Great Elm Capital (GECC) risk factors, FY2025 10-K

Risks Relating to Our Investments

1. 01Our portfolio companies may experience financial distress and our investments in such companies may be restructured
2. 02We face increasing competition for investment opportunities. Limited availability of attractive investment opportunities in the market could cause us to hold a larger percentage of our assets in liquid securities until market conditions improve
3. 03We are invested in a limited number of portfolio companies which may subject us to a risk of significant loss if one or more of these companies defaults on its obligations under any of its debt instruments
4. 04Our portfolio is subject to change over time and may be concentrated in a limited number of industries, which subjects us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated32% rewritten
5. 05We are exposed to risks relating to our specialty finance investments
6. 06Any unrealized losses we experience in our portfolio may be an indication of future realized losses, which could reduce our income available for distribution
7. 07Our investments may be risky, and we could lose all or part of our investments
8. 08Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our returns on equity
9. 09We are not in a position to exercise control over certain of our portfolio companies or to prevent decisions by management of such portfolio companies that could decrease the value of our investments
10. 10We have made, and in the future intend to pursue additional, investments in specialty finance businesses, which may require reliance on the management teams of such businesses
11. 11Defaults by our portfolio companies may harm our operating results
12. 12If we invest in companies that experience significant financial or business difficulties, we may be exposed to certain distressed lending risks
13. 13Investing in middle-market companies involves a high degree of risk and our financial results may be affected adversely if one or more of our portfolio investments defaults on its loans or notes or fails to perform as we expect
14. 14An investment strategy that includes privately held companies presents challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns
15. 15Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
16. 16There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims
17. 17Junior priority liens on collateral securing loans and notes that we invest in may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the senior priority creditors and us
18. 18The reference rates for our loans may change
19. 19We may mismatch the interest rate and maturity exposure of our assets and liabilities
20. 20We may not realize gains from our equity investments
21. 21Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments
22. 22We may hold a significant portion of our portfolio assets in cash, cash equivalents, money market mutual funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less, which may have a negative impact on our business and operations
23. 23We may be subject to risks associated with investments in collateralized loan obligations
24. 24We and/or our portfolio companies may be materially and adversely impacted by global climate change23% rewritten
25. 25The lack of liquidity in our investments may adversely affect our business

Risks Relating to Our Business and Structure

1. 26Capital markets experience periods of disruption and instability. These market conditions have historically materially and adversely affected debt and equity capital markets in the United States and abroad, which had, and may in the future have, a negative impact on our business and operations
2. 27We may experience fluctuations in our quarterly results
3. 28Our success depends on the ability of our investment adviser to attract and retain qualified personnel in a competitive environment
4. 29Our ability to grow depends on our ability to raise equity capital and/or access debt financing
5. 30Economic recessions or downturns could impair our portfolio companies and harm our operating results20% rewritten
6. 31Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability46% rewritten
7. 32We may acquire other funds, portfolios of assets or pools of debt and those acquisitions may not be successful
8. 33Our failure to maintain our status as a BDC would reduce our operating flexibility
9. 34Regulations governing our operations as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage
10. 35Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse
11. 36We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income
12. 37We may expose ourselves to risks associated with the inclusion of non-cash income prior to receipt of cash
13. 38We may choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive
14. 39We may expose our self to risks if we engage in hedging transactions
15. 40We will be subject to corporate level U.S. federal income tax if we are unable to meet certain RIC qualification and distribution requirements under the Code
16. 41We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business
17. 42The incentive fee structure and the formula for calculating the management fee may incentivize GECM to pursue speculative investments, advise us to use leverage when it may be unwise to do so, or advise us to refrain from reducing debt levels when it would otherwise be appropriate to do so
18. 43We may be obligated to pay our investment adviser certain fees even if we incur a loss
19. 44A general increase in interest rates will likely have the effect of making it easier for GECM to receive incentive fees, without necessarily resulting in an increase in our net earnings
20. 45GECM has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
21. 46We incur significant costs as a result of being a publicly traded company
22. 47Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy69% rewritten
23. 48There is, and will be, uncertainty as to the value of our portfolio investments
24. 49Our financial condition and results of operations depend on our ability to effectively manage and deploy capital
25. 50The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning affecting us or our third-party service providers, could impair our ability to conduct business effectively
26. 51We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations45% rewritten
27. 52Technological developments in artificial intelligence could disrupt the markets in which we operate and subject us to increased competition, legal and regulatory risks and compliance costsNew
28. 53Terrorist attacks, acts of war, natural disasters or an epidemic or pandemic may affect the market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition34% rewritten
29. 54There are significant potential conflicts of interest that could impact our investment returns
30. 55Our investment adviser’s liability is limited under the Investment Management Agreement, and we are required to indemnify our investment adviser against certain liabilities, which may lead our investment adviser to act in a riskier manner on our behalf than it would when acting for its own account

Risks Relating to Our Common Stock

1. 56Our common stock price may be volatile and may decrease substantially, and an investor may lose money in connection with an investment in our shares
2. 57Provisions of the Maryland General Corporation Law and our organizational documents could deter takeover attempts and have an adverse impact on the prices of our common stock
3. 58Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees
4. 59Our Board is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners
5. 60Shares of closed-end investment companies, including BDCs, frequently trade at a discount from their NAV
6. 61Our stockholders may not receive distributions or our distributions may not grow over time and a portion of our distributions may be a return of capital
7. 62Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan
8. 63Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock
9. 64Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock

Risks Relating to Indebtedness

1. 65We may borrow additional money, which would magnify the potential for loss on amounts invested and may increase the risk of investing with us28% rewritten
2. 66Incurring additional indebtedness could increase the risk in investing in our Company21% rewritten
3. 67Incurring additional leverage may magnify our exposure to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability
4. 68The Loan Agreement contains various covenants that may limit our ability to react to changes in the economy or, if not complied with, could accelerate repayment under the Loan Agreement should we borrow under such agreement, thereby materially and adversely affecting our liquidity, financial condition and results of operations
5. 69We may not be able to generate sufficient cash to service all of our indebtedness and to fund our working capital and capital expenditures, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful