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EX-99.(31)(1) - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT - Goldman Sachs Private Middle Market Credit LLCd411006dex99311.htm
EX-99.(32) - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - Goldman Sachs Private Middle Market Credit LLCd411006dex9932.htm
EX-99.(31)(2) - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT - Goldman Sachs Private Middle Market Credit LLCd411006dex99312.htm

 

 

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, 2017

or

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

Commission file number 000-55660

 

 

Goldman Sachs Private Middle Market Credit LLC

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   81-3233378

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

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

Not Applicable

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

 

 

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  X    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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:   X    Smaller reporting company:  
          (Do not check if a smaller reporting company)     

Emerging growth company  X

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.  X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ☐    NO  X

The number of the registrant’s limited liability company common units outstanding at November 2, 2017 was 5,023,428.

 

 

 


GOLDMAN SACHS PRIVATE MIDDLE MARKET CREDIT LLC

 

   

INDEX

   PAGE  

PART I

  FINANCIAL INFORMATION      4  
ITEM 1.   Financial Statements      4  
  Consolidated Statements of Financial Condition as of September 30, 2017 (Unaudited) and December 31, 2016      4  
  Consolidated Statements of Operations for the three and nine months ended September 30, 2017 (Unaudited) and for the three months ended September 30, 2016 (Unaudited) and for the period from June 9, 2016 (inception) to September 30, 2016 (Unaudited)      5  
  Consolidated Statements of Changes in Members’ Capital for the nine months ended September 30, 2017 (Unaudited) and for the period from June 9, 2016 (inception) to September 30, 2016 (Unaudited)      6  
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 (Unaudited) and for the period from June 9, 2016 (inception) to September 30, 2016 (Unaudited)      7  
  Consolidated Schedules of Investments as of September 30, 2017 (Unaudited) and December 31, 2016      8  
  Notes to the Consolidated Financial Statements (Unaudited)      12  
ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      28  
ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk      42  
ITEM 4.   Controls and Procedures      43  
PART II   OTHER INFORMATION      44  
ITEM 1.   Legal Proceedings      44  
ITEM 1A.   Risk Factors      44  
ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds      44  
ITEM 3.   Defaults Upon Senior Securities      44  
ITEM 4.   Mine Safety Disclosures      44  
ITEM 5.   Other Information      44  
ITEM 6.   Exhibits      44  
SIGNATURES      46  

 

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “target,” “estimate,” “intend,” “continue” or “believe” or the negatives of, or other variations on these terms or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. Our forward-looking statements include information in this report regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operations and financial position. Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ, from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Under Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act, such as this quarterly report on Form 10-Q.

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

 

   

our future operating results;

   

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

   

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

   

our business prospects and the prospects of our portfolio companies;

   

the impact of investments that we expect to make;

   

the impact of increased competition;

   

our contractual arrangements and relationships with third parties;

   

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

   

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

   

the relative and absolute performance of our investment adviser;

   

our expected financings and investments;

   

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

   

our ability to make distributions;

   

the adequacy of our cash resources and working capital;

   

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

   

the impact of future acquisitions and divestitures;

   

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

   

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

   

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

   

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

   

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

   

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

 

3


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Financial Condition

(in thousands, except unit and per unit amounts)

 

    September 30, 2017
(Unaudited)
  December 31, 2016
Assets    
Non-controlled/non-affiliated investments, at fair value (cost of $663,426 and $199,182, respectively)   $ 664,370     $ 199,436  
Investments in affiliated money market fund (cost of $1 and $138,311, respectively)     1       138,311  
Cash     37,553       3,863  
Receivable for common units sold     2,435        
Interest and dividends receivable from non-controlled/non-affiliated investments     2,594       645  
Deferred financing costs     784       1,351  
Deferred offering costs           859  
Other assets     17        
 

 

 

 

 

 

 

 

Total assets   $ 707,754     $ 344,465  
 

 

 

 

 

 

 

 

Liabilities    
Debt   $ 289,000     $ 130,000  
Interest and other debt expenses payable     615       188  
Management fees payable     1,351       698  
Incentive fees payable     3,736        
Distribution payable     9,962       2,998  
Accrued offering costs           285  
Accrued organization costs           115  
Directors’ fees payable     27        
Accrued expenses and other liabilities     1,007       740  
 

 

 

 

 

 

 

 

Total liabilities   $ 305,698     $ 135,024  
 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)    
Members’ Capital    
Preferred units (0 units issued and outstanding)   $     $  

Common units (4,123,094 and 2,142,978 units issued and outstanding at September 30, 2017 and December 31, 2016, respectively)

    405,176       209,521  
Accumulated net realized gain (loss)     (11      
Accumulated undistributed net investment income (distributions in excess of net investment income)     (4,053     (334
Net unrealized appreciation (depreciation) on investments     944       254  
 

 

 

 

 

 

 

 

TOTAL MEMBERS’ CAPITAL   $ 402,056     $ 209,441  
 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBERS’ CAPITAL   $ 707,754     $ 344,465  
 

 

 

 

 

 

 

 

Net asset value per unit   $ 97.51     $ 97.73  

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

4


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Operations

(in thousands, except unit and per unit amounts)

(Unaudited)

 

    For the three
months ended
September 30, 2017
  For the three
months ended
September 30, 2016
  For the nine
months ended
September 30, 2017
  For the period from
June 9, 2016
(inception) to
September 30, 2016
Investment Income:        
From non-controlled/non-affiliated investments:        

Interest income

  $ 14,749     $ 1,195     $ 33,014     $ 1,195  

Other income

    177       9       644       9  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment income from non-controlled/non-affiliated investments

    14,926       1,204       33,658       1,204  
From non-controlled affiliated investments:        

Dividend income

    2       12       14       12  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment income from non-controlled affiliated investments

    2       12       14       12  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment income   $ 14,928     $ 1,216     $ 33,672     $ 1,216  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:        

Interest and other debt expenses

  $ 2,980     $ 437     $ 5,982     $ 437  

Management fees

    1,351       611       3,129       611  

Incentive fees

    1,541             3,736        

Offering costs

          395       949       395  

Professional fees

    375       211       819       211  

Administration, custodian and transfer agent fees

    150       83       372       83  

Directors’ fees

    31       78       90       78  

Organization costs

          22             360  

Other expenses

    85       28       259       28  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses   $ 6,513     $ 1,865     $ 15,336     $ 2,203  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees waiver

  $     $ (391   $     $ (391
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net expenses   $ 6,513     $ 1,474     $ 15,336     $ 1,812  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INVESTMENT INCOME (LOSS)   $ 8,415     $ (258   $ 18,336     $ (596
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gains (losses) on investment transactions:        
Net realized gain (loss) from:        

Non-controlled/non-affiliated investments

  $ (9   $     $ (11   $  

Net change in unrealized appreciation (depreciation) from:

       

Non controlled/non-affiliated investments

    261       12       690       12  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gains (losses)   $ 252     $ 12     $ 679     $ 12  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN MEMBERS’ CAPITAL RESULTING FROM OPERATIONS   $ 8,667     $ (246   $ 19,015     $ (584
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

  $ 2.41     $ (0.47   $ 6.77     $ (1.35

Earnings (loss) per unit (basic and diluted)

  $ 2.48     $ (0.45   $ 7.02     $ (1.32

Weighted average units outstanding

    3,492,675       547,715       2,708,267       442,016  

Distributions declared per unit

  $ 2.42     $     $ 6.84     $  

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

5


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Changes in Members’ Capital

(in thousands, except unit and per unit amounts)

(Unaudited)

 

    For the nine
months ended
September 30, 2017
  For the period from
June 9, 2016
(inception) to
September 30, 2016
Increase (decrease) in Members’ Capital resulting from operations:    

Net investment income (loss)

  $ 18,336     $ (596

Net realized gain (loss) on investments

    (11      

Net change in unrealized appreciation (depreciation) on investments

    690       12  
 

 

 

 

 

 

 

 

Net increase (decrease) in Members’ Capital resulting from operations   $ 19,015     $ (584
 

 

 

 

 

 

 

 

Distributions to unitholders from:    

Net investment income

  $ (22,055   $  
 

 

 

 

 

 

 

 

Total distributions to unitholders   $ (22,055   $  
 

 

 

 

 

 

 

 

Capital transactions:    

Issuance of units (1,980,116 and 1,681,503 units, respectively)

  $ 195,655     $ 165,039  
 

 

 

 

 

 

 

 

Net increase in Members’ Capital resulting from capital transactions   $ 195,655     $ 165,039  
 

 

 

 

 

 

 

 

TOTAL INCREASE (DECREASE) IN MEMBERS’ CAPITAL   $ 192,615     $ 164,455  
 

 

 

 

 

 

 

 

Members’ Capital at beginning of period   $ 209,441     $  
 

 

 

 

 

 

 

 

Members’ Capital at end of period   $ 402,056     $ 164,455  
 

 

 

 

 

 

 

 

Accumulated undistributed net investment income (distributions in excess of net investment income)

  $ (4,053   $ (596
 

 

 

 

 

 

 

 

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

6


Goldman Sachs Private Middle Market Credit LLC

Consolidated Statements of Cash Flows

(in thousands, except unit and per unit amounts)

(Unaudited)

 

     For the nine
months ended
September 30, 2017
  For the period from
June 9, 2016
(inception) to
September 30, 2016
Cash flows from operating activities:     
Net increase (decrease) in Members’ Capital resulting from operations:    $ 19,015     $ (584

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

    

Purchases of investments

     (522,458     (146,115

Investments in affiliated money market fund, net

     138,310       (153,004

Proceeds from sales of investments and principal repayments

     59,665        

Net realized (gain) loss on investments

     11        

Net change in unrealized (appreciation) depreciation on investments

     (690     (12

Amortization of premium and accretion of discount, net

     (1,462     (26

Amortization of deferred financing costs

     847       180  

Amortization of deferred offering costs

     949       395  
Increase (decrease) in operating assets and liabilities:     

(Increase) decrease in receivable for common units sold

     (2,435      

(Increase) decrease in interest and dividends receivable

     (1,949     (294

(Increase) decrease in other assets

     (19     (6

Increase (decrease) in interest and other debt expenses payable

     420       182  

Increase (decrease) in management fees payable

     653       220  

Increase (decrease) in incentive fees payable

     3,736        

Increase (decrease) in accrued organization costs

     (115     360  

Increase (decrease) in directors’ fees payable

     27       78  

Increase (decrease) in accrued expenses and other liabilities

     269       538  
  

 

 

 

 

 

 

 

Net cash provided by (used for) operating activities    $ (305,226   $ (298,088
  

 

 

 

 

 

 

 

Cash flows from financing activities:     

Proceeds from issuance of common units

   $ 195,655     $ 164,881  

Offering costs paid

     (375     (15

Distributions paid

     (15,091      

Financing costs paid

     (273     (1,399

Borrowings on debt

     492,000       137,500  

Repayments of debt

     (333,000      
  

 

 

 

 

 

 

 

Net cash provided by (used for) financing activities    $ 338,916     $ 300,967  
  

 

 

 

 

 

 

 

Net increase (decrease) in cash      33,690       2,879  
Cash, beginning of period      3,863        
  

 

 

 

 

 

 

 

Cash, end of period    $ 37,553     $ 2,879  
  

 

 

 

 

 

 

 

Supplemental and non-cash financing activities     
Interest expense paid    $ 4,305     $ 76  
Accrued but unpaid deferred financing and debt issuance costs    $ 7     $ 352  
Accrued but unpaid offering costs    $     $ 1,552  
Accrued but unpaid distributions    $ 9,962     $  

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

7


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of September 30, 2017

(in thousands, except unit and per unit amounts)

(Unaudited)

 

Portfolio Company   Industry   Interest   Maturity     Par Amount     Cost     Fair Value  
Investments at Fair Value – 165.24%#*            
Corporate Debt – 163.52%            
1st Lien/Senior Secured Debt – 45.65%            

Clinical Supplies Management Holdings,
Inc.(+++) (1)

  Containers & Packaging   L + 7.75% (1.00% Floor)     10/12/2021     $ 23,979     $ 23,568     $ 23,559  

Clinical Supplies Management Holdings,
Inc.(1) (2) (3)

  Containers & Packaging   L + 7.75% (1.00% Floor)     10/12/2021       2,000       (33     (35
Continuum Managed Services LLC(+) (4)   IT Services   L + 8.75% (1.00% Floor)     06/08/2023       31,770       30,930       30,896  
Continuum Managed Services LLC(2) (3) (4)   IT Services   L + 8.75% (1.00% Floor)     06/08/2023       2,658       (69     (73
Continuum Managed Services LLC(2) (3) (4)   IT Services   L + 8.75% (1.00% Floor)     06/08/2022       3,280       (85     (90
Datacor Holdings, Inc.(1)   Chemicals   9.50%     08/12/2022       14,000       13,761       13,755  
FWR Holding Corporation(++++)   Hotels, Restaurants & Leisure   L + 6.00% (1.00% Floor)     08/21/2023       13,671       13,334       13,329  
FWR Holding Corporation(+++) (2)   Hotels, Restaurants & Leisure   L + 6.00% (1.00% Floor)     08/21/2023       1,764       442       441  
FWR Holding Corporation(2) (3)   Hotels, Restaurants & Leisure   L + 6.00% (1.00% Floor)     08/21/2019       4,410       (108     (110
Dade Bag & Paper Co. LLC(+) (1) (4)   Distributors   L + 7.50% (1.00% Floor)     06/10/2024       16,359       16,043       16,032  
Netvoyage Corporation(+) (1) (4)   Software   L + 9.50% (1.00% Floor)     03/24/2022       12,527       12,297       12,308  
Netvoyage Corporation(1) (2) (3) (4)   Software   L + 9.50% (1.00% Floor)     03/24/2022       1,044       (19     (18
SF Home Décor, LLC(+++) (4)   Household Products   L + 9.50% (1.00% Floor)     07/13/2022       31,205       30,298       30,269  
Xactly Corporation(+) (4)   Internet Software & Services   L + 7.25% (1.00% Floor)     07/29/2022       29,800       29,220       29,204  
Xactly Corporation(2) (3) (4)   Internet Software & Services   L + 7.25% (1.00% Floor)     07/29/2022       2,554       (49     (51
Yasso, Inc.(++) (1) (4)   Food Products   L + 7.75% (1.00% Floor)     03/23/2022       14,428       14,163       14,139  
         

 

 

   

 

 

 

Total 1st Lien/Senior Secured Debt

            183,693       183,555  
1st Lien/Last-Out Unitranche (5) – 28.03%            
Intelligent Document Solutions, Inc.(+++) (4)   Diversified Financial Services   L + 8.25% (1.00% Floor)     08/31/2022       17,900       17,459       17,453  
myON, LLC(+) (1) (4)   Internet Software & Services   L + 8.50% (1.00% Floor)     02/17/2022       11,300       11,096       11,102  
Smarsh, Inc.(+) (1) (4)   Software   L + 7.88% (1.00% Floor)     03/31/2021       26,135       25,704       25,677  
Vantage Mobility International, LLC(+) (1)   Health Care Equipment & Supplies   L + 7.75% (1.00% Floor)     09/09/2021       25,111       24,692       24,672  
You Fit, LLC(+++) (1)   Diversified Consumer Services   L + 6.75% (1.00% Floor)     01/04/2022       34,500       33,509       33,810  
         

 

 

   

 

 

 

Total 1st Lien/Last-Out Unitranche

            112,460       112,714  
2nd Lien/Senior Secured Debt – 89.01%            
American Dental Partners, Inc.(+++) (1) (4)   Health Care Providers & Services   L + 8.50% (1.00% Floor)     09/25/2023       13,600       13,283       13,294  

Association Member Benefits Advisors,
LLC(+) (1)

  Insurance   L + 8.75% (1.00% Floor)     06/08/2023       28,000       27,492       27,440  
Country Fresh Holdings, LLC(+++) (4)   Food Products   L + 8.75% (1.00% Floor)     10/02/2023       13,800       13,531       13,524  
DuBois Chemicals, Inc.(+) (1) (4)   Chemicals   L + 8.00% (1.00% Floor)     03/15/2025       20,000       19,570       19,800  
ERC Finance, LLC(+) (4)   Health Care Providers & Services   L + 8.00% (1.00% Floor)     09/21/2025       29,800       29,131       29,129  
Granicus, Inc.(+++) (1)   Software   L + 9.00% (1.00% Floor)     09/07/2023       25,500       25,044       25,054  
Market Track, LLC(+) (1) (4)   Internet Catalog & Retail   L + 7.75% (1.00% Floor)     06/05/2025       32,800       31,843       31,816  
National Spine and Pain Centers, LLC(+++) (1) (4)   Health Care Providers & Services   L + 8.25% (1.00% Floor)     12/02/2024       28,500       27,671       27,645  
Oasis Outsourcing Holdings, Inc.(+) (4)   Diversified Financial Services   L + 7.25% (1.00% Floor)     07/01/2024       33,580       33,088       33,076  
PPC Industries Inc.(+++) (4)   Containers & Packaging   L + 8.00% (1.00% Floor)     05/08/2025       13,300       13,172       13,267  
Procare Software, LLC(+++) (1)   Diversified Financial Services   L + 8.75% (1.00% Floor)     09/30/2022       35,000       34,331       34,475  
Recipe Acquisition Corp.(+++) (1)   Food Products   L + 9.00% (1.00% Floor)     12/01/2022       20,000       19,672       19,650  
Regulatory DataCorp, Inc.(+) (1)   Diversified Financial Services   L + 9.00% (1.00% Floor)     09/21/2023       15,000       14,732       14,738  
SMB Shipping Logistics, LLC(++++) (1) (4)   Air Freight & Logistics   L + 8.75% (1.00% Floor)     02/03/2025       20,000       19,717       19,700  
Zep Inc.(+) (4)   Chemicals   L + 8.25% (1.00% Floor)     08/11/2025       35,700       34,813       35,254  
         

 

 

   

 

 

 

Total 2nd Lien/Senior Secured Debt

            357,090       357,862  
Unsecured Debt – 0.83%            
Recipe Acquisition Corp.(1)   Food Products   13.25% PIK     12/21/2022       3,400       3,333       3,340  
         

 

 

   

 

 

 

Total Unsecured Debt

            3,333       3,340  
         

 

 

   

 

 

 

Total Corporate Debt

            656,576       657,471  

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

8


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of September 30, 2017

(in thousands, except unit and per unit amounts)

(Unaudited)

 

Portfolio Company   Industry   Coupon          Shares     Cost     Fair Value  
Preferred Stock – 0.66%            
Datacor Holdings, Inc.(1) (6) (7)   Chemicals         1,000,000     $ 1,000     $ 1,030  
Recipe Acquisition Corp.(1) (6)   Food Products   11.00% PIK                                1,600       1,496       1,640  
         

 

 

   

 

 

 

Total Preferred Stock

            2,496       2,670  
Common Stock – 1.03%            
Continuum Managed Services LLC – Class A(1) (4) (6)   IT Services         1,079       1,079       1,079  
Continuum Managed Services LLC – Class B(1) (4) (6)   IT Services         731,623       11       11  
myON, LLC(1) (4) (6)   Internet Software & Services         24,131       900       900  
National Spine and Pain Centers, LLC(1) (4) (6)   Health Care Providers & Services         900       900       900  
Yasso, Inc.(1) (4) (6)   Food Products         1,360       1,360       1,233  
         

 

 

   

 

 

 

Total Common Stock

            4,250       4,123  
Portfolio Company   Industry               Units     Cost     Fair Value  
Warrants – 0.03%            
Recipe Acquisition Corp.(1) (6)   Food Products         44     $ 104     $ 106  
         

 

 

   

 

 

 

Total Warrants

            104       106  
          Yield          Shares     Cost     Fair Value  
Investments in Affiliated Money Market Fund – 0.00% # *          
Goldman Sachs Financial Square Government Fund – Institutional Shares(8)   0.91%(8)       822     $ 1     $ 1  
         

 

 

   

 

 

 

Total Investments in Affiliated Money Market Fund

          1       1  
         

 

 

   

 

 

 
TOTAL INVESTMENTS – 165.24%           $ 663,427     $ 664,371  
         

 

 

   

 

 

 
LIABILITIES IN EXCESS OF OTHER ASSETS – (65.24%)           $ (262,315
           

 

 

 
MEMBERS’ CAPITAL – 100.00%             $ 402,056  
           

 

 

 

 

*  

Unless otherwise indicated, all investments are domiciled in the United States.

#   

Percentages are based on members’ capital.

(+)   

The interest rate on these loans is subject to the greater of a LIBOR floor or 1 month LIBOR plus a base rate. The 1 month LIBOR as of September 30, 2017 was 1.23%.

(++)   

The interest rate on these loans is subject to the greater of a LIBOR floor or 2 month LIBOR plus a base rate. The 2 month LIBOR as of September 30, 2017 was 1.27%.

(+++)   

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2017 was 1.33%.

(++++)  

The interest rate on these loans is subject to the greater of a LIBOR floor or 6 month LIBOR plus a base rate. The 6 month LIBOR as of September 30, 2017 was 1.51%.

(1)   

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

(2)   

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See Note 7 “Commitments and Contingencies”.

(3)   

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

(4)   

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

(5)   

In exchange for the greater risk of loss, the “last-out” portion of the Company’s unitranche loan investment generally earns a higher interest rate than the “first-out” portions.

(6)   

Non-income producing security.

(7)   

The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of September 30, 2017 the aggregate fair value of non-qualifying assets was $1,030 or 0.15% of the Company’s total assets.

(8)   

The rate shown is the annualized seven-day yield as of September 30, 2017.

L – LIBOR

PIK – Payment-In-Kind

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

9


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2016

(in thousands, except unit and per unit amounts)

 

Portfolio Company   Industry   Interest   Maturity     Par Amount     Cost     Fair Value  
Investments at Fair Value – 95.22%#            
Corporate Debt – 93.98%            
1st Lien/Senior Secured Debt – 20.79%            
Clinical Supplies Management Holdings, Inc.(++)   Containers & Packaging   L + 7.75% (1.00% Floor)     10/12/2021     $ 5,300     $ 5,198     $ 5,194  
Clinical Supplies Management Holdings, Inc.(+) (2)   Containers & Packaging   L + 7.75% (1.00% Floor)     10/12/2021       14,000       5,112       5,080  
Clinical Supplies Management Holdings, Inc.(2) (3)   Containers & Packaging   L + 7.75% (1.00% Floor)     10/12/2021       2,000       (38 )     (40 )
Datacor Holdings, Inc.   Chemicals   9.50%     08/12/2022       14,000       13,734       13,720  
Greenskies Renewable Energy, LLC(++)   Construction & Engineering   L + 9.00% (0.50% Floor)     08/19/2021       20,000       19,623       19,600  
         

 

 

   

 

 

 

Total 1st Lien/Senior Secured Debt

            43,629       43,554  
1st Lien/Last-Out Unitranche (4) – 11.23%            
Vantage Mobility International, LLC(+)   Health Care Equipment & Supplies   L + 7.75% (1.00% Floor)     09/09/2021       24,000       23,544       23,520  
         

 

 

   

 

 

 

Total 1st Lien/Last-Out Unitranche

            23,544       23,520  
2nd Lien/Senior Secured Debt – 60.37%            
Association Member Benefits Advisors, LLC(++)   Insurance   L + 8.75% (1.00% Floor)     06/08/2023       28,000       27,445       27,440  
Global Healthcare Exchange, LLC(+)   Health Care Technology   L + 8.75% (1.00% Floor)     08/14/2023       15,000       14,782       15,150  
Granicus, Inc.(++)   Software   L + 9.00% (1.00% Floor)     09/07/2023       25,500       25,005       24,990  
Procare Software, LLC(++)   Diversified Financial Services   L + 8.75% (1.00% Floor)     09/30/2022       25,000       24,515       24,500  
Recipe Acquisition Corp.(++)   Food Products   L + 9.00% (1.00% Floor)     12/01/2022       20,000       19,620       19,650  
Regulatory DataCorp, Inc.(++)   Diversified Financial Services   L + 9.00% (1.00% Floor)     09/21/2023       15,000       14,709       14,700  
         

 

 

   

 

 

 

Total 2nd Lien/Senior Secured Debt

            126,076       126,430  
Unsecured Debt – 1.59%            
Recipe Acquisition Corp.   Food Products   13.25% PIK     12/21/2022       3,400       3,333       3,332  
         

 

 

   

 

 

 

Total Unsecured Debt

            3,333       3,332  
         

 

 

   

 

 

 

Total Corporate Debt

            196,582       196,836  
         

 

 

   

 

 

 
Portfolio Company   Industry        Coupon     Shares     Cost     Fair Value  
Preferred Stock – 1.19%            
Datacor Holdings, Inc.(5) (6)   Chemicals         1,000,000     $ 1,000     $ 1,000  
Recipe Acquisition Corp.(5)   Food Products       11.00% PIK       1,600       1,496       1,500  
         

 

 

   

 

 

 

Total Preferred Stock

            2,496       2,500  
         

 

 

   

 

 

 
Portfolio Company   Industry               Units     Cost     Fair Value  
Warrants – 0.05%            
Recipe Acquisition Corp. (5)   Food Products         44     $ 104     $ 100  
         

 

 

   

 

 

 

Total Warrants

            104       100  
         

 

 

   

 

 

 
               Yield     Shares     Cost     Fair Value  
Investments in Affiliated Money Market Fund – 66.04%#          
Goldman Sachs Financial Square Government Fund       0.45%(1)       138,311,004     $ 138,311     $ 138,311  
         

 

 

   

 

 

 

Total Investments in Affiliated Money Market Fund

          138,311       138,311  
         

 

 

   

 

 

 
TOTAL INVESTMENTS – 161.26%           $ 337,493     $ 337,747  
         

 

 

   

 

 

 
LIABILITIES IN EXCESS OF OTHER ASSETS – (61.26%)           $ (128,306 )
           

 

 

 
MEMBERS’ CAPITAL – 100.00%             $ 209,441  
           

 

 

 

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

10


Goldman Sachs Private Middle Market Credit LLC

Consolidated Schedule of Investments as of December 31, 2016 (continued)

(in thousands, except unit and per unit amounts)

 

#  

Percentages are based on Members’ Capital.

(+)   

The interest rate on these loans is subject to the greater of a LIBOR floor or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2016 was 0.77%.

(++)   

The interest rate on these loans is subject to the greater of a LIBOR floor or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2016 was 1.00%.

(1)   

The rate shown is the annualized seven-day yield as of December 31, 2016.

(2)   

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See Note 7 “Commitments and Contingencies”.

(3)   

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

(4)   

In addition to the interest earned based on the stated rate of this loan, the Company may be entitled to receive additional interest as a result of its arrangement with other lenders in a syndication.

(5)   

Non-income producing security.

(6)   

The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets.

L – LIBOR

PIK – Payment-In-Kind

 

The accompanying notes are part of these unaudited consolidated financial statements.

 

11


Goldman Sachs Private Middle Market Credit LLC

Notes to the Consolidated Financial Statements

(in thousands, except unit and per unit amounts)

(Unaudited)

 

1. ORGANIZATION

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

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

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

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

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

The term of the Company is until May 5, 2024, subject to the Board of Directors’ right to liquidate the Company at any time and to extend the term of the Company for up to two successive one-year periods. Upon the request of the Board of Directors and the approval of a majority-in-interest of the unitholders, the term of the Company may be further extended.

Credit Alternatives GP LLC (the “Initial Member”), an affiliate of the Investment Adviser, made a capital contribution to the Company of one hundred dollars on June 9, 2016 (inception) and served as the sole initial member of the Company. The Company cancelled the Initial Member’s interest in the Company on July 14, 2016, the first date on which investors (other than the Initial Member) made their initial capital contribution to purchase Units (the “Initial Drawdown Date”).

The Company has formed wholly owned subsidiaries, which are structured as Delaware limited liability companies, to hold certain equity or equity-like investments in portfolio companies.

 

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s functional currency is U.S. dollars and these consolidated financial statements have been prepared in that currency. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to Regulation S-X. This requires the Company to make certain estimates and assumptions that may affect the amounts reported in the consolidated financial statements and accompanying notes. These consolidated financial statements reflect adjustments that in the opinion of the Company are necessary for the fair statement of the results for the periods presented. Actual results may differ from the estimates and assumptions included in the consolidated financial statements.

 

12


Certain financial information that is included in annual consolidated financial statements, including certain financial statement disclosures, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes related thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2017. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year, any other interim period or any future year or period.

As an investment company, the Company applies the accounting and reporting guidance in Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies (“ASC 946”) issued by the Financial Accounting Standards Board (“FASB”).

Basis of Consolidation

As provided under ASC 946, the Company will not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the financial position and results of operations of its wholly owned subsidiary, My-On PMMC Blocker, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

The Company records its investment transactions on a trade date basis. Realized gains and losses are based on the specific identification method.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums to par value on investments purchased are accreted and amortized, respectively, into interest income over the life of the respective investment using the effective interest method. Loan origination fees, original issue discount (“OID”) and market discounts or premiums are capitalized and amortized into interest income using the effective interest method or straight-line method, as applicable. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees and unamortized discounts are recorded as interest income. For the three and nine months ended September 30, 2017, the Company earned $0 and $700, respectively, in prepayment premiums and $17 and $568, respectively, in accelerated accretion of upfront loan origination fees and unamortized discounts. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016, the Company earned no prepayment premiums and no accelerated accretion of upfront loan origination fees and unamortized discounts.

Fees received from portfolio companies (directors’ fees, consulting fees, administrative fees, tax advisory fees and other similar compensation) are paid to the Company, unless, to the extent required by applicable law or exemptive relief, if any, therefrom, the Company only receives its allocable portion of such fees when invested in the same portfolio company as another account managed by Goldman Sachs.

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

Certain investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the principal amount or shares (if equity) of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity or upon the investment being called by the issuer. PIK is recorded as interest or dividend income, as applicable. If at any point the Company believes PIK is not expected to be realized, the investment generating PIK will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends are generally reversed through interest or dividend income, respectively.

Certain structuring fees, amendment fees and syndication fees are recorded as other income when earned. Administrative agent fees received by the Company are recorded as other income when the services are rendered over time.

Non-Accrual Investments

Loans or debt securities are placed on non-accrual status when it is probable that principal or interest will not be collected according to contractual terms. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest are paid and, in management’s judgment, principal and interest payments are likely to remain current. The Company may make exceptions to this treatment if a loan or debt security has sufficient collateral value and is in the process of collection. As of September 30, 2017 and December 31, 2016, the Company did not have any investments on non-accrual status.

 

13


Investments

The Company carries its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), issued by the FASB, which defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. Fair value is generally based on quoted market prices provided by independent pricing services, broker or dealer quotations or alternative price sources. In the absence of quoted market prices, broker or dealer quotations or alternative price sources, investments are measured at fair value as determined by the Board of Directors within the meaning of the Investment Company Act.

Due to the inherent uncertainties of valuation, certain estimated fair values may differ significantly from the values that would have been realized had a ready market for these investments existed, and these differences could be material. See Note 5 “Fair Value Measurement.”

The Company generally invests in illiquid securities, including debt and equity investments, of middle-market companies. The Board of Directors has delegated to the Investment Adviser day-to-day responsibility for implementing and maintaining internal controls and procedures related to the valuation of the Company’s portfolio investments. Under valuation procedures adopted by the Board of Directors, market quotations are generally used to assess the value of the investments for which market quotations are readily available. The Investment Adviser obtains these market quotations from independent pricing services or at the bid prices obtained from at least two brokers or dealers, if available; otherwise from a principal market maker or a primary market dealer. To assess the continuing appropriateness of pricing sources and methodologies, the Investment Adviser regularly performs price verification procedures and issues challenges as necessary to independent pricing services or brokers, and any differences are reviewed in accordance with the valuation procedures. If the Board of Directors or Investment Adviser has a bona fide reason to believe any such market quotation does not reflect the fair value of an investment, it may independently value such investment in accordance with valuation procedures for investments for which market quotations are not readily available.

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

 

  (1)

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

 

  (2)

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

 

  (3)

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

 

  (4)

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

 

  (5)

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

 

  (6)

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

 

14


Money Market Funds

Investments in money market funds are valued at net asset value (“NAV”) per share. See Note 3 “Significant Agreements and Related Party Transactions.”

Cash

Cash consists of deposits held at a custodian bank. As of September 30, 2017 and December 31, 2016, the Company held $37,553 and $3,863, respectively, in cash.

Foreign Currency Translation

Amounts denominated in foreign currencies are translated into U.S. dollars on the following basis: (i) investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates effective on the date of valuation; and (ii) purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates prevailing on the transaction dates.

The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included within the net realized and unrealized gains or losses on investment transactions.

Income Taxes

The Company recognizes tax positions in its consolidated financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The Company reports any interest expense related to income tax matters in income tax expense, and any income tax penalties under expenses in the Consolidated Statements of Operations.

The Company’s tax positions have been reviewed based on applicable statutes of limitation for tax assessments, which may vary by jurisdiction, and based on such review, the Company has concluded that no additional provision for income tax is required in the consolidated financial statements. The Company is subject to potential examination by certain taxing authorities in various jurisdictions. The Company’s tax positions are subject to ongoing interpretation of laws and regulations by taxing authorities.

The Company has elected to be treated as a RIC commencing with its taxable year ended December 31, 2016. So long as the Company maintains its status as a RIC, it will generally not be subject to corporate-level U.S. federal income tax on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. As a result, any U.S. federal income tax liability related to income earned and distributed by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.

To qualify as a RIC, the Company must meet specified source-of-income and asset diversification requirements and timely distribute to its unitholders for each taxable year at least 90% of its investment company taxable income (generally, its net ordinary income plus the excess of its realized net short-term capital gains over realized net long-term capital losses, determined without regard to the dividends paid deduction). In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income. If the Company chooses to do so, this generally would increase expenses and reduce the amount available to be distributed to unitholders. The Company will accrue excise tax on estimated undistributed taxable income as required.

Distributions

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. The Company may pay distributions in excess of its taxable net investment income. This excess would be a tax-free return of capital in the period and reduce the unitholder’s tax basis in its Units. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent they are charged or credited to common Units, accumulated undistributed net investment income or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Company’s annual RIC tax return. Distributions to common unitholders are recorded on the ex-dividend date. The amount to be paid out as a distribution is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by the Investment Adviser. The Company may pay distributions to its unitholders in a year in excess of its net ordinary income and capital gains for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes. The Company intends to timely distribute to its unitholders substantially all of its annual taxable income for each year, except that the Company may retain certain net capital gains for reinvestment and, depending upon the level of the Company’s taxable income earned in a year, the Company may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax. The specific tax characteristics of the Company’s distributions will be reported to unitholders after the end of the calendar year. All distributions will be subject to available funds, and no assurance can be given that the Company will be able to declare such distributions in future periods.

 

15


Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of, and amendments to, the Company’s revolving credit facility (the “Revolving Credit Facility”). These costs are amortized using the straight-line method over the term of the Revolving Credit Facility. Deferred financing costs related to the Revolving Credit Facility are presented separately as an asset on the Company’s Consolidated Statements of Financial Condition.

Organization Costs

Organization costs include costs relating to the formation and organization of the Company. These costs are expensed as incurred. Upon the Initial Drawdown Date, unitholders bore such costs. Unitholders that made capital commitments after the Initial Drawdown Date bore a pro rata portion of such costs at the time of their first investment in the Company.

Offering Costs

Offering costs consist primarily of fees and expenses incurred in connection with the continuous offering of Units, including legal, printing and other costs, as well as costs associated with the preparation and filing of the Company’s registration statement on Form 10. Offering costs were recognized as a deferred charge and were amortized on a straight line basis over 12 months beginning on the date of commencement of investment operations.

 

3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

Investment Advisory Agreement

The Company entered into an investment advisory agreement effective as of April 11, 2016 (the “Investment Advisory Agreement”) with the Investment Adviser, pursuant to which the Investment Adviser manages the Company’s investment program and related activities.

Management Fee

The Company pays the Investment Adviser a management fee (the “Management Fee”), payable quarterly in arrears, equal to 0.375% (i.e., an annual rate of 1.50%) of the average NAV of the Company (including un-invested cash and cash equivalents) at the end of the then-current quarter and the prior calendar quarter (and, in the case of the Company’s first quarter, the NAV as of such quarter-end). The Management Fee for any partial quarter will be appropriately prorated.

For the three and nine months ended September 30, 2017, Management Fees amounted to $1,351 and $3,129, respectively. As of September 30, 2017, $1,351 remained payable. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016, Management Fees amounted to $611 and $611, respectively.

Incentive Fee

Pursuant to the Investment Advisory Agreement, the Company pays to the Investment Adviser an Incentive Fee (the “Incentive Fee”) as follows:

 

  a)

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

 

  b)

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

 

16


  c)

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

 

  d)

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

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

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

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

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

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

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

For the three and nine months ended September 30, 2017, the Company accrued unvested Incentive Fees of $1,541 and $3,736, respectively. As of September 30, 2017, $3,736 remained payable. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016, the Company did not accrue Incentive Fees.

Expense Limitation

Pursuant to the Investment Advisory Agreement, Company expenses borne by the Company in the ordinary course on an annual basis (excluding Management Fee, Incentive Fee, organizational and start-up expenses and leverage-related expenses) will not exceed an amount equal to 0.5% of the aggregate amount of commitments to the Company by holders of its common Units; provided, however, that expenses incurred outside of the ordinary course, including litigation and similar expenses, are not subject to such cap. To date, there have been no reimbursements from the Investment Adviser pursuant to this provision.

 

17


Administration and Custodian Fees

The Company has entered into an administration agreement with State Street Bank and Trust Company (the “Administrator”) under which the Administrator provides various accounting and administrative services to the Company. The Company pays the Administrator fees for its services as it determines are commercially reasonable in its sole discretion. The Company also reimburses the Administrator for all reasonable expenses. To the extent that the Administrator outsources any of its functions, the Administrator pays any compensation associated with such functions. The Administrator also serves as the Company’s custodian (the “Custodian”).

For the three and nine months ended September 30, 2017, the Company incurred expenses for services provided by the Administrator and the Custodian of $114 and $288, respectively. As of September 30, 2017, $5 remained payable. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016, the Company incurred expenses for services provided by the Administrator and the Custodian of $69 and $69, respectively.

Transfer Agent Fees

State Street Bank and Trust Company serves as the Company’s transfer agent (“Transfer Agent”), registrar and disbursing agent. For the three and nine months ended September 30, 2017, the Company incurred expenses for services provided by the Transfer Agent of $36 and $84, respectively. As of September 30, 2017, $14 remained payable. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016, the Company incurred expenses for services provided by the Transfer Agent of $14 and $14, respectively.

Affiliates

The Company’s investments in affiliates for the nine months ended September 30, 2017 were as follows.

 

    

Fair Value as of

December 31,
2016

   

Gross

Additions(2)

   

Gross

Reductions(3)

    Net
Realized Gains/
(Losses)
   

Change in

Unrealized

Gains/(Losses)

   

Fair Value as of
September 30,

2017

   

Dividend,

Interest
and PIK
Income

   

Other

Income

 
Non-Controlled Affiliates            

Goldman Sachs Financial Square Government
Fund (1)

  $ 138,311     $ 197,657     $ (335,967   $     $     $ 1     $ 14     $  

Total Non-Controlled Affiliates

  $ 138,311     $ 197,657     $ (335,967   $     $     $ 1     $ 14     $  

 

(1)   

Fund advised by an affiliate of Goldman Sachs.

(2)   

Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the accretion of discounts, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)   

Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

The Company’s investments in affiliates for the period from June 9, 2016 (inception) to December 31, 2016 were as follows:

 

    

Fair Value as of

June 9, 2016
(inception)

   

Gross

Additions(2)

   

Gross

Reductions(3)

    Net
Realized Gains/
(Losses)
   

Change in

Unrealized

Gains/(Losses)

   

Fair Value as of
December 31,

2016

   

Dividend,

Interest,
and PIK
Income

   

Other

Income

 
Non-Controlled Affiliates            

Goldman Sachs Financial Square Government
Fund (1)

  $     $ 398,443     $ (260,132   $     $     $ 138,311     $ 25     $  

Total Non-Controlled Affiliates

  $     $ 398,443     $ (260,132   $     $     $ 138,311     $ 25     $  

 

(1)   

Fund advised by an affiliate of Goldman Sachs.

(2)   

Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the accretion of discounts, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

(3)   

Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

 

18


Co-investment Activity

In certain circumstances, negotiated co-investments by the Company and other funds managed by the Investment Adviser may be made only pursuant to an order from the SEC permitting the Company to do so. On January 4, 2017, the SEC granted GSAM, Goldman Sachs BDC, Inc. (“GS BDC”), Goldman Sachs Middle Market Lending Corp. (“GS MMLC”) and the Company exemptive relief (“Exemptive Relief”) that permits the Company to co-invest with GS BDC, GS MMLC and certain other funds that may be managed by GSAM, including the GSAM Credit Alternatives Team, in the future, subject to certain terms and conditions in the Exemptive Relief. The GSAM Credit Alternatives Team is comprised of investment professionals dedicated to the Company’s investment strategy and other funds that share a similar investment strategy with the Company, who are responsible for identifying investment opportunities, conducting research and due diligence on prospective investments, negotiating and structuring the Company’s investments and monitoring and servicing the Company’s investments, together with investment professionals who are primarily focused on investment strategies in syndicated, liquid credit. Under the terms of the Exemptive Relief, a “required majority” (as defined in Section 57(o) of the Investment Company Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to the Company and the Company’s stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with the then-current investment objectives and strategies of the Company. As a result of the Exemptive Relief, there could be significant overlap in the Company’s investment portfolio and the investment portfolios of GS BDC, GS MMLC and/or other funds established by the GSAM Credit Alternatives Team that could avail themselves of the Exemptive Relief.

 

4. INVESTMENTS

As of the dates indicated, the Company’s investments (excluding an investment in a money market fund managed by an affiliate of Group Inc. of $1 and $138,311, respectively) consisted of the following:

 

     September 30, 2017      December 31, 2016  
Investment Type    Cost      Fair Value      Cost      Fair Value  
1st Lien/Senior Secured Debt    $ 183,693      $ 183,555      $ 43,629      $ 43,554  
1st Lien/Last-Out Unitranche      112,460        112,714        23,544        23,520  
2nd Lien/Senior Secured Debt      357,090        357,862        126,076        126,430  
Unsecured Debt      3,333        3,340        3,333        3,332  
Preferred Stock      2,496        2,670        2,496        2,500  
Common Stock      4,250        4,123                
Warrants      104        106        104        100  

Total Investments

   $ 663,426      $ 664,370      $ 199,182      $ 199,436  

As of the dates indicated, the industry composition of the Company’s portfolio at fair value was as follows:

 

Industry    September 30, 2017     December 31, 2016  
Diversified Financial Services      15.0     19.7
Health Care Providers & Services      10.7        
Chemicals      10.5       7.4  
Software      9.5       12.5  
Food Products      8.1       12.3  
Internet Software & Services      6.2        
Containers & Packaging      5.5       5.1  
Diversified Consumer Services      5.1        
IT Services      4.8        
Internet Catalog & Retail      4.8        
Household Products      4.5        
Insurance      4.1       13.8  
Health Care Equipment & Supplies      3.7       11.8  
Air Freight & Logistics      3.0        
Distributors      2.4        
Hotels, Restaurants & Leisure      2.1        
Construction & Engineering            9.8  
Health Care Technology            7.6  

Total

     100.0     100.0

 

19


As of the dates indicated, the geographic composition of the Company’s portfolio at fair value was as follows:

 

Geographic    September 30, 2017     December 31, 2016  
United States      100.0     100.0

Total

     100.0     100.0

 

5. FAIR VALUE MEASUREMENT

The fair value of a financial instrument is the amount that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities. The three levels of the fair value hierarchy are as follows:

Basis of Fair Value Measurement

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

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

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

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Note 2 “Significant Accounting Policies” should be read in conjunction with the information outlined below.

The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 2 Instruments.

 

Level 2 Instruments    Valuation Techniques and Significant Inputs
Equity and Fixed Income   

The types of instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include commercial paper, most government agency obligations, most corporate debt securities, certain mortgage-backed securities, certain bank loans, less liquid publicly listed equities, certain state and municipal obligations, certain money market instruments and certain loan commitments.

 

Valuations of Level 2 Equity and Fixed Income instruments can be verified to quoted prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

 

20


The table below presents the valuation techniques and the nature of significant inputs generally used in determining the fair value of Level 3 Instruments.

 

Level 3 Instruments    Valuation Techniques and Significant Inputs
Bank Loans, Corporate Debt, and Other Debt Obligations   

Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available. Other valuation methodologies are used as appropriate including market comparables, transactions in similar instruments and recovery/liquidation analysis.

Equity

  

Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:

•    Transactions in similar instruments;

•    Discounted cash flow techniques;

•    Third party appraisals; and

•    Industry multiples and public comparables.

Evidence includes recent or pending reorganizations (for example, merger proposals, tender offers and debt restructurings) and significant changes in financial metrics, including:

•    Current financial performance as compared to projected performance;

•    Capitalization rates and multiples; and

•    Market yields implied by transactions of similar or related assets.

The tables below present the ranges of significant unobservable inputs used to value the Company’s Level 3 assets and liabilities as of September 30, 2017 and December 31, 2016. These ranges represent the significant unobservable inputs that were used in the valuation of each type of instrument, but they do not represent a range of values for any one instrument. For example, the lowest yield in 1st Lien/Senior Secured is appropriate for valuing that specific debt investment, but may not be appropriate for valuing any other debt investments in this asset class. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 assets and liabilities.

 

Level 3 Instruments  

Level 3 Assets as of

September 30, 2017(1)

 

Significant Unobservable

Inputs by Valuation

Techniques(2)

 

Range(3) of Significant
Unobservable

Inputs (Weighted Average(4)
as of

September 30, 2017

Bank Loans, Corporate Debt, and Other

Debt Obligations

  1st Lien/Senior Secured Debt   Discounted cash flows:    
  $79,740  

•    Discount Rate

  9.9%  –  12.1%(10.5%)
  1st Lien/Last-Out Unitranche   Discounted cash flows:    
    $95,261  

•    Discount Rate

  10.3%  –  11.1%(10.6%)
    2nd Lien/Senior Secured Debt   Discounted cash flows:    
    $233,612  

•    Discount Rate

  10.5%  –  11.6%(11.2%)
    Unsecured Debt   Discounted cash flows:    
    $3,340  

•    Discount Rate

  4.0%  –  13.8%(13.6%)
Equity   Preferred Stock   Discounted cash flows:    
    $2,670  

•    Discount Rate

  11.9%  –  14.2%(12.6%)
       
      Comparable multiples:    
       

•    EV/EBITDA(5)

  10.4x  –  13.6x (9.9x)
    Common Stock   Discounted cash flows:    
    $4,123  

•    Discount Rate

  9.7%  –  16.6%(13.1%)
       
      Comparable multiples:    
     

•    EV/Revenue

  2.1x  –  9.6x (3.0x)
       
      Comparable multiples:    
       

•    EV/EBITDA(5)

  8.4x  –  18.0x (14.0x)
    Warrants   Discounted cash flows:    
    $106  

•    Discount Rate

  8.8%  –  11.4%(11.2%)
       
      Comparable multiples:    
       

•    EV/EBITDA(5)

  4.5x  –  10.8x (12.5x)

 

(1)   

Included within Level 3 Assets of $629,116 is an amount of $210,264 for which the Investment Adviser did not develop the unobservable inputs (examples include single source broker quotations, third party pricing, and prior transactions).

(2)   

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(3)   

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(4)   

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

(5)   

Enterprise value of portfolio company as a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

21


Level 3 Instruments  

Level 3 Assets as of

December 31, 2016(1)

 

Significant Unobservable

Inputs by Valuation

Techniques(2)

 

Range(3) of Significant
Unobservable

Inputs (Weighted Average(4))
as of

December 31, 2016

Bank Loans, Corporate Debt, and

Other Debt Obligations

  1st Lien/Senior Secured Debt   Discounted cash flows:    
  $33,320  

•    Discount Rate

  9.9% – 11.9%(11.1%)
  1st Lien/Last-Out Unitranche   Discounted cash flows:    
    $23,520  

•    Discount Rate

  6.8% – 10.9%(11.2%)
    2nd Lien/Senior Secured Debt   Discounted cash flows:    
    $83,840  

•    Discount Rate

  11.7% – 11.9%(11.8%)
Equity   Preferred Stock   Discounted cash flows:    
    $1,000  

•    Discount Rate

  7.3% – 10.0%(13.9%)
       
      Comparable multiples:    
       

•    EV/EBITDA(5)

  9.4x – 14.7x (10.0x)

 

(1)   

Included within Level 3 Assets of $199,436 is an amount of $57,756 for which the Investment Adviser did not develop the unobservable inputs (examples include single source broker quotations, third party pricing, and prior transactions).

(2)   

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparable and discounted cash flows may be used together to determine fair value. Therefore, the Level 3 balance encompasses both of these techniques.

(3)   

The range for an asset category consisting of a single investment represents the relevant market data considered in determining the fair value of the investment.

(4)   

Weighted average for an asset category consisting of multiple investments is calculated by weighting the significant unobservable input by the relative fair value of the investment. Weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

(5)   

Enterprise value of portfolio company as a multiple of EBITDA.

As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of September 30, 2017 and December 31, 2016. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. Included in the consideration and selection of discount rates is risk of default, rating of the investment, call provisions and comparable company investments. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in the value of market comparable transactions or market multiples would result in an increase or decrease, respectively, in the fair value.

The following is a summary of the Company’s assets categorized within the fair value hierarchy as of September 30, 2017:

 

Assets    Level 1      Level 2      Level 3      Total  
1st Lien/Senior Secured Debt    $      $      $ 183,555      $ 183,555  
1st Lien/Last-Out Unitranche                    112,714        112,714  
2nd Lien/Senior Secured Debt             35,254        322,608        357,862  
Unsecured Debt                    3,340        3,340  
Preferred Stock                    2,670        2,670  
Common Stock                    4,123        4,123  
Warrants                    106        106  
Affiliated Money Market Fund      1                      1  
Total assets    $ 1      $ 35,254      $ 629,116      $ 664,371  

The following is a summary of the Company’s assets categorized within the fair value hierarchy as of December 31, 2016:

 

Assets    Level 1      Level 2      Level 3      Total  
1st Lien/Senior Secured Debt    $      $      $ 43,554      $ 43,554  
1st Lien/Last-Out Unitranche                    23,520        23,520  
2nd Lien/Senior Secured Debt                    126,430        126,430  
Unsecured Debt                    3,332        3,332  
Preferred Stock                    2,500        2,500  
Warrants                    100        100  
Affiliated Money Market Fund      138,311                      138,311  
Total assets    $ 138,311      $      $ 199,436      $ 337,747  

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. For the nine months ended September 30, 2017 and for the period from June 9, 2016 (inception) to September 30, 2016, there were no transfers between levels.

 

22


The following is a reconciliation of Level 3 assets for the nine months ended September 30, 2017:

 

Level 3  

Beginning

Balance

as of

January 1,

2017

    Purchases(1)    

Net

Realized

Gain (Loss)

   

Net Change in

Unrealized

Appreciation

(Depreciation)(2)

   

Sales and

Settlements(1)

   

Net

Amortization

of Premium/

Discount

   

Transfers

In

   

Transfers

Out

   

Ending

Balance

as of

September 30,

2017

 

1st Lien/Senior Secured Debt

  $ 43,554     $ 180,173     $ (11   $ (63   $ (40,725   $ 627     $     $     $ 183,555  
1st Lien/Last-Out Unitranche     23,520       92,609             278       (3,940     247                   112,714  

2nd Lien/Senior Secured Debt

    126,430       210,618             (23     (15,000     583                   322,608  
Unsecured Debt     3,332                   7             1                   3,340  
Preferred Stock     2,500                   170                               2,670  
Common Stock           4,250             (127                             4,123  
Warrants     100                   6                               106  
Total assets   $ 199,436     $ 487,650     $ (11   $ 248     $ (59,665   $ 1,458     $     $     $ 629,116  

 

(1)   

Purchases may include PIK and securities received in corporate actions and restructurings. Sales and Settlements may include securities delivered in corporate actions and restructuring of investments.

(2)   

Change in unrealized appreciation (depreciation) relating to assets still held as of September 30, 2017 totaled $224, consisting of the following: 1st Lien/Senior Secured Debt $(87), 1st Lien/Last-Out Unitranche $278, 2nd Lien/Senior Secured Debt $(23), Unsecured Debt $7, Preferred Stock $170, Common Stock $(127) and Warrants $6.

The following is a reconciliation of Level 3 assets for the period from June 9, 2016 (inception) to September 30, 2016:

 

Level 3   Beginning
Balance
as of
June 9, 2016
(Inception)
    Purchases(1)     Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation
(Depreciation)(2)
    Sales and
Settlements(1)
   

Net
Amortization
of Premium/

Discount

    Transfers
In
    Transfers
Out
    Ending
Balance
as of
September 30,
2016
 
1st Lien/Senior Secured Debt   $     $ 33,320     $     $ (14   $     $ 14     $     $     $ 33,320  
1st Lien/Last-Out Unitranche           23,520                                           23,520  
2nd Lien/Senior Secured Debt           73,500             (10           10                   73,500  
Preferred Stock           1,000                                           1,000  
Total assets   $         –     $ 131,340     $         –     $ (24   $         –     $ 24     $         –     $         –     $ 131,340  

 

(1)   

Purchases may include PIK and securities received in corporate actions and restructurings. Sales and Settlements may include securities delivered in corporate actions and restructuring of investments.

(2)   

Change in unrealized appreciation (depreciation) relating to assets still held at September 30, 2016 totaled $(24), consisting of the following: 1st Lien/Senior Secured Debt $(14), 1st Lien/Last-Out Unitranche $0, 2nd Lien/Senior Secured Debt $(10), and Preferred Stock $0.

Debt Not Carried at Fair Value

The fair value of the Company’s debt, which would have been categorized as Level 3 within the fair value hierarchy as of September 30, 2017 and December 31, 2016, approximates its carrying value.

6. DEBT

In accordance with the Investment Company Act, with certain exceptions, the Company is only allowed to borrow amounts such that its asset coverage ratio, as defined in the Investment Company Act, is at least 2 to 1 after such borrowing. As of September 30, 2017 and December 31, 2016, the Company’s outstanding borrowings were $289,000 and $130,000, respectively, and the Company’s asset coverage ratio was 2.39 to 1 and 2.61 to 1, respectively.

Revolving Credit Facility

The Company entered into a Revolving Credit Facility on July 18, 2016 with Bank of America, N.A. as administrative agent (the “Administrative Agent”), lead arranger, letter of credit issuer and lender.

 

23


On March 3, 2017, the Company amended the Revolving Credit Facility to, among other things:

 

   

temporarily increase the maximum committed principal amount of the Revolving Credit Facility by $100,000 to $350,000, with such temporary increase expiring on December 29, 2017 or earlier pursuant to the terms of the Revolving Credit Facility; and

 

   

increase the interest rate on obligations under the Revolving Credit Facility to either (1) the prevailing London InterBank Offered Rate (“LIBOR”) for one, two, three or six months plus 3.00% per annum (increased from 2.25% per annum) or (2) an alternate base rate (the greater of the prime rate of such commercial bank, the federal funds rate plus 0.50%, and LIBOR plus 1.00%) plus 2.00% per annum (increased from 1.25% per annum).

The maximum principal amount of the Revolving Credit Facility was $350,000 as of September 30, 2017, of which $289,000 was drawn as of September 30, 2017, subject to availability under the “Borrowing Base.” The Borrowing Base is calculated based on the unfunded capital commitments of the investors meeting various eligibility requirements (subject to investor concentration limits) multiplied by specified advance rates. The Company has the ability to increase the maximum principal amount of the Revolving Credit Facility up to $750,000 subject to increasing commitments of existing lenders and/or obtaining commitments of new lenders and certain other conditions. The Revolving Credit Facility will mature on July 17, 2018, subject to extension with the consent of the Administrative Agent and the extending lenders, and certain other conditions.

The Company has the ability to elect either LIBOR or the alternative base rate at the time of draw-down, and loans may be converted from one rate to another at any time, subject to certain conditions. The Company pays a 0.25% annualized fee on a quarterly basis on committed but undrawn amounts under the Revolving Credit Facility.

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

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

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

Costs of $2,031 were incurred in connection with obtaining and amending the Revolving Credit Facility, which have been recorded as deferred financing costs on the Consolidated Statements of Financial Condition and are being amortized over the life of the Revolving Credit Facility using the straight-line method. As of September 30, 2017 and December 31, 2016, outstanding deferred financing costs were $784 and $1,351, respectively.

The summary information of the Revolving Credit Facility for the three and nine months ended September 30, 2017 is as follows:

 

    

Three months ended

September 30, 2017

   

Three months ended

September 30, 2016

   

Nine months ended

September 30, 2017

    For the period from
June 9, 2016
(inception) to
September 30, 2016
 
Borrowing Interest Expense   $ 2,608     $ 139     $ 4,811     $ 139  
Facility fees     70       118       324       118  
Amortization of financing costs     302       180       847       180  
Total   $ 2,980     $ 437     $ 5,982     $ 437  
Weighted average interest rate     4.30%       2.96%       4.10%       2.96%  
Average outstanding balance   $ 240,853     $ 22,860   $ 156,756     $ 22,860

 

*  

Average outstanding debt balance was calculated beginning on July 18, 2016, the date on which the Company entered into the Revolving Credit Facility.

 

24


7. COMMITMENTS AND CONTINGENCIES

Capital Commitments

The Company had aggregate capital commitments and undrawn capital commitments from investors as follows as of the dates indicated:

 

     September 30, 2017     December 31, 2016  
     

Capital

Commitments

    

Unfunded

Capital

Commitments

    

% of Capital

Commitments

Funded

   

Capital

Commitments

    

Unfunded

Capital

Commitments

    

% of Capital

Commitments

Funded

 
Common Units    $ 1,097,430      $ 691,381        37   $ 1,001,880      $ 791,485        21

Portfolio Company Commitments

The Company may enter into commitments to fund investments. As of September 30, 2017, the Company believed that it had adequate financial resources to satisfy its unfunded commitments. The Company had the following unfunded commitments by investment types as of the dates indicated:

 

     September 30, 2017     December 31, 2016  
      Commitment
Expiration
Date(1)
     Unfunded
Commitment(2)
     Fair
Value(3)
    Commitment
Expiration
Date(1)
     Unfunded
Commitment(2)
     Fair
Value(3)
 
1st Lien/Senior Secured Debt                 
Clinical Supplies Management Holdings, Inc.           $      $       04/12/2018      $ 8,640      $ (173
Continuum Managed Services LLC      06/08/2019        2,658        (73                    
FWR Holding Corporation      08/21/2019        4,410        (110                    
Clinical Supplies Management Holdings, Inc.      10/12/2021        2,000        (35     10/12/2021        2,000        (40
Netvoyage Corporation      03/24/2022        1,044        (18                    
Continuum Managed Services LLC      06/08/2022        3,280        (90                    
Xactly Corporation      07/29/2022        2,554        (51                    
FWR Holding Corporation      08/21/2023        1,279        (32                    
Total 1st Lien/Senior Secured Debt             $ 17,225      $ (409            $ 10,640      $ (213
Total             $ 17,225      $ (409            $ 10,640      $ (213

 

(1)   

Commitments are generally subject to borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. These amounts may remain outstanding until the commitment period of an applicable loan expires, which may be shorter than its maturity.

(2)   

Net of capitalized fees, expenses and OID.

(3)   

A negative fair value was reflected as investments, at fair value in the Consolidated Statements of Financial Condition. The negative fair value is the result of the capitalized discount on the loan.

Contingencies

In the normal course of business, the Company enters into contracts that provide a variety of general indemnifications. Any exposure of the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications.

 

8. MEMBERS’ CAPITAL

Capital Drawdowns

The following table summarizes the total Units issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the nine months ended September 30, 2017.

 

Unit Issue Date    Units Issued      Proceeds Received  
April 27, 2017      203,758      $ 20,013  
April 28, 2017      535        53  
May 26, 2017      444,153        43,897  
June 29, 2017      441,837        43,897  
August 21, 2017      557,806        54,872  
September 28, 2017      332,027        32,923  

Total capital drawdowns

     1,980,116      $ 195,655  

 

25


The following table summarizes the total Units issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements from June 9, 2016 (inception) to September 30, 2016.

 

Unit Issue Date    Units Issued      Proceeds Received  
July 14, 2016      310,360      $ 31,036  
July 15, 2016      4,000        400  
August 23, 2016      160,219        15,718  
September 15, 2016      1,206,924        117,885  

Total capital drawdowns

     1,681,503      $ 165,039  

Distributions

The following table reflects the distributions declared on the Company’s common Units for the nine months ended September 30, 2017:

 

Date Declared   Record Date   Payment Date   Amount Per Unit
February 22, 2017   March 31, 2017   April 17, 2017   $2.02
May 1, 2017   June 30, 2017   July 26, 2017   $2.40
August 1, 2017   September 29, 2017   October 24, 2017   $2.42

There were no distributions for the period from June 9, 2016 (inception) to September 30, 2016.

 

9. EARNINGS PER UNIT

The following information sets forth the computation of basic and diluted earnings per unit for the three and nine months ended September 30, 2017, for the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016.

 

     

For the three

months ended

September 30, 2017

    

For the three

months ended

September 30, 2016

   

For the nine

months ended

September 30, 2017

    

For the period from
June 9,2016
(inception) to

September 30, 2016

 

Numerator for basic and diluted earnings per unit - increase in Members’ Capital resulting from operations

   $ 8,667      $ (246   $ 19,015      $ (584

Denominator for basic and diluted earnings per unit - the weighted average Units outstanding

     3,492,675        547,715       2,708,267        442,016  

Basic and diluted earnings (loss) per unit

   $ 2.48      $ (0.45   $ 7.02      $ (1.32

Diluted earnings per unit equal basic earnings per unit because there were no common unit equivalents outstanding during the period presented.

 

26


10. FINANCIAL HIGHLIGHTS

Below is the schedule of financial highlights of the Company for the nine months ended September 30, 2017 and for the period from June 9, 2016 (inception) to September 30, 2016:

 

     For the nine months
ended
September 30, 2017
  For the period from
June 9, 2016
(inception) to
September 30, 2016
Per Unit Data:(1)  
NAV, beginning of period    $ 97.73     $ 100.00  
Net investment income (loss)      6.77       (1.35
Net realized and unrealized gains (losses)      (0.15 )(2)      (0.85
  

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations      6.62       (2.20
  

 

 

 

 

 

 

 

Distributions declared from net investment income(3)      (6.84      
  

 

 

 

 

 

 

 

Total increase (decrease) in net assets      (0.22     (2.20
  

 

 

 

 

 

 

 

NAV, end of period    $ 97.51     $ (97.80
  

 

 

 

 

 

 

 

Units outstanding, end of period      4,123,094       1,681,503  
Weighted average units outstanding      2,708,267       442,016  
Total return based on NAV(4)      6.77%       (2.20)%  
Ratio/Supplemental Data (all amounts in thousands except ratios):     
Members’ Capital, end of period    $ 402,056     $ 164,455  
Ratio of net expenses to average Members’ Capital(5)      7.12%       11.28%  

Ratio of expenses (without incentive fees and interest and other debt expenses) to Members’
Capital(5)

     2.69%       8.94%  
Ratio of interest and other debt expenses to average Members’ Capital(5)      3.02%       3.24%  
Ratio of incentive fees to average Members’ Capital(5)      1.41%       –%  
Ratio of total expenses to average Members’ Capital(5)      7.12%       12.18%  
Ratio of net investment income (loss) to average Members’ Capital(5)      9.91%       (2.25)%  
Average debt outstanding    $ 156,756     $ 22,860  
Average debt per unit(6)    $ 57.88     $ 51.72  
Portfolio turnover      14%       –%  

 

(1)   

The per unit data was derived by using the weighted average units outstanding during the period.

(2)   

For the nine months ended September 30, 2017, the amount shown does not correspond with the aggregate realized and unrealized gains (losses) on investment transactions for the period as it includes the effect of the timing of the distribution.

(3)   

The per unit data for distributions declared reflects the actual amount of distributions declared per unit for the applicable period.

(4)   

Total return based on NAV is calculated as the change in NAV per unit during the period plus dividends declared per unit, divided by the beginning NAV per unit.

(5)   

Annualized, except for, as applicable, unvested Incentive Fees and certain operating expenses.

(6)   

Average debt per unit is calculated as average debt outstanding divided by the weighted average units outstanding during the period.

 

11. SUBSEQUENT EVENTS

Subsequent events after the Consolidated Statements of Financial Condition date have been evaluated through the date the unaudited consolidated financial statements were issued. Other than the items discussed below, the Company has concluded that there is no impact requiring adjustment or disclosure in the consolidated financial statements.

On October 23, 2017, the Company delivered a capital drawdown notice to its investors relating to the sale of approximately 900,334 common Units for an aggregate offering price of approximately $87,794. The common Units were issued on October 30, 2017.

On October 31, 2017, the Board of Directors declared a distribution equal to an amount up to the Company’s taxable earnings per unit, including net investment income (if positive) for the period October 1, 2017 through December 31, 2017, payable on or about January 23, 2018 to unitholders of record as of December 29, 2017.

 

27


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. References to “we,” “us,” “our,” and the “Company,” mean Goldman Sachs Private Middle Market Credit LLC, unless otherwise specified. The terms “GSAM,” our “Adviser” or our “Investment Adviser” refer to Goldman Sachs Asset Management, L.P., a Delaware limited partnership. The term “Group Inc.” refers to The Goldman Sachs Group, Inc. The term “Goldman Sachs” refers to Group Inc., together with Goldman Sachs & Co. LLC, GSAM and its other subsidiaries and affiliates. The discussion and analysis contained in this section refers to our financial condition, results of operations and cash flows. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Please see “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with this discussion and analysis. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this report.

OVERVIEW

We are a specialty finance company focused on lending to middle-market companies. We are a closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”). In addition, we have elected to be treated and expect to qualify annually as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2016. From our commencement of investment operations on July 1, 2016 through September 30, 2017, we originated $741.50 million in aggregate principal amount of debt and equity investments prior to any subsequent exits and repayments. We seek to generate current income and, to a lesser extent, capital appreciation primarily through direct originations of secured debt, including first lien, unitranche, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments. “Unitranche” loans are first lien loans that may extend deeper in a company’s capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority between different lenders in the unitranche loan. In a number of instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the “last out” portion that we would continue to hold. In exchange for the greater risk of loss, the “last out” portion generally earns a higher interest rate than the “first out” portion. We use the term “mezzanine” to refer to debt that ranks senior only to a borrower’s equity securities and ranks junior in right of payment to all of such borrower’s other indebtedness. We may make multiple investments in the same portfolio company.

We expect to invest, under normal circumstances, at least 80% of our net assets (plus any borrowings for investment purposes), directly or indirectly in private middle-market credit obligations and related instruments. We define “credit obligations and related instruments” for this purpose as any fixed-income instrument, including loans to, and bonds and preferred stock of, portfolio companies and other instruments that provide exposure to such fixed-income instruments. “Middle market” is used to refer to companies with earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) of between $5 million and $75 million annually. While, as a result of fluctuations in the net asset value (“NAV”) of one asset relative to another asset, private middle-market credit obligations and related instruments may represent less than 80% of our net assets (plus any borrowings for investment purposes) at any time, we may not invest, under normal circumstances, more than 20% of our net assets (plus any borrowings for investment purposes) in securities and other instruments that are not private middle-market credit obligations and related instruments. To the extent we determine to invest indirectly in private middle-market credit obligations and related instruments, we may invest through certain synthetic instruments, including derivatives that have similar economic characteristics to private middle-market credit obligations which we will value at market value or, if no market value is ascertainable, at fair value for the purpose of complying with the above mentioned policy. For purposes of determining compliance with our 80% policy, each applicable derivative instrument will be valued based upon its market value. We will notify unitholders at least 60 days prior to any change to the 80% investment policy described above.

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

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

 

28


For a discussion of the competitive landscape we face, please see “Risk Factors—We operate in a highly competitive market for investment opportunities” and “Business—Competitive Advantages” in our annual report on Form 10-K for the year ended December 31, 2016.

KEY COMPONENTS OF OPERATIONS

Investments

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

As a BDC, we may not acquire any assets other than “qualifying assets” specified in the Investment Company Act, unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), “eligible portfolio companies” include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenues

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

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

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

Expenses

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

 

   

our operational and organizational expenses;

 

   

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

 

   

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

 

   

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

 

29


   

brokers’ commissions;

 

   

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

 

   

legal, auditing or accounting expenses;

 

   

taxes or governmental fees;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

costs of holding Unitholder meetings;

 

   

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

 

   

insurance premiums; and

 

   

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

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

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

Leverage

Our revolving credit facility (the “Revolving Credit Facility”) allows us to borrow money and lever our investment portfolio, subject to the limitations of the Investment Company Act, with the objective of increasing our yield. This is known as “leverage” and could increase or decrease returns to our Unitholders. The use of leverage involves significant risks. As a BDC, with certain limited exceptions, we are only permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, equals at least 2 to 1 after such borrowing. Certain trading practices and investments, such as reverse repurchase agreements, may be considered borrowings or involve leverage and thus may be subject to Investment Company Act restrictions. In accordance with applicable SEC staff guidance and interpretations, when we engage in such transactions, instead of maintaining an asset coverage ratio of at least 2 to 1, we may segregate or earmark liquid assets, or enter into an offsetting position, in an amount at least equal to our exposure, on a mark-to-market basis, to such transactions (as calculated pursuant to requirements of the SEC). Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. Practices and investments that may involve leverage but are not considered borrowings are not subject to the Investment Company Act’s asset coverage requirement and we will not otherwise segregate or earmark liquid assets or enter into offsetting positions for such transactions. The amount of leverage that we employ will depend on our Investment Adviser’s and our board of directors (the “Board of Directors” or the “Board”) assessment of market conditions and other factors at the time of any proposed borrowing.

 

30


PORTFOLIO AND INVESTMENT ACTIVITY

As of September 30, 2017 and December 31, 2016, our portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc. of less than $0.01 million and $138.31 million, respectively) consisted of the following:

 

     As of  
     September 30, 2017     December 31, 2016  
     Amortized
Cost
     Fair
Value
     Percentage
of Total
Portfolio at
Fair Value
    Amortized
Cost
     Fair
Value
     Percentage
of Total
Portfolio at
Fair Value
 
     ($ in millions)            ($ in millions)         
First Lien/Senior Secured Debt    $ 183.70      $ 183.56        27.6 %   $ 43.63      $ 43.55        21.8 %
First Lien/Last-Out Unitranche      112.46        112.71        17.0       23.54        23.52        11.8  
Second Lien/Senior Secured Debt      357.09        357.86        53.9       126.08        126.44        63.4  
Unsecured Debt      3.33        3.34        0.5       3.33        3.33        1.7  
Preferred Stock      2.50        2.67        0.4       2.50        2.50        1.3  
Common Stock      4.25        4.12        0.6                      
Warrants      0.10        0.11        0.0       0.10        0.10        0.0  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Investments

   $ 663.43      $ 664.37        100.0 %   $ 199.18      $ 199.44        100.0 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of September 30, 2017 and December 31, 2016, the weighted average yield on our portfolio by asset type (excluding our investment in a money market fund managed by an affiliate of Group Inc.), at cost and fair value, was as follows:

 

     As of  
     September 30, 2017      December 31, 2016  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
Weighted Average Yield(1)            
First Lien/Senior Secured Debt(2)      10.0%        10.0%        10.0%        10.1%  
First Lien/Last-Out Unitranche(2)(4)      10.2%        10.2%        10.2%        10.2%  
Second Lien/Senior Secured Debt(2)      10.1%        10.1%        10.2%        10.2%  
Unsecured Debt(2)      13.8%        13.7%        13.8%        13.8%  
Preferred Stock(3)      0.0%        0.0%        0.0%        0.0%  
Common Stock(3)      0.0%        0.0%                
Warrants(3)      0.0%        0.0%        0.0%        0.0%  
Total Portfolio      10.0%        10.0%        10.1%        10.1%  

 

(1)   

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

(2)   

Computed based on the (a) annual stated interest rate or yield earned plus amortization of fees and discounts on the performing debt and other income producing investments, divided by (b) the total investments (including investments on non-accrual and non-income producing investments) at amortized cost or fair value, respectively. For investments that are subject to a London InterBank Offered Rate (“LIBOR”) floor, the yield calculation assumes the greater of the applicable LIBOR floor or 3 month LIBOR as of respective period end date. The actual interest rate may vary.

(3)   

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

(4)   

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

The following table presents certain selected information regarding our investment portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.) as of September 30, 2017 and December 31, 2016:

 

     As of  
     September 30, 2017      December 31, 2016  
Number of portfolio companies      29        10  
Percentage of performing debt bearing a floating rate(1)      97.4%        91.3%  
Percentage of performing debt bearing a fixed rate(1)(2)      2.6%        8.7%  
Weighted average leverage (net debt/EBITDA)(3)      5.1x        5.0x  
Weighted average interest coverage(3)      2.8x        2.9x  
Median EBITDA(3)(4)    $  35.66 million      $ 14.95 million  

 

(1)   

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

(2)   

Includes income producing preferred stock investments.

(3)   

For a particular portfolio company, EBITDA typically represents net income before net interest expense, income tax expense, depreciation and amortization. The net debt to EBITDA represents the ratio of a portfolio company’s total debt (net of cash) and excluding debt subordinated to our investment in a portfolio company, to a portfolio company’s EBITDA. The interest coverage ratio represents the ratio of a portfolio company’s EBITDA as a multiple of interest expense. Weighted average net debt to EBITDA is weighted based on the fair value of our debt investments excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as investments that are underwritten and covenanted based on recurring revenue. Weighted average interest coverage is weighted based on the fair value of our performing debt investments, excluding investments where interest coverage may not be the appropriate measure of credit risk, such as investments that are underwritten and covenanted based on recurring revenue. Median EBITDA is based on our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk, such as investments that are underwritten and covenanted based on recurring revenue. As September 30, 2017 and December 31, 2016, investments where net debt to EBITDA may not be the appropriate measure of credit risk represented 16.6% and 0.0%, respectively, of total debt investments at fair value. Portfolio company statistics are derived from the most recently available financial statements of each portfolio company as of the respective reported end date. Portfolio company statistics have not been independently verified by us and may reflect a normalized or adjusted amount.

(4)   

In 2017 we have invested in 16 new portfolio companies for which EBITDA is the appropriate measure of credit risk. These companies had a median EBITDA of $50.32 million which has driven the portfolio’s median EBITDA higher in 2017.

 

31


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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

As part of the monitoring process, our Investment Adviser also employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Investment Adviser grades the credit risk of all investments on a scale of 1 to 4. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (e.g. at the time of origination or acquisition), although it may also take into account the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The grading system is as follows:

 

   

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

 

   

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

 

   

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

 

   

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

Our Investment Adviser grades the investments in our portfolio at least quarterly and it is possible that the grade of a portfolio investment may be reduced or increased over time. For investments graded 3 or 4, our Investment Adviser enhances its level of scrutiny over the monitoring of such portfolio company. The following table shows the composition of our portfolio (excluding our investment in a money market fund managed by an affiliate of Group Inc.) on the 1 to 4 grading scale as of September 30, 2017 and December 31, 2016:

 

     As of  
     September 30, 2017     December 31, 2016  

Investment

Performance Rating

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

(in

millions)

          

(in

millions)

        
Grade 1    $        %   $        %
Grade 2      664.37        100.0       199.44        100.0  
Grade 3                           
Grade 4                           
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 664.37        100.0 %   $ 199.44        100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 

 

32


The following table shows the amortized cost of our performing and non-accrual investments as of September 30, 2017 and December 31, 2016:

 

     As of  
     September 30, 2017     December 31, 2016  
     Amortized
Cost
     Percentage
of Total
Portfolio
at
Amortized
Cost
    Amortized
Cost
     Percentage
of Total
Portfolio
at
Amortized
Cost
 
    

(in

millions)

          

(in

millions)

        
Performing    $ 663.43        100.0 %   $ 199.18        100.0 %
Non-accrual                           
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 663.43        100.0 %   $ 199.18        100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

 

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

The following table shows our investment activity for the three months ended September 30, 2017 and 2016 by investment type:

 

     For the Three Months Ended  
       September 30,  
2017
       September 30,  
2016
 
     (in millions)  
New investment commitments at cost:      
Gross originations    $ 210.79      $ 146.12  
Less: Syndications(1)              
  

 

 

    

 

 

 
Net amount of new investments committed at cost:    $ 210.79      $ 146.12  
Amount of investments committed at cost(2):      
First Lien/Senior Secured Debt    $ 81.71      $ 33.32  
First Lien/Last-Out Unitranche      18.54        23.52  
Second Lien/Senior Secured Debt      110.54        88.28  
Unsecured Debt              
Preferred Stock             1.00  
Common Stock              
Warrants              
  

 

 

    

 

 

 

Total

   $ 210.79      $ 146.12  
  

 

 

    

 

 

 
Proceeds from investments sold or repaid:      
First Lien/Senior Secured Debt    $ 11.67      $  
First Lien/Last-Out Unitranche      0.07         
Second Lien/Senior Secured Debt              
Unsecured Debt              
Preferred Stock              
Common Stock              
Warrants              
  

 

 

    

 

 

 

Total

   $ 11.74      $  
  

 

 

    

 

 

 

Net increase (decrease) in portfolio

   $ 199.05      $ 146.12  
  

 

 

    

 

 

 
Number of new investment commitments in new portfolio companies(3)      8        8  
Total new investment commitment amount in new portfolio companies(3)    $ 209.70      $ 146.12  
Average new investment commitment amount in new portfolio companies(3)    $ 26.21      $ 18.27  
Number of new investment commitments in existing portfolio companies(3)      1         
Total new investment commitment amount in existing portfolio companies(3)    $ 1.09      $  
Weighted average remaining term for new investment commitments (in years)(3)(4)      6.3        5.8  
Percentage of new debt investment commitments at floating interest rates(3)      100.0%        87.5%  
Percentage of new debt investment commitments at fixed interest rates(3)      –%        12.5%  
Weighted average yield on new debt and income producing investment commitments (2) (3) (5)      9.8%        10.3%  
Weighted average yield on new investment commitments (2) (3) (6)      9.8%        10.2%  
Weighted average yield on debt and income producing investments sold or paid down(7)      10.7%        N/A  
Weighted average yield on investments sold or paid down(8)      10.7%        N/A  

 

(1)   

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

(2)   

Net of capitalized fees, expenses and original issue discount (“OID”).

 

33


(3)   

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

(4)   

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

(5)   

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

(6)   

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

(7)   

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

(8)   

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

RESULTS OF OPERATIONS

Our operating results for the three and nine months ended September 30, 2017, for the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016 were as follows:

 

    For the
Three Months Ended
September 30, 2017
    For the
Three Months Ended
September 30, 2016
    For the
Nine Months Ended
September 30, 2017
    For the Period from
June 9, 2016
(Inception) to
September 30, 2016
 
    ($ in millions)  
Total investment income   $ 14.93     $ 1.22     $ 33.67     $ 1.22  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    (6.51     (1.87     (15.33     (2.20

Management fee waiver

          0.39             0.39  
 

 

 

   

 

 

   

 

 

   

 

 

 
Net expenses     (6.51     (1.48     (15.33     (1.81
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

    8.42       (0.26     18.34       (0.59
Net realized gain (loss) on investments     (0.01           (0.01      

Net unrealized appreciation (depreciation) on investments

    0.26       0.01       0.69       0.01  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 8.67     $ (0.25   $ 19.02     $ (0.58
 

 

 

   

 

 

   

 

 

   

 

 

 

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

Investment Income

 

    For the Three
Months Ended
September 30, 2017
    For the Three
Months Ended
September 30, 2016
    For the Nine
Months Ended
September 30, 2017
    For the Period
from June 9,
2016 (inception)
to September 30, 2016
 
    ($ in millions)  
Interest   $ 14.75   $ 1.20   $ 33.01   $ 1.20
Dividend income           0.01     0.01     0.01
Other income     0.18     0.01     0.65     0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

  $ 14.93   $ 1.22   $ 33.67   $ 1.22
 

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Investment income for the three and nine months ended September 30, 2017 was driven by our deployment of capital and increasing invested balance.

Expenses

 

     For the Three
Months Ended
September 30, 2017
     For the Three
Months Ended
September 30, 2016
    For the Nine
Months Ended
September 30, 2017
     For the Period from
June 9, 2016
(inception) to
September 30, 2016
 
     ($ in millions)  
Interest and other debt expenses    $ 2.98      $ 0.44     $ 5.98      $ 0.44  
Management fees      1.35        0.61       3.13        0.61  
Incentive fees      1.54              3.74         
Offering costs             0.39       0.95        0.39  
Professional fees      0.38        0.22       0.82        0.22  
Administration, custodian and transfer agent fees      0.15        0.08       0.37        0.08  
Directors’ fees      0.03        0.08       0.09        0.08  
Organization costs             0.02              0.36  
Other expenses      0.08        0.03       0.25        0.03  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

   $ 6.51      $ 1.87     $ 15.33      $ 2.21  
Management fees waiver           $ (0.39          $ (0.39
  

 

 

    

 

 

   

 

 

    

 

 

 

Net expenses

   $ 6.51      $ 1.48     $ 15.33      $ 1.82  
  

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2017, we accrued incentive fees of $1.54 million, management fees of $1.35 million and interest and other debt expenses due to our Revolving Credit Facility of $2.98 million. In addition, our expenses consisted of $0.38 million in professional fees and $0.26 million of other general administrative expenses.

For the nine months ended September 30, 2017, we accrued incentive fees of $3.74 million, management fees of $3.13 million, expenses related to the continuous offering of our common Units of $0.95 million, and interest and other debt expenses due to our Revolving Credit Facility of $5.98 million. In addition, our expenses consisted of $0.82 million in professional fees and $0.71 million of other general administrative expenses.

For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) through September 30, 2016, we accrued gross management fees before waivers of $0.61 million and $0.61 million, respectively. Offsetting those fees, we received management fee waivers of $0.39 million and $0.39 million, respectively, which resulted in net management fees of $0.22 million.

For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) through September 30, 2016, we incurred organization costs of $0.02 million and $0.36 million, respectively. For the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) through September 30, 2016, we accrued for offering costs of $0.39 million and $0.39 million, respectively.

Interest and credit facility expenses for the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) through September 30, 2016 were $0.44 million and $0.44 million, respectively, due to our entry into the Revolving Credit Facility.

In addition, our expenses for the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) through September 30, 2016 consisted of $0.22 million and $0.22 million in professional fees, and $0.19 million and $0.19 million of other general and administrative expenses, respectively.

Net Unrealized Appreciation (Depreciation) on Investments

Any changes in fair value are recorded in change in unrealized appreciation (depreciation) on investments. For further details on the valuation process, refer to “Critical Accounting Policies—Valuation of Portfolio Investments.” Net unrealized appreciation (depreciation) on investments for the three and nine months ended September 30, 2017 and the three months ended September 30, 2016 and for the period from June 9 (inception) to September 30, 2016 were as follows:

 

     For the Three
Months Ended
September 30, 2017
    For the Three
Months Ended
September 30, 2016
    For the Nine
Months Ended
September 30, 2017
    For the Period from
June 9, 2016
(inception) to
September 30,
2016
 
     ($ in millions)  
Unrealized appreciation    $ 0.78     $ 0.04   $ 1.49     $ 0.04
Unrealized depreciation      (0.52     (0.03 )     (0.80     (0.03 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

   $ 0.26     $ 0.01   $ 0.69     $ 0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The change in unrealized appreciation (depreciation) on investments for the three and nine months ended September 30, 2017, the three months ended September 30, 2016 and for the period from June 9, 2016 (inception) to September 30, 2016 consisted of the following:

 

    For the Three
Months Ended
September 30, 2017
    For the Three
Months Ended
September 30, 2016
    For the Nine
Months Ended
September 30, 2017
    For the Period from
June 9, 2016
(inception) to
September 30, 2016
 
    ($ in millions)  
Portfolio Company:        
American Dental Partners, Inc.   $ 0.03     $     $ 0.01     $  
Association Member Benefits Advisors, LLC     (0.01           (0.05      
Clinical Supplies Management Holdings, Inc.     (0.02           0.03        
Continuum Managed Services, LLC     (0.03           (0.04      
Datacor Holdings, Inc.     (0.04     (0.01     0.04       (0.01
DuBois Chemicals, Inc.     (0.01           0.23        
Global Healthcare Exchange, LLC           0.04       (0.37     0.04  
Granicus, Inc.     (0.01           0.03        
Greenskies Renewable Energy, LLC           (0.01     0.02       (0.01
Market Track, LLC     (0.02           (0.03      
MyON, LLC     0.02             0.01        
National Spine and Pain Centers, LLC     (0.02           (0.02      
Netvoyage Corporation     0.02             0.01        
PPC Industries, Inc.     (0.04           0.10        
Procare Software, LLC     0.15             0.16        
Recipe Acquisition Corp.     0.08       (0.01     0.10       (0.01
Regulatory DataCorp, Inc.     0.03             0.02        
SF Home Décor, LLC     (0.03           (0.03      
Smarsh, Inc.     (0.02           (0.03      
SMB Shipping Logistics, LLC                 (0.02      
Vantage Mobility International, LLC     (0.02                  
Xactly Corporation     (0.02           (0.02      
Yasso, Inc.     (0.14           (0.15      
You Fit, LLC     (0.04           0.30        
Zep, Inc.     0.44             0.44        
Other, net     (0.04           (0.05      
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 0.26     $ 0.01   $ 0.69     $ 0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

We expect to generate cash primarily from the net proceeds of any future offerings of securities, drawdowns of capital commitments, future borrowings and cash flows from operations. To the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our Board of Directors otherwise determines that leveraging our portfolio would be in our best interest and the best interests of our unitholders, we may enter into credit facilities in addition to our existing credit facilities, or issue other senior securities. We would expect any such credit facilities may be secured by certain of our assets and may contain advance rates based upon pledged collateral. The pricing and other terms of any such facilities would depend upon market conditions when we enter into any such facilities as well as the performance of our business, among other factors. As a BDC, with certain limited exceptions, we are only permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, is at least 2 to 1 after such borrowing. As of September 30, 2017 and December 31, 2016, our asset coverage ratio was 2.39 to 1 and 2.61 to 1, respectively. We may also refinance or repay any of our indebtedness at any time based on our financial condition and market conditions.

 

36


As of September 30, 2017, we had cash of approximately $37.55 million, an increase of $33.69 million from December 31, 2016. In addition, as of September 30, 2017, we had an investment in a money market fund managed by an affiliate of Group Inc. of less than $0.01 million. Cash used by operating activities for the nine months ended September 30, 2017 was approximately $305.22 million, primarily driven by net purchases of investments of $462.79 million and other operating activities of $0.24 million, offset by net sales of investments in the affiliated money market fund of $138.31 million, and increase in Members’ Capital resulting from operations of $19.02 million. Cash provided by financing activities for the nine months ended September 30, 2017 was approximately $338.91 million, primarily driven by proceeds from the issuance of common Units of $195.65 million and net borrowings on debt of $159.00 million, partially offset by distributions paid of $15.09 million and other financing activities of $0.65 million.

As of September 30, 2016, we had cash of approximately $2.88 million. In addition, as of September 30, 2016, we had an investment in a money market fund managed by an affiliate of Group Inc. of $153.00 million. Cash used by operating activities for the three months ended September 30, 2016 was approximately $298.09 million, primarily driven by purchases of investments of $146.12 million, net purchase of investments in the affiliated money market fund of $153.00 million, and decrease in net assets resulting from operations of $0.58 million, partially offset by proceeds from other operating activities of $1.61 million. Cash provided by financing activities for the period from June 9, 2016 (inception) to September 30, 2016 was approximately $300.97 million, primarily driven by proceeds from the issuance of common units of $164.88 and borrowings on debt of $137.50 million, partially offset by other financing activities of $1.41 million.

To the extent permissible under the risk retention rules and applicable provisions of the 1940 Act, we may raise capital by securitizing certain of our investments, including through the formation of one or more collateralized loan obligations or asset based facilities, while retaining all or most of the exposure to the performance of these investments. This would involve contributing a pool of assets to a special purpose entity, and selling debt interests in such entity on a non-recourse or limited-recourse basis to purchasers. We may also pursue other forms of debt financing, including potentially from the Small Business Administration through a future small business investment company subsidiary (subject to regulatory approvals).

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

As of September 30, 2017, we had aggregate capital commitments and undrawn capital commitments from investors as follows:

 

     September 30, 2017      December 31, 2016  
     Capital
Commitments
($ in millions)
     Unfunded
Capital
Commitments
($ in millions)
     % of Capital
Commitments
Funded
     Capital
Commitments
($ in millions)
     Unfunded
Capital
Commitments
($ in millions)
     % of Capital
Commitments
Funded
 
Common Units    $ 1,097.43      $ 691.38        37%    $ 1,001.88      $ 791.49        21%

The following table summarizes the total Units issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the nine months ended September 30, 2017:

 

Unit Issue Date

   Units Issued   Proceeds Received
($ in millions)
 
April 27, 2017    203,758   $ 20.01  
April 28, 2017    535     0.05  
May 26, 2017    444,153     43.90  
June 29, 2017    441,837     43.90  
August 21, 2017    557,806     54.87  
September 28, 2017    332,027     32.92  
  

 

 

 

 

 

Total capital drawdowns

   1,980,116   $ 195.65  
  

 

 

 

 

 

The following table summarizes the total Units issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements from June 9, 2016 (inception) to September 30, 2016.

 

Unit Issue Date    Units Issued  

Proceeds Received

($ in millions)

 
July 14, 2016    310,360   $ 31.04  
July 15, 2016    4,000     0.40  
August 23, 2016    160,219     15.72  
September 15, 2016    1,206,924     117.88  
Total capital drawdowns    1,681,503   $ 165.04  

 

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Contractual Obligations

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

The following table shows our contractual obligations as of September 30, 2017:

 

     Payments Due by Period ($ in millions)  
     Total      Less Than
1 Year
     1 – 3 Years      3 – 5 Years      More Than
5 Years
 
Revolving Credit Facility    $ 289.00      $ 289.00      $         –      $         –      $         –  

Revolving Credit Facility

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

On March 3, 2017, we amended the Revolving Credit Facility to, among other things:

 

   

temporarily increase the maximum committed principal amount of the Revolving Credit Facility by $100.00 million to $350.00 million, with such temporary increase expiring on December 29, 2017 or earlier pursuant to the terms of the Revolving Credit Facility; and

 

   

increase the interest rate on obligations under the Revolving Credit Facility to either (1) the prevailing LIBOR for one, two, three or six months plus 3.00% per annum (increased from 2.25% per annum) or (2) an alternate base rate (the greater of the prime rate of such commercial bank, the federal funds rate plus 0.50%, and LIBOR plus 1.00%) plus 2.00% per annum (increased from 1.25% per annum).

The maximum principal amount of the Revolving Credit Facility is $350.00 million as of September 30, 2017, of which $289.00 million was drawn as of September 30, 2017, subject to availability under the “Borrowing Base.” The Borrowing Base is calculated based on the unfunded capital commitments of the investors meeting various eligibility requirements (subject to investor concentration limits) multiplied by specified advance rates. We have the ability to increase the maximum principal amount of the Revolving Credit Facility up to $750.00 million, subject to increasing commitments of existing lenders and/or obtaining commitments of new lenders and certain other conditions. The Revolving Credit Facility will mature on July 17, 2018, subject to extension with the consent of the Administrative Agent and the extending lenders, and certain other conditions.

We have the ability to elect either LIBOR or the alternative base rate at the time of draw-down, and loans may be converted from one rate to another at any time, subject to certain conditions. We pay a 0.25% annualized fee on a quarterly basis on committed but undrawn amounts under the Revolving Credit Facility.

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

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

 

38


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

HEDGING

Subject to applicable provisions of the Investment Company Act and applicable Commodity Futures Trading Commission (“CFTC”) regulations, we may enter into hedging transactions in a manner consistent with SEC guidance. To the extent that any of our loans is denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of futures, options, swaps and forward contracts. Costs incurred in entering into such contracts or in settling them, if any, will be borne by us. Our Investment Adviser has claimed no-action relief from CFTC registration and regulation as a commodity pool operator pursuant to a CFTC staff no-action letter (the “BDC CFTC No-Action Letter”) with respect to our operations, with the result that we will be limited in our ability to use futures contracts or options on futures contracts or engage in swap transactions. Specifically, the BDC CFTC No-Action Letter imposes strict limitations on using such derivatives other than for hedging purposes, whereby the use of derivatives not used solely for hedging purposes is generally limited to situations where (i) the aggregate initial margin and premiums required to establish such positions does not exceed five percent of the liquidation value of our portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; or (ii) the aggregate net notional value of such derivatives does not exceed 100% of the liquidation value of our portfolio. Moreover, we anticipate entering into transactions involving such derivatives to a very limited extent solely for hedging purposes or otherwise within the limitations of the BDC CFTC No-Action Letter. As of September 30, 2017, no hedging arrangements were used.

OFF-BALANCE SHEET ARRANGEMENTS

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to fund investments and to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of September 30, 2017, we believed that we had adequate financial resources to satisfy our unfunded commitments. As of September 30, 2017 and December 31, 2016 our unfunded commitments to provide funds to portfolio companies were as follows:

 

     As of  
     September 30,
2017
    December 31,
2016
 
     (in millions)  
Unfunded Commitments     
First Lien/Senior Secured Debt    $ 17.23     $ 10.64  
  

 

 

   

 

 

 

Total

   $ 17.23     $ 10.64  
  

 

 

   

 

 

 

As of September 30, 2017, we had aggregate Commitments and undrawn Commitments from investors as follows:

 

    September 30, 2017  
     Capital
Commitments
($ in millions)
    Unfunded
Capital
Commitments
($ in millions)
    % of Capital
Commitments
Funded
 
Common Units   $ 1,097.43     $ 691.38       37%

RECENT DEVELOPMENTS

On October 23, 2017, we delivered a capital drawdown notice to our investors relating to the sale of approximately 900,334 shares of common Units for an aggregate offering price of approximately $87,794. The common Units were issued on October 30, 2017.

On October 31, 2017, our Board of Directors declared a distribution equal to an amount up to our taxable earnings per unit, including net investment income (if positive) for the period October 1, 2017 through December 31, 2017, payable on or about January 23, 2018 to unitholders of record as of December 29, 2017.

CRITICAL ACCOUNTING POLICIES

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

 

39


Valuation of Portfolio Investments

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

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

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

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

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

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

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

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

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

 

40


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

 

  (1)

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

 

  (2)

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

 

  (3)

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

 

  (4)

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

 

  (5)

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

 

  (6)

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

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

Investment Transactions and Related Investment Income

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

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

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

 

 

41


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

Non-Accrual Status

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

Distribution Policy

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

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

Federal Income Taxes

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

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

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As of September 30, 2017 and December 31, 2016, on a fair value basis, approximately 2.6% and 8.7%, respectively, of our performing debt investments bore interest at a fixed rate and approximately 97.4% and 91.3%, respectively, of our performing debt investments bore interest at a floating rate. Our borrowings under the Revolving Credit Facility bear interest at a floating rate.

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

Based on our September 30, 2017 balance sheet, the following table shows the annual impact on net income of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:

 

Total Cashflow Sensitivities

   Interest
Income
     Interest
Expense
     Total  
Up 300 basis points      17.26        (8.09      9.17  
Up 200 basis points      11.51        (5.39      6.12  
Up 100 basis points      5.76        (2.70      3.06  
Up 75 basis points      4.31        (2.02      2.29  
Up 50 basis points      2.88        (1.35      1.53  
Up 25 basis points      1.44        (0.68      0.76  
Down 25 basis points      (1.38      0.67        (0.71
Down 50 basis points      (1.60      1.35        (0.25
Down 75 basis points      (1.59      2.02        0.43  
Down 100 basis points      (1.60      2.70        1.10  
Down 200 basis points      (1.59      3.32        1.73  
Down 300 basis points      (1.59      3.32        1.73  

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

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Exchange Act. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

An investment in our securities involves a high degree of risk. There have been no material changes to the risk factors previously reported under Item 1A: “Risk Factors” of our Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 28, 2017. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial may materially affect its business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table summarizes the total Units issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the three months ended September 30, 2017:

 

Unit Issue Date   Units Issued    

Proceeds Received

($ in millions)

 
August 21, 2017     557,806       54.87  
September 28, 2017     332,027       32.92  

Total capital drawdowns

    889,833     $ 87.79  

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

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Index to Exhibits, which is incorporated herein by reference.

 

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INDEX TO EXHIBITS

 

EXHIBIT

NO.

  

EXHIBIT

3.1   

Certificate of Formation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10 (File No. 000-55660), filed on July 13, 2016).

3.2   

Second Amended and Restated Limited Liability Company Agreement dated November 1, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-55660), filed on November 3, 2016).

31.1   

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2   

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32   

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements 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.

 

      GOLDMAN SACHS PRIVATE MIDDLE MARKET CREDIT LLC
Date: November 2, 2017       /s/ Brendan McGovern
     

Brendan McGovern

Chief Executive Officer and President

(Principal Executive Officer)

Date: November 2, 2017       /s/ Jonathan Lamm
     

Jonathan Lamm

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

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