Transactions" of Item 1. "Financial Statements."
We are currently offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, "Non-founder shares") through the Second Follow-On Public Offering. There are differing selling fees and commissions for each share class. We also pay distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public Offerings (excluding shares sold pursuant to our distribution reinvestment plan).
In October 2024, our board of directors approved new per share public offering prices for each share class in the Follow-On Public Offering. The new public offering prices are effective as of October 31, 2024. The following table provides the new public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the Follow-On Public Offering:
Class A Class T Class D Class I
Effective October 31, 2024:
Public Offering Price, Per Share $ 38.01 $ 36.57 $ 34.53 $ 35.26
Selling Commissions, Per Share 2.28 1.10 - -
Dealer Manager Fees, Per Share 0.95 0.64 - -
Since we commenced operations on February 7, 2018, we have raised total net offering proceeds (including amounts raised from our private offerings, the Initial Public Offering and the Follow-On Public Offering) of approximately $1,091.7 million, including approximately $41.3 million received through our distribution reinvestment plan as of September 30, 2024.
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Portfolio and Investment Activity
As of September 30, 2024, we had invested in 16 portfolio companies, consisting of equity investments and debt investments in all but one portfolio company. The table below presents our portfolio company investments (in millions):
As of September 30, 2024
Equity Investments
Debt Investments(1)
Portfolio Company Initial Investment Date Ownership % Cost Basis Senior Secured Debt Interest Rate Maturity Date Cost Basis
Total Cost Basis(2)
Lawn Doctor 2/7/2018 61 % $ 27.6 Second Lien 16.0 % 2/7/2030 $ 15.0 $ 42.6
Lawn Doctor 6/30/2023 - - First Lien
(3)
8/6/2029 29.5 29.5
Polyform 2/7/2018 87 15.6 Secured 16.0 2/7/2026 15.7 31.3
Roundtables 8/1/2019 81 33.5 Second Lien 16.0 7/1/2028 12.1 45.6
Roundtables 11/13/2019 - - Secured 8.0 6/1/2025 2.0 2.0
Milton Industries Inc. 11/21/2019 13 6.6 Second Lien 15.0 12/19/2027 3.4 10.0
Resolution Economics, LLC 1/2/2020 8 8.1 Second Lien 15.0 12/30/2027 2.8 10.9
Blue Ridge 3/24/2020 16 11.1 Second Lien 15.0 12/28/2028 2.6 13.7
HSH 7/16/2020 75 17.3 Secured 15.0 7/16/2027 24.4 41.7
ATA 4/1/2021 75 37.1
Secured
15.0 4/1/2027 37.0 74.1
Douglas 10/7/2021 90 35.5 Second Lien 16.0 10/7/2028 15.0 50.5
Clarion 12/9/2021 96 56.8 First Lien 15.0 12/9/2028 22.5 79.3
Vektek 5/6/2022 84 56.9 Second Lien 15.0 11/6/2029 24.4 81.3
Vektek 6/30/2023 - - Secured
(3)
5/6/2029 24.7 24.7
TacMed 3/24/2023 95 76.7
Secured
16.0 3/24/2030 29.0 105.7
Sill 10/20/2023 94 82.5
Secured
14.0 10/20/2030 15.9 98.4
USAW 2/21/2024 5 8.6 Second Lien 16.0 8/20/2031 1.4 10.0
LBR 6/17/2024 7 60.9
(4)
(4)
(4)
- 60.9
MAP 7/18/2024 50 21.5 First Lien 15.0 7/18/2031 8.0 29.5
$ 556.3 $ 285.4 $ 841.7
FOOTNOTES:
(1) The note purchase agreements contain customary covenants and events of default. As of September 30, 2024, all of our portfolio companies were in compliance with their respective debt covenants.
(2) See the Schedule of Investments and Note 3. "Investments" of Item 1. "Financial Statements" for additional information related to our investments, including fair values as of September 30, 2024.
(3) As of September 30, 2024, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60%. SOFR at September 30, 2024 was 5.16%.
(4) Investment in portfolio company consists of minority equity interests only.
The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on our results of operations and cash flows from operations, which would impact our ability to make distributions to shareholders. See our Form 10-K for the year ended December 31, 2023 for additional information regarding our portfolio companies and their related business activities.
Our Portfolio Companies
The below information regarding our portfolio companies contain a financial measure, Adjusted EBITDA, utilized by management to evaluate the operating performance and liquidity of our portfolio companies that is not calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Adjusted EBITDA should not be considered in isolation from or as superior to or as a substitute for net income (loss), income (loss) from operations, or other financial measures determined in accordance with GAAP. We use this non-GAAP financial measure to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our portfolio companies. We present this non-GAAP measure quarterly for our portfolio companies in which we own a controlling equity interest and annually for all of our portfolio companies.
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You are encouraged to evaluate the adjustments to Adjusted EBITDA, including the reasons we consider this measure appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future our portfolio companies may incur expenses that are the same as or similar to some of the adjustments in this presentation. The presentation of Adjusted EBITDA should not be construed as an inference that the future results of our portfolio companies will be unaffected by unusual or non-recurring items.
We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies, because not all companies calculate this non-GAAP measure in the same manner. Because of these limitations and additional limitations described below, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA only as a supplemental measure.
Additionally, we provide our proportionate share of each non-GAAP measure because our ownership percentage of each portfolio company varies. We urge investors to consider our ownership percentage of each portfolio company when evaluating the results of each of our portfolio companies.
Adjusted EBITDA
When evaluating the performance of our portfolio, we monitor Adjusted EBITDA to measure the financial and operational performance of our portfolio companies and their ability to pay contractually obligated debt payments to us. In connection with this evaluation, the Manager and Sub-Manager review monthly portfolio company operating performance versus budgeted expectations and conduct regular operational review calls with the management teams of the portfolio companies.
We present Adjusted EBITDA as a supplemental measure of the performance of our portfolio companies because we believe it assists investors in comparing the performance of such businesses across reporting periods on a consistent basis by excluding items that we do not believe are indicative of their core operating performance.
We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain other non-recurring items that we do not consider indicative of the ongoing operating performance of our portfolio companies. These further adjustments are itemized below. Our proportionate share of Adjusted EBITDA is calculated based on our equity ownership percentage at period end.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: (i) Adjusted EBITDA does not reflect cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; (iii) Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness; (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; (v) Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the ongoing operations of our portfolio companies; and (vi) other companies in similar industries as our portfolio companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.
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Lawn Doctor
As of September 30, 2024 and December 31, 2023, Lawn Doctor, Inc. ("Lawn Doctor") had total assets of approximately $98.8 million and $100.0 million, respectively.
The following table reconciles our proportionate share of Adjusted EBITDA from net income of Lawn Doctor for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 11,410 $ 9,499 $ 34,635 $ 31,693
Net income (GAAP) $ 955 $ 816 $ 2,470 $ 1,918
Interest and debt related expenses 1,491 1,493 4,439 4,550
Depreciation and amortization 646 659 1,918 1,955
Income tax expense 377 199 1,023 677
Adjusted EBITDA (non-GAAP) $ 3,469 $ 3,167 $ 9,850 $ 9,100
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 2,100 $ 1,917 $ 5,963 $ 5,509
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 61% of Lawn Doctor.
Polyform
As of September 30, 2024 and December 31, 2023, Polyform Products, Co. ("Polyform") had total assets of approximately $31.8 million and $33.1 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net loss of Polyform for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 4,594 $ 4,236 $ 13,138 $ 12,355
Net loss (GAAP) $ (73) $ (222) $ (513) $ (619)
Interest and debt related expenses 736 733 2,182 2,168
Depreciation and amortization 466 465 1,395 1,395
Income tax benefit (15) (88) (189) (246)
Adjusted EBITDA (non-GAAP) $ 1,114 $ 888 $ 2,875 $ 2,698
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 971 $ 774 $ 2,505 $ 2,351
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 87% of Polyform.
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Roundtables
As of September 30, 2024 and December 31, 2023, Auriemma U.S. Roundtables ("Roundtables") had total assets of approximately $62.0 million and $61.6 million, respectively. In August 2023, Roundtables acquired insideARM, a U.S.-based company providing services to the third-party debt collection industry.
The following table reconciles our proportionate share of Adjusted EBITDA from net income of Roundtables for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 4,523 $ 4,551 $ 13,162 $ 12,750
Net income (GAAP)
$ 362 $ 330 $ 364 $ 809
Interest and debt related expenses 608 664 1,875 1,955
Depreciation and amortization 483 519 1,566 1,541
Income tax expense
109 100 110 246
Adjusted EBITDA (non-GAAP) $ 1,562 $ 1,613 $ 3,915 $ 4,551
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 1,261 $ 1,303 $ 3,162 $ 3,675
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 81% of Roundtables.
HSH
As of September 30, 2024 and December 31, 2023, Healthcare Safety Holdings, LLC ("HSH") had total assets of approximately $42.8 million and $45.0 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of HSH for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 8,646 $ 9,176 $ 25,744 $ 26,869
Net income (GAAP) $ 394 $ 797 $ 1,574 $ 2,329
Interest and debt related expenses 942 921 2,779 2,752
Depreciation and amortization 714 746 2,208 2,251
Income tax expense 153 309 568 906
Adjusted EBITDA (non-GAAP) $ 2,203 $ 2,773 $ 7,129 $ 8,238
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 1,641 $ 2,066 $ 5,312 $ 6,138
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 75% of HSH.
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ATA
As of September 30, 2024 and December 31, 2023, ATA Holding Company, LLC ("ATA") had total assets of approximately $88.3 million and $89.2 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income (loss) of ATA for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 14,174 $ 13,376 $ 38,998 $ 36,326
Net income (loss) (GAAP) $ 51 $ (93) $ (1,595) $ (2,771)
Interest and debt related expenses 1,472 1,501 4,407 4,505
Depreciation and amortization 1,069 1,094 3,254 3,285
Adjusted EBITDA (non-GAAP) $ 2,592 $ 2,502 $ 6,066 $ 5,019
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 1,944 $ 1,876 $ 4,550 $ 3,764
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 75% of ATA.
Douglas
As of September 30, 2024 and December 31, 2023, Douglas Machines Corp. ("Douglas") had total assets of approximately $56.3 million and $57.6 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net (loss) income of Douglas for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 6,510 $ 5,855 $ 20,367 $ 23,862
Net (loss) income (GAAP) $ (109) $ (715) $ 99 $ 511
Interest and debt related expenses 596 634 1,884 1,882
Depreciation and amortization 367 383 1,075 1,060
Income tax (benefit) expense
(4) (4) (183) 171
Adjusted EBITDA (non-GAAP) $ 850 $ 298 $ 2,875 $ 3,624
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 767 $ 268 $ 2,594 $ 3,269
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 90% of Douglas.
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Clarion
As of September 30, 2024 and December 31, 2023, Clarion Safety Systems, LLC ("Clarion") had total assets of approximately $81.2 million and $80.4 million, respectively. In December 2023, Clarion acquired machine safeguarding integrator Arrow Industrial Solutions.
The following table reconciles our proportionate share of Adjusted EBITDA from net income of Clarion for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 4,063 $ 3,280 $ 12,620 $ 9,868
Net income (GAAP) $ 255 $ 149 $ 1,301 $ 384
Interest and debt related expenses 834 852 2,511 2,545
Depreciation and amortization 256 247 769 741
Income tax expense 98 58 503 150
Adjusted EBITDA (non-GAAP) $ 1,443 $ 1,306 $ 5,084 $ 3,820
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 1,390 $ 1,279 $ 4,896 $ 3,742
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 96% and 98%, respectively, of Clarion.
Vektek
As of September 30, 2024 and December 31, 2023, Vektek Holdings, LLC ("Vektek") had total assets of approximately $112.4 million and $114.1 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of Vektek for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 9,232 $ 9,898 $ 27,051 $ 29,684
Net income (GAAP) $ 340 $ 489 $ 711 $ 1,213
Interest and debt related expenses 1,590 1,565 4,709 5,278
Depreciation and amortization 898 911 2,728 2,715
Income tax expense 48 4 76 18
Adjusted EBITDA (non-GAAP) $ 2,876 $ 2,969 $ 8,224 $ 9,224
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 2,408 $ 2,486 $ 6,885 $ 7,722
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 84% of Vektek.
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TacMed
As of September 30, 2024 and December 31, 2023, Tacmed Holdings, LLC ("TacMed") had total assets of approximately $111.6 million and $114.3 million, respectively.
The following table reconciles our proportionate share of Adjusted EBITDA from net income (loss) of TacMed for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenues $ 14,100 $ 10,341 $ 31,997 $ 19,697
Net income (loss) (GAAP) $ 538 $ 2 $ (3,027) $ (5,878)
Interest and debt related expenses 1,183 1,186 3,529 2,453
Depreciation and amortization 1,315 1,270 4,105 2,636
Income tax expense (benefit) 130 (521) (523) (1,695)
Transaction related expenses(1)
- 17 26 1,959
Purchase accounting impact on cost of goods sold(2)
- (708) - 2,542
Adjusted EBITDA (non-GAAP) $ 3,166 $ 1,246 $ 4,110 $ 2,017
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(3)
$ 3,024 $ 1,190 $ 3,925 $ 1,926
FOOTNOTES:
(1)Initial buyer transaction costs paid by TacMed included in the purchase price. Transaction related expenses are non-recurring.
(2)Purchase accounting requires inventory to be recorded at fair value as of the purchase date. As inventory is sold, cost of goods sold is higher than the cost to manufacture inventory due to the step up in fair value. Increased cost of goods sold due to purchase accounting is non-recurring.
(3)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024 and 2023, we owned approximately 95% of TacMed.
Sill
As of September 30, 2024 and December 31, 2023, Sill Holdings, LLC ("Sill") had total assets of approximately $109.9 million and $76.9 million, respectively. The Company made its initial investment in Sill in October 2023. In June 2024, Sill acquired Seltser and Goldstein Public Insurance Adjusters ("S&G"). Headquartered in Peabody, MA, S&G is a public insurance adjuster primarily representing residential and commercial property owners.
The following table reconciles our proportionate share of Adjusted EBITDA from net loss of Sill for the quarter and nine months ended September 30, 2024 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2024
Revenues $ 6,391 $ 14,636
Net loss (GAAP) $ (1,173) $ (1,917)
Interest and debt related expenses 621 1,759
Depreciation and amortization 821 1,922
Income tax expense 1,718 1,038
Adjusted EBITDA (non-GAAP) $ 1,987 $ 2,802
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1)
$ 1,860 $ 2,623
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024, we owned approximately 94% of Sill.
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MAP
As of September 30, 2024, MAP had total assets of approximately $49.8 million. The Company made its initial investment in MAP in July 2024.
The following table reconcile our proportionate share of Adjusted EBITDA from net loss of MAP for the quarter ended September 30, 2024 (in thousands):
Quarter Ended
September 30,
2024
Revenues $ 2,878
Net loss (GAAP) $ (546)
Interest and debt related expenses 297
Depreciation and amortization 419
Transaction related expenses(1)
1,412
Adjusted EBITDA (non-GAAP) $ 1,582
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(2)
$ 797
FOOTNOTE:
(1)Initial buyer transaction costs paid by MAP included in the purchase price. Transaction related expenses are non-recurring.
(2)Amounts based on our ownership percentage as of the end of the periods presented. As of September 30, 2024, we owned approximately 50% of MAP.
Other Portfolio Companies
As of September 30, 2024, we held minority equity and debt positions in four portfolio companies and held a minority equity position in one portfolio company. Two of these portfolio companies completed the following add-on acquisitions during the nine months ended September 30, 2024:
•In May 2024, Blue Ridge ESOP Associates ("Blue Ridge") acquired TSC 401K. TSC 401K is a premier third-party administration firm that offers expert retirement plan consulting, design, and administration solutions for businesses and their financial advisors.
•In August 2024, USAW acquired AWR Services, Inc ("AWR"). Headquartered in Austin, TX, AWR provides utility management services to the water and wastewater industry. AWR is a strategic acquisition serving to broaden USAW's service capabilities, expand its geographic footprint, diversify its customer base, and contribute to increased scale of the business.
Factors Impacting Our Operating Results
We expect that the results of our operations will be affected by a number of factors. Many of the factors that will affect our operating results are beyond our control. We will be dependent upon the earnings of and cash flow from the businesses that we acquire to meet our operating and management fee expenses and to make distributions. These earnings and cash flows, net of any minority interests in these businesses, will be available:
•first, to meet our management fees and corporate overhead expenses; and
•second, to fund business operations and to make distributions to our shareholders.
Size of assets
If we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make. The size of our assets will be a key revenue driver. Generally, as the size of our assets grows, the amount of income we receive will increase. In addition, our assets may grow at an uneven pace as opportunities to acquire assets may be irregularly timed, and the timing and extent of the Manager's and the Sub-Manager's success in identifying such opportunities, and our success in making acquisitions, cannot be predicted.
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Market conditions
From time to time, the global capital markets may experience periods of disruption and instability, as we have seen and continue to see with the recent public health crises, natural disasters and geopolitical events, which could materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital. Furthermore, economic growth remains affected by inflationary pressure and supply chain related disruptions and could be slowed or halted by significant external events. Some of our portfolio companies have experienced supply chain related disruptions from time to time. In some instances, strategic decisions to hold more inventory have been made as a result of ongoing supply chain related disruptions. Significant changes or volatility in the capital markets have and may continue to have a negative effect on the valuations of our businesses and other assets. While all of our assets are likely to not be publicly traded, applicable accounting standards require us to assume as part of our valuation process that our assets are sold in a principal market to market participants (even if we plan on holding an asset long term or through its maturity) and impairments of the market values or fair market values of our assets, even if unrealized, must be reflected in our financial statements for the applicable period, which could result in significant reductions to our net asset value for the period. Significant changes in the capital markets may also affect the pace of our activity and the potential for liquidity events involving our assets. Thus, the illiquidity of our assets may make it difficult for us to sell such assets to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our assets if we were required to sell them for liquidity purposes.
Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, make additional investments in our portfolio companies, make distributions to our shareholders and fund our operations. Additionally, to the extent we have available cash we may make investments in short-term U.S. Treasury bills. Our primary sources of cash will generally consist of:
•the net proceeds from the Public Offerings;
•distributions and interest earned from our assets; and
•proceeds from sales of assets and principal repayments from our assets.
We expect we will have sufficient cash from current sources to meet our liquidity needs for the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In light of the current economic environment, impacted by rising interest rates, record inflationary pressures due to global supply chain issues, a rise in energy prices, and the impact of the recent public health crises, natural disasters and geopolitical events on the global economy, we are closely monitoring overall liquidity levels and changes in the business performance of our portfolio companies to be in a position to enact changes to ensure adequate liquidity going forward.
While we generally intend to hold our assets for the long term, certain assets may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty.
As of September 30, 2024 and December 31, 2023, we had cash and cash equivalents of approximately $152.1 million and $134.5 million, respectively.
Sources of Liquidity and Capital Resources
Offerings. We received approximately $170.5 million and $198.6 million in net proceeds during the nine months ended September 30, 2024 and 2023, respectively, from the Initial Public Offering and the Follow-On Public Offering, which excludes approximately $13.1 million and $9.0 million raised through our distribution reinvestment plan, respectively. As of September 30, 2024, we had approximately 813 million authorized common shares remaining for sale.
Investments. We received a return of capital from portfolio company investments of approximately $2.4 million and $0.2 million during the nine months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 2023, we received proceeds from sales and redemptions of U.S. Treasury bills of approximately $813.7 million, of which approximately $755.0 million was reinvested in new U.S. Treasury bills. We did not have any sale or redemptions of U.S. Treasury bills for the nine months ended September 30, 2024.
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Borrowings. We did not borrow any amounts during the nine months ended September 30, 2024 or 2023. See Note 8. "Borrowings" of Item 1. "Financial Statements" for additional information regarding our 2022 Line of Credit and 2024 Line of Credit.
Uses of Liquidity and Capital Resources
Investments. We used approximately $122.7 million and $161.5 million of cash to purchase portfolio company investments during the nine months ended September 30, 2024 and 2023, respectively.
Operating Activities. We generated operating cash flows (excluding amounts related to investment activity) of approximately $16.9 million and $10.4 million during the nine months ended September 30, 2024 and 2023, respectively.
Distributions. We paid distributions to our shareholders of approximately $14.6 million and $12.7 million (which excludes distributions reinvested of approximately $13.1 million and $9.0 million, respectively) during the nine months ended September 30, 2024 and 2023, respectively. See "Distributions Declared" below for additional information.
Share Repurchases. We paid approximately $34.8 million and $11.2 million during the nine months ended September 30, 2024 and 2023, respectively, to repurchase shares in accordance with our Share Repurchase Program.
Deferred Financing Costs.We paid approximately $0.2 million and $0.1 million in deferred financing costs during the nine months ended September 30, 2024 and 2023.
Reimbursement of Expense Support. During the nine months ended September 30, 2024 and 2023, we reimbursed the Manager and Sub-Manager approximately $0.6 million and $2.4 million, respectively, for Expense Support received in previous years. Expense Support is received or Expense Support reimbursement is paid annually. As of September 30, 2024, there is no remaining unreimbursed Expense Support under the terms of the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements will automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. No expense support was due from the Manager and Sub-Manager for the nine months ended September 30, 2024 and 2023. See Note 5. "Related Party Transactions" of Item 1. "Financial Statements" for additional information.
Distributions Declared
The Company's board of directors declared distributions on a monthly basis during the nine months ended September 30, 2024 and 2023 (nine record dates). The following table reflects the total distributions declared during the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Nine Months Ended September 30,
2024 2023
Distribution Period
Distributions Declared(1)
Distributions Reinvested(2)
Cash Distributions Net of Distributions Reinvested (2)
Distributions Declared(1)(2)
Distributions Reinvested (2)
Cash Distributions Net of Distributions Reinvested (2)
First Quarter $ 8,807 $ 4,056 $ 4,751 $ 6,601 $ 2,590 $ 4,011
Second Quarter 9,214 4,344 4,870 7,195 2,976 4,219
Third Quarter 9,676 4,693 4,983 7,865 3,401 4,464
$ 27,697 $ 13,093 $ 14,604 $ 21,661 $ 8,967 $ 12,694
FOOTNOTES:
(1) Monthly distributions declared per share for each share class were as follows:
Record Date Period Class FA Class A Class T Class D Class I Class S
January 1, 2024 - September 30, 2024
$ 0.104167 $ 0.104167 $ 0.083333 $ 0.093750 $ 0.104167 $ 0.104167
January 1, 2023 - September 30, 2023
0.104167 0.104167 0.083333 0.093750 0.104167 0.104167
(2) Amounts based on distribution record date.
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Cash distributions declared net of distributions reinvested were funded from the following sources noted below (in thousands):
Nine Months Ended September 30,
2024 2023
Amount
Percentage(1)
Amount
Percentage(1)
Net investment income before Expense Support (reimbursement) $ 17,618 120.6 % $ 17,918 141.2 %
Expense Support (reimbursement) - - (644) (5.1)
Net investment income $ 17,618 120.6 % $ 17,274 136.1 %
Cash distributions declared, net of distributions reinvested(2)
$ 14,604 100.0 % $ 12,694 100.0 %
FOOTNOTES:
(1) Represents percentage of cash distributions declared, net of distribution reinvested for the period presented.
(2) Excludes $13,093 and $8,967 of distributions reinvested pursuant to our distribution reinvestment plan during the nine months ended September 30, 2024 and 2023, respectively.
Distribution amounts and sources of distributions declared vary among share classes. We calculate each shareholder's specific distribution amount for the period using record and declaration dates. Distributions are declared on all classes of our shares at the same time. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. Distributions on the Non-founder shares may be lower than distributions on Founder shares because we are required to pay higher management and total return incentive fees to the Manager and the Sub-Manager with respect to the Non-founder shares. Additionally, distributions on Class T and Class D shares are lower than distributions on Class FA, Class A, Class I and Class S shares because we are required to pay ongoing distribution and shareholder servicing fees with respect to Class T and Class D shares. There is no assurance that we will pay distributions in any particular amount, if at all.
See Note 6. "Distributions" in Item 1. "Financial Statements" for additional disclosures regarding distributions.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in the Public Offerings have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash, are residents of Opt-In States, or are clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan. Opt-In States include Alabama, Arkansas, California, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Vermont and Washington. Shareholders who are residents of Opt-In States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.
The purchase price for shares purchased under our distribution reinvestment plan is equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under the Share Repurchase Program.
We do not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in the Public Offerings is allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.
Our shareholders will be taxed on their allocable share of income, even if their distributions are reinvested in additional shares of our common shares and even if no distributions are made.
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Share Repurchase Program
We adopted the Share Repurchase Program effective March 2019, as amended, pursuant to which we conduct quarterly share repurchases to allow our shareholders to sell all or a portion of their shares (at least 5% of his or her shares) back to us at a price equal to the net asset value per share of the month immediately prior to the repurchase date. The repurchase date is generally the last business day of the month of a calendar quarter end. We are not obligated to repurchase shares under the Share Repurchase Program. If we determine to repurchase shares, the Share Repurchase Program also limits the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The Share Repurchase Program also includes certain restrictions on the timing, amount and terms of our repurchases intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.
Our board of directors has the right to amend or suspend the Share Repurchase Program to the extent it determines that it is in our best interest to do so, such as when repurchase requests would place an undue burden on our liquidity, adversely affect our operations, risk having an adverse impact on us that would outweigh the benefit of repurchasing our shares or risk our ability to qualify as a partnership for U.S. federal income tax purposes, upon 30 days' prior notice to our shareholders. Once the Share Repurchase Program is suspended, the Share Repurchase Program requires that we consider the recommencement of the plan at least quarterly. Continued suspension of the Share Repurchase Program would only be permitted under the plan if our board of directors determines that the continued suspension of the Share Repurchase Program is in our best interest and the best interest of our shareholders. Our board of directors must affirmatively authorize the recommencement of the plan before shareholder requests will be considered again. Our board of directors cannot terminate the Share Repurchase Program absent a liquidity event or where otherwise required by law. We may provide notice by including such information in a current report on Form 8-K or in our annual or quarterly reports, each of which are publicly filed with the SEC followed by a separate mailing to our investors. Moreover, the Share Repurchase Program will terminate, and we no longer will accept shares for repurchase, if and when our shares are listed on a national securities exchange, are included for quotation in a national securities market or, in the sole determination of our board of directors, a secondary trading market for the shares otherwise develops. All shares to be repurchased under the Share Repurchase Program must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares requested to be repurchased, we will not repurchase any such shares.
The aggregate amount of funds under the Share Repurchase Program is determined on a quarterly basis at the sole discretion of our board of directors. At the sole discretion of our board of directors, we may use sources, including, but not limited to, offering proceeds and borrowings to repurchase shares.
To the extent that the number of shares submitted to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, from among the requests for repurchase received by us based upon the total number of shares for which repurchase was requested and the order of priority described in the Share Repurchase Program. We may repurchase shares including fractional shares, computed to three decimal places. We have had no unfufilled share repurchase requests under the Share Repurchase Program since inception.
Under the Share Repurchase Program, our ability to make new acquisitions of businesses or increase the current distribution rate may become limited if, over any two-year period, we experience repurchase demand in excess of capacity. If, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, we will not make any new acquisitions of businesses (excluding short-term cash management investments under 90 days in duration) and we will use all available investable assets (as defined below) to satisfy repurchase requests (subject to the limitations under the Share Repurchase Program) until all Unfulfilled Repurchase Requests have been satisfied. Additionally, during such time as there remains any Unfulfilled Repurchase Requests outstanding from such period, the Manager and the Sub-Manager will defer their total return incentive fee until all such Unfulfilled Repurchase Requests have been satisfied. "Investable assets" includes net proceeds from new subscription agreements, unrestricted cash, proceeds from marketable securities, proceeds from the distribution reinvestment plan, and net cash flows after any payment, accrual, allocation, or liquidity reserves or other business costs in the normal course of owning, operating or selling our acquired businesses, debt service, repayment of debt, debt financing costs, current or anticipated debt covenants, funding commitments related to our businesses, customary general and administrative expenses, customary organizational and offering costs, asset management and advisory fees, performance or actions under existing contracts, obligations under our organizational documents or those of our subsidiaries, obligations imposed by law, regulations, courts or arbitration, or distributions or establishment of an adequate liquidity reserve as determined by our board of directors.
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During the nine months ended September 30, 2024 and 2023, we received requests for the repurchase of approximately $38.3 million and $15.6 million, respectively, of our common shares. Our board of directors approved the repurchase requests received.
The following tables summarizes the shares repurchased during the nine months ended September 30, 2024 and 2023 (in thousands except per share data):
Shares Repurchased Total Consideration Average Price Paid
per Share
Class FA shares 139 $ 5,199 $ 37.19
Class A shares 114 3,890 34.01
Class T shares 134 4,505 33.86
Class D shares 61 2,051 33.70
Class I shares 627 21,675 34.53
Class S shares 27 1,003 38.03
Nine Months Ended September 30, 2024
1,102 $ 38,323 $ 34.77
Class FA shares 42 $ 1,480 $ 35.57
Class A shares 55 1,811 32.78
Class T shares 57 1,844 33.05
Class D shares 31 1,003 32.65
Class I shares 266 8,909 33.33
Class S shares 14 534 36.42
Nine Months Ended September 30, 2023
465 $ 15,581 $ 33.48
Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto.
Through September 30, 2024, we had acquired equity and debt investments in 16 portfolio companies. As of September 30, 2024 and 2023, the fair value of our portfolio company investments totaled approximately $1,051.9 million and $779.0 million, respectively. Additionally, as of September 30, 2023, we had invested in U.S. Treasury bills with a fair value of $50.0 million. We did not have any U.S. Treasury bills at September 30, 2024. See "Portfolio and Investment Activity" above for discussion of the general terms and characteristics of our investments, and for information regarding our portfolio companies.
The following table summarizes our operating results for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Total investment income $ 19,678 $ 15,921 $ 51,753 $ 43,745
Total operating expenses (11,679) (10,159) (34,125) (25,827)
Expense support (reimbursement), net (353) - - (644)
Net investment income before taxes 7,646 5,762 17,628 17,274
Income tax expense (15) - (10) -
Net investment income 7,631 5,762 17,618 17,274
Total net realized gain on investments - - - 4
Total net change in unrealized appreciation on investments, including unrealized foreign currency gain 15,545 11,966 50,747 24,572
Net increase in net assets resulting from operations $ 23,176 $ 17,728 $ 68,365 $ 41,850
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Investment Income
Investment income consisted of the following for the quarter and nine months ended September 30, 2024 and 2023 (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
From portfolio company investments:
Interest income $ 10,333 $ 9,436 $ 30,221 $ 24,277
Dividend income 6,634 5,017 15,675 15,624
PIK dividend income 1,490 - 1,490 -
From U.S. Treasury bills and cash accounts
Interest and dividend income 1,221 1,468 4,367 3,844
Total investment income $ 19,678 $ 15,921 $ 51,753 $ 43,745
Interest income from portfolio company investments is generated from our senior secured note investments, the majority of which had fixed rate interest as of September 30, 2024 and 2023. As of September 30, 2024 and 2023, our weighted average annual yield on our accruing debt investments was 14.2%, based on amortized cost as defined above in "Portfolio and Investment Activity." Interest income from our debt investments was approximately $10.3 million and $9.4 million for quarters ended September 30, 2024 and 2023, respectively, and approximately $30.2 million and $24.3 million during the nine months ended September 30, 2024 and 2023. The increase in interest income from portfolio company investments during the quarter ended September 30, 2024, as compared to the quarter ended September 30, 2023, is primarily attributable to new debt investments made during the twelve months ended September 30, 2024 of approximately $25.2 million. The increase in interest income from portfolio company investments during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, is primarily attributable new debt investments made during March 2023 through July 2024 and the additional debt investments made in existing portfolio companies on June 30, 2023 of approximately $54.5 million.
Dividend income from portfolio company investments is recorded on the record date for privately issued securities, but excludes any portion of distributions that are treated as a return of capital. Dividend income was approximately $6.6 million and $5.0 million for the quarters ended September 30, 2024 and 2023, and approximately $15.7 million and $15.6 million during the nine months ended September 30, 2024 and 2023, respectively. During each of the nine months ended September 30, 2024 and 2023, we received dividend income from twelve and nine of our portfolio companies, respectively.
PIK dividend income from portfolio company investments is computed at the contractual rate specified in each applicable agreement and are accrued and recorded as dividend income and added to the principal balance of the preferred equity. PIK dividend income was approximately $1.5 million for the quarter and nine months ended September 30, 2024. No PIK dividend income was recognized for the quarter and nine months ended September 30, 2023. The increase in PIK dividend income is primarily attributable to the new preferred equity investment made during June 2024.
Our total investment income, excluding our co-investment in LBR which is primarily accruing PIK dividends, for the nine months ended September 30, 2024, resulted in annualized cash yields ranging from 2.2% to 21.4% based on our investment cost, as compared to 4.3% to 19.8% for the nine months ended September 30, 2023.
We stopped investing in U.S. Treasury bills by the end of the fourth quarter of 2023. During the nine months ended September 30, 2023, our effective yield on U.S. Treasury bills ranged from 3.4% to 5.0%. We currently invest in an IntraFi Cash Service ("ICS") account. During the nine months ended September 30, 2024, our effective yield on cash invested in the ICS account ranged from 4.5% to 5.0%.
We do not believe that our interest income, dividend income and total investment income are representative of either our stabilized performance or our future performance. We expect investment income to increase in future periods as we increase our base of assets that we expect to acquire from existing cash, borrowings and an expected increase in capital available for investment using proceeds from the Public Offerings.
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Operating Expenses
Our operating expenses for the quarter and nine months ended September 30, 2024 and 2023 were as follows (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Total return incentive fees $ 5,174 $ 3,743 $ 14,932 $ 8,710
Base management fees 4,802 3,505 13,028 9,342
Offering expenses 338 1,071 879 3,022
Professional services 851 490 2,435 1,501
Pursuit costs (159) 682 843 1,228
Distribution and shareholder servicing fees 334 310 971 873
Custodian and accounting fees 127 142 394 420
Insurance expense 56 51 159 157
Director fees and expenses 52 50 159 151
General and administrative expenses 104 115 325 423
Total operating expenses 11,679 10,159 34,125 25,827
Expense support 353 - - -
Reimbursement of expense support - - - 644
Net expenses $ 12,032 $ 10,159 $ 34,125 $ 26,471
We consider the following expense categories to be relatively fixed in the near term: insurance expenses and director fees and expenses. Variable operating expenses include total return incentive fees, base management fees, offering expenses, professional services, distribution and shareholder servicing fees, custodian and accounting fees, general and administrative expenses, and pursuit costs. We expect these variable operating expenses to increase in connection with the growth in our asset base (base management fees, total return incentive fees, accounting fees and general and administrative expenses), the number of shareholders and open accounts (professional services, distribution and shareholder servicing fees and custodian and accounting fees), and/or the complexity of our investment processes and capital structure (professional services).
Total Return Incentive Fee
The Manager and Sub-Manager are eligible to receive incentive fees based on the Total Return to Shareholders, as defined in the Management Agreement and Sub-Management Agreement, for each share class in any calendar year, payable annually in arrears. We accrue (but do not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and perform a final reconciliation at completion of each calendar year. The total return incentive fee is due and payable to the Manager and Sub-Manager no later than ninety (90) calendar days following the end of the applicable calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement.
We recorded total return incentive fees of approximately $5.2 million and $3.7 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $14.9 million and $8.7 million during the nine months ended September 30, 2024 and 2023, respectively. The increase in total return incentive fees during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, is primarily due to an increase in net investment income and an increase in the net change in unrealized appreciation on investments.
Base Management Fee
Our base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares, 2% of the product of (x) our average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears.
We incurred base management fees of approximately $4.8 million and $3.5 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $13.0 million and $9.3 million during the nine months ended September 30, 2024 and 2023, respectively. The increase in base management fees is primarily attributable to the increase in our average gross assets (excluding cash and U.S. Treasury bills) which were approximately $948.2 million and $702.1 million during the nine months ended September 30, 2024 and 2023, respectively.
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Offering Expenses
Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the Public Offerings, are capitalized on our condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to our condensed consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager.
We expensed offering expenses of approximately $0.3 million and $1.1 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $0.9 million and $3.0 million during the nine months ended September 30, 2024 and 2023, respectively. The decrease is due to lower incurred offering expenses by the Manager during the quarter and nine months ended September 30, 2024.
Pursuit Costs
Pursuit costs relate to transactional expenses incurred to identify, evaluate and negotiate acquisitions that ultimately were not consummated. We incurred pursuit costs of approximately $(0.2) million and $0.7 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $0.8 million and $1.2 million during the nine months ended September 30, 2024 and 2023, respectively.
Distribution and Shareholder Servicing Fee
The Managing Dealer is eligible to receive a distribution and shareholder servicing fee, subject to certain limits, with respect to our Class T and Class D shares sold in the Public Offerings (excluding Class T shares and Class D shares sold through our distribution reinvestment plan and those received as share distributions) in an amount equal to 1.00% and 0.50%, respectively, of the current net asset value per share.
We incurred distribution and shareholder servicing fees of approximately $0.3 million and $0.3 million during the quarters ended September 30, 2024 and 2023 and approximately $1.0 million and $0.9 million during the nine months ended September 30, 2024 and 2023.
Other Operating Expenses
Other operating expenses (consisting of professional services, insurance expense, custodian and accounting fees, director fees and expenses, and general and administrative expenses) were approximately $1.2 million and $0.8 million during the quarters ended September 30, 2024 and 2023, respectively, and approximately $3.5 million and $2.7 million during the nine months ended September 30, 2024 and 2023, respectively.
Expense Support (Reimbursement)
We have entered into an Expense Support and Conditional Reimbursement Agreement with the Manager and the Sub-Manager, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that our annual regular cash distributions exceed our annual net income (with certain adjustments). Expense Support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of our distribution reinvestment plan) to shareholders minus (b) the available operating funds (the "Expense Support"). The Expense Support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. The Manager and Sub-Manager equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable to the Manager or the Sub-Manager.
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If, on the last business day of the calendar year, the annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the "Excess Operating Funds"), we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to the Conditional Reimbursements as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.
Since inception, we have received cumulative Expense Support of approximately $5.1 million. During the nine months ended September 30, 2023, we recorded reimbursement of Expense Support of approximately $0.6 million. We reimbursed approximately $0.6 million and $2.4 million of Expense Support to the Manager and Sub-Manager for the years ended December 31, 2023 and 2022, respectively. As of September 30, 2024, there is no remaining amount of Expense Support to be collected from the Manager and Sub-Manager subject to reimbursement. Additionally, the Company did not record accrued expense support due from the Manager and Sub-Manager during each of the nine months ended September 30, 2024 and 2023.
The actual amount of Expense Support or Expense Support Reimbursement is determined as of the last business day of each calendar year and is paid within 90 days after each year end per the terms of the Expense Support and Conditional Reimbursement Agreement described above. See Note 5. "Related Party Transactions" of Item 1. "Financial Statements" for additional information.
Other Expenses and Changes in Net Assets
Net Change in Unrealized Appreciation on Portfolio Company Investments
Unrealized appreciation on portfolio company investments is based on the current fair value of our investments as determined by our board of directors based on inputs from the Sub-Manager and our independent valuation firm and consistent with our valuation policy, which take into consideration, among other factors, actual results of our portfolio companies in comparison to budgeted results for the year, future growth prospects, and the valuations of publicly traded and private comparable companies as determined by our independent valuation firm.
During the quarter and nine months ended September 30, 2024, we recognized a net change in unrealized appreciation on our portfolio company investments of approximately $16.8 million and $53.3 million, respectively. The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on eleven portfolio companies of approximately $64.3 million, offset partially by gross unrealized depreciation on four portfolio companies of approximately $11.0 million during the nine months ended September 30, 2024. One portfolio company investment has remained flat. Gross unrealized appreciation was due to EBITDA growth, accretive add-on acquisitions, multiple expansion in certain of our portfolio companies and unrealized foreign currency gain.Gross unrealized depreciation was primarily driven by EBITDA declines. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $1.3 million and $2.6 million during the quarter and nine months ended September 30, 2024.
During the quarter and nine months ended September 30, 2023, we recognized a net change in unrealized appreciation on portfolio company investments of approximately $14.1 million and $28.8 million, respectively. The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on eight portfolio companies of approximately $45.6 million, offset partially by gross unrealized depreciation on three portfolio company of approximately $16.8 million during the nine months ended September 30, 2023. One portfolio company investment has remained flat. Gross unrealized appreciation was primarily due to EBITDA growth and accretive add-on acquisitions. Gross unrealized depreciation was primarily driven by EBITDA declines. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $2.1 million and $4.2 million during the quarter and nine months ended September 30, 2023.
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Net Assets
During the quarter and nine months ended September 30, 2024 and 2023, the net increase in net assets consisted of the following (in thousands):
Quarter Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Operations $ 23,176 $ 17,728 $ 68,365 $ 41,850
Distributions to shareholders (9,676) (7,865) (27,697) (21,661)
Capital transactions 54,111 66,913 143,903 191,992
Net increase in net assets $ 67,611 $ 76,776 $ 184,571 $ 212,181
Operations increased by approximately $5.4 million and $26.5 million, respectively, during the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023. The increase in operations for the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023, is primarily due to an increase in the net change in unrealized appreciation on investments of approximately $3.6 million and $26.2 million, respectively, and a increase in net investment income of approximately $1.9 million and $0.3 million, respectively.
Distributions increased approximately $1.8 million and $6.0 million, respectively, during the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023, primarily as a result of an increase in shares outstanding.
Capital transactions decreased by approximately $12.8 million and $48.1 million, respectively, during the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023. The decrease in capital transactions for the quarter and nine months ended September 30, 2024, as compared to the quarter and nine months ended September 30, 2023, is primarily due to an increase in share repurchases of approximately $5.0 million and $22.7 million, respectively, and a decrease in net proceeds received through the Follow-On Public Offering (including proceeds received through our distribution reinvestment plan) of approximately $7.8 million and $25.3 million, respectively.
Total Returns
The following table illustrates year-to-date ("YTD"), trailing 12 months ("One Year"), trailing 36 months ("Three Year"), Average Annual Return ("AAR"), trailing 60 months ("Five Year"), Average Annual Return ("AAR") and cumulative total returns with and without upfront selling commissions and dealer manager fees ("sales load"), as applicable. All total returns with sales load assume full upfront selling commissions and dealer manager fees. Total returns are calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other share classes assume distributions are reinvested in the same share class. Management believes total return is a useful measure of the overall investment performance of our shares.
YTD Total Return
One Year
Total Return(1)
Three Year Total Return(2)
Five Year Total Return(3)
AAR Since Inception(4)
Cumulative
Total Return(4)
Cumulative Total Return Period(4)
Class FA (no sales load) 7.2 % 10.0 % 30.8 % 69.9 % 14.8 % 98.1 % Feb. 7, 2018 - Sep. 30, 2024
Class FA (with sales load) 0.2 % 2.8 % 22.3 % 58.9 % 12.8 % 85.2 % Feb. 7, 2018 - Sep. 30, 2024
Class A (no sales load) 6.5 % 8.9 % 26.7 % 59.5 % 12.8 % 83.1 % Apr. 10, 2018 - Sep. 30, 2024
Class A (with sales load) (2.6) % (0.3) % 16.0 % 45.9 % 10.4 % 67.5 % Apr. 10, 2018 - Sep. 30, 2024
Class I 6.4 % 8.8 % 26.7 % 60.0 % 13.1 % 84.9 % Apr. 10, 2018 - Sep. 30, 2024
Class T (no sales load) 5.8 % 8.1 % 24.6 % 52.8 % 11.3 % 71.5 % May 25, 2018 - Sep. 30, 2024
Class T (with sales load) 0.8 % 3.0 % 18.7 % 45.5 % 10.0 % 63.4 % May 25, 2018 - Sep. 30, 2024
Class D 6.3 % 8.7 % 26.7 % 57.3 % 11.8 % 73.8 % June 26, 2018 - Sep. 30, 2024
Class S (no sales load) 7.2 % 10.0 % 32.7 % N/A 14.9 % 67.3 % Mar. 31, 2020 - Sep. 30, 2024
Class S (with sales load) 3.5 % 6.1 % 28.0 % N/A 13.6 % 61.4 % Mar. 31, 2020 - Sep. 30, 2024
FOOTNOTES:
(1) For the period from October 1, 2023 to September 30, 2024.
(2) For the period from October 1, 2021 to September 30, 2024.
(3) For the period from October 1, 2019 to September 30, 2024.
(4) For the period from the date the first share was issued for each respective share class to September 30, 2024. The AAR since inception is calculated by taking the Cumulative Total Return and dividing it by the cumulative total return period.
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We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above and the risk factors identified in Item 1A in Part I of our Form 10-K for the year ended December 31, 2023 and this Quarterly Report, including the negative impacts from recent geopolitical events.
Our shares are illiquid investments for which there currently is no secondary market. Investors should not expect to be able to resell their shares regardless of how we perform. If investors are able to sell their shares, they will likely receive less than their purchase price. Our net asset value and total returns - which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations - are inherently uncertain. Past performance is not a guarantee of future results. Current performance may be higher or lower than the performance data reported above.
Hedging Activities
As of September 30, 2024, we had not entered into any derivatives or other financial instruments. With respect to any potential financings, general increases in interest rates over time may cause the interest expense associated with our borrowings to increase, and the value of our debt investments to decline. We may seek to stabilize our financing costs as well as any potential decline in our assets by entering into derivatives, swaps or other financial products in an attempt to hedge our interest rate risk. In the event we pursue any assets outside of the United States we may have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We may in the future, enter into derivatives or other financial instruments in an attempt to hedge any such foreign currency exchange risk. It is difficult to predict the impact hedging activities may have on our results of operations.
Seasonality
We do not anticipate that seasonality will have a significant effect on our results of operations.
Critical Accounting Policies and Use of Estimates
See our Form 10-K for the year ended December 31, 2023 and Note 2. "Significant Accounting Policies" of Part I of this Quarterly Report for a summary of our critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We anticipate that our primary market risks will be related to the credit quality of our counterparties, market interest rates and changes in exchange rates. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to shareholders to realize attractive returns through ownership of our shares. Many of these risks have been magnified due to the continuing uncertainties caused by the recent geopolitical events; however, while we continue to monitor the geopolitical events, its impact on such risks remains uncertain and difficult to predict.
Credit Risk
We expect to encounter credit risk relating to (i) the businesses and other assets we acquire and (ii) our ability to access the debt markets on favorable terms. We will seek to mitigate this risk by deploying a comprehensive review and asset selection process, including scenario analysis, and careful ongoing monitoring of our acquired businesses and other assets as well as mitigation of negative credit effects through back up planning. Nevertheless, unanticipated credit losses could occur, which could adversely impact our operating results.
Changes in Market Interest Rates
We are subject to financial market risks, including changes in interest rates. Our debt investments are currently structured with fixed interest rates. Returns on investments that carry fixed rates are not subject to fluctuations in payments we receive from our borrowers, and will not adjust should rates move up or down. However, the fair value of our debt investments may be negatively impacted by rising interest rates. We may also invest in floating interest rate debt investments in the future.
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We had not borrowed any money as of September 30, 2024. However, to the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds may increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
Exchange Rate Sensitivity
We hold investments that are denominated in British pounds that may be affected by movements in the rate of exchange between the U.S. dollar and British pounds. We may manage exposure to investments in foreign currencies by hedging such risks. As of September 30, 2024, we have not entered into any derivative financial instruments or other arrangements to hedge a change in exchange rate against the US dollar. We estimate that as of September 30, 2024, a 10% decline in the rate of exchange of British pounds against the U.S. dollar would result in a decline in the "Net change in unrealized appreciation on investments" in the Company's condensed consolidated statements of operations of $6.4 million.
Additionally, some of the portfolio companies we invest in conduct business in foreign jurisdictions and therefore our investments have an indirect exposure to risks associated with changes in foreign exchange rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports we filed under the Securities Exchange Act of 1934, as amended ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, there were no changes in internal control over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we and individuals employed by us may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our businesses. In addition, our business and the businesses of the Manager, the Sub-Manager and the Managing Dealer are subject to extensive regulation, which may result in regulatory proceedings. Legal proceedings, lawsuits, claims and regulatory proceedings are subject to many uncertainties and their ultimate outcomes are not predictable with assurance.
As of September 30, 2024, we were not involved in any legal proceedings. Additionally, there is no action, suit or proceeding pending before any court, or, to our knowledge, threatened by any regulatory agency or other third party, against the Manager, the Sub-Manager or the Managing Dealer that would have a material adverse effect on us.
Item 1A. Risk Factors
We have disclosed under the heading "Risk Factors" in our Form 10-K for the year ended December 31, 2023, risk factors which materially affect our business, financial condition or results of operations. You should carefully consider the risk factors set forth in our Form 10-K. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Shares
In March 2019, our board of directors approved and adopted a share repurchase program, as amended (the "Share Repurchase Program"). The total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares will be limited to up to 2.5% of the aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of the aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of the Company's trailing four quarters). Notwithstanding the foregoing, at the sole discretion of our board of directors, we may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. Our board of directors, in its sole discretion, may amend, suspend or terminate the Share Repurchase Program or waive any of its specific conditions to the extent it is in our best interest, including to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.
During the quarter ended September 30, 2024, we repurchased the following shares (in thousands except per share data):
Period Total Number of Shares Repurchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan
Maximum Value of Shares That May Yet Be Purchased Under the Plan (1)
July 1, 2024 to July 31, 2024
- $ - - $ 28,573
August 1, 2024 to August 31, 2024
- - - 28,573
September 1, 2024 to September 30, 2024
335 $ 35.12 335 16,806
FOOTNOTE:
(1) Repurchases are limited under the Share Repurchase Program as described above. During the quarter ended September 30, 2024, we received requests for the repurchase of approximately $11,767 of our common shares. Our board of directors approved the repurchases.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
The exhibits required by this item are set forth in the Exhibit Index attached hereto and are file or incorporated as part of this report.
EXHIBIT INDEX
The following exhibits are filed or incorporated as part of this report.
3.1
3.2
4.1
4.2
4.3
31.1*
Certification of Chief Executive Officer of CNL Strategic Capital, LLC, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer of CNL Strategic Capital, LLC, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer and Chief Financial Officer of CNL Strategic Capital, LLC, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following materials from CNL Strategic Capital, LLC Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2024, formatted in iXBRL (Inline eXtensible Business Reporting Language); (i) Condensed Consolidated Statements of Assets and Liabilities, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Net Assets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Consolidated Schedules of Investments, and (vi) Notes to the Condensed Consolidated Financial Statements.
104 Cover Page Interactive Data File included as Exhibit 101 (embedded within the Inline XBRL document)
* Filed herewith
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of November, 2024.
CNL STRATEGIC CAPITAL, LLC
By: /s/ Chirag J. Bhavsar
CHIRAG J. BHAVSAR
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Tammy J. Tipton
TAMMY J. TIPTON
Chief Financial Officer
(Principal Financial and Accounting Officer)
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