PhenixFIN (PFX) risk factors, FY2024 10-K

RISK RELATING TO OUR BUSINESS AND STRUCTURE

1. 01Certain Risks in the Current Environment
2. 02We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and adversely affect the yields, and increase the risks of, our investments in portfolio companies, and make it more difficult for us to raise equity capital should we choose to do so
3. 03Events outside of our control, including terrorist attacks, acts of war, natural disasters or public health crises, could negatively affect the portfolio companies in which we invest and make the valuation of those investments more uncertain
4. 04Rising interest rates may increase our borrowing costs and reduce the net return that we are able to achieve on debt investments in portfolio companies, and may also increase the risk of default on our portfolio company loans
5. 05Further downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our cost of borrowing and the net return on our investments
6. 06Economic recessions or downturns could impair our portfolio companies, increase our funding costs and limit our access to capital

Risks Related to Our Business

1. 07As a result of our internalized operating structure, including our internalized management and investment functions, we may incur significant costs and face significant risks associated with being self-managed, including adverse effects on our business and financial condition
2. 08As an internally managed BDC, we are dependent upon our management team and other professionals, and if we are not able to hire and retain qualified personnel, we will not realize the benefits of an internally managed BDC
3. 09We may suffer credit and capital losses
4. 10Because we use borrowed funds to make investments or fund our business operations, we are exposed to risks typically associated with leverage which increase the risk of investing in us
5. 11The lack of liquidity in our investments may adversely affect our business
6. 12A substantial portion of our portfolio investments will be recorded at fair value as determined in good faith by our valuation designee under the oversight of our board of directors and, as a result, there may be uncertainty regarding the value of our portfolio investments
7. 13We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer
8. 14We are exposed to risks associated with changes in interest rates
9. 15Loans under our Credit Facility and the financial credit we extend to our portfolio companies bear interest based on SOFR, but experience with SOFR based loans is limited
10. 16Because we use debt to finance various investments, changes in interest rates will affect our cost of capital and net investment income
11. 17If our investments are not managed effectively, we may be unable to achieve our investment objective
12. 18We may experience fluctuations in our periodic operating results
13. 19Any failure on our part to maintain our status as a BDC could reduce our operating flexibility
14. 20We may have difficulty paying required distributions if we recognize income before or without receiving cash representing such income
15. 21We may not be able to pay distributions to our shareholders
16. 22The highly competitive market in which we operate may limit our investment opportunities
17. 23In the event we make distributions, we would need additional capital to finance our growth and such capital may not be available on favorable terms or at all
18. 24Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval
19. 25Because we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us
20. 26We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay distributions
21. 27A failure of cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively

Risks Related to Our Investments

1. 28We may not realize gains from our equity investments
2. 29We have invested materially in senior secured first lien term loans and senior secured second lien term loans issued by private companies
3. 30Our investments in private portfolio companies may be risky, and you could lose all or part of your investment
4. 31Our portfolio companies may prepay loans, which prepayment may reduce stated yields if capital returned cannot be invested in transactions with equal or greater expected yields
5. 32Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio and our ability to make follow-on investments in certain portfolio companies may be restricted
6. 33Client borrowers, particularly with respect to asset-based lending activities, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional risk
7. 3412.1% of the Company’s total assets (as of September 30, 2024) are invested in our affiliate’s asset-based lending business and its activities are influenced by volatility in prices of gemstones and jewelry
8. 35The gemstones and jewelry business is subject to the risk of fraud and counterfeiting
9. 36We may be subject to risks associated with our investments in unitranche loans
10. 37Covenant-Lite Loans may expose us to different risks, including with respect to liquidity, price volatility, ability to restructure loans, credit risks and less protective loan documentation, than is the case with loans that contain financial maintenance covenants
11. 38As a BDC, our ability to invest in public companies and foreign companies is limited by the 1940 Act
12. 39Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments
13. 40Hedging transactions may expose us to additional risks
14. 41The disposition of our investments may result in contingent liabilities
15. 42If we invest in the securities and obligations of distressed and bankrupt issuers, we might not receive interest or other payments
16. 43We are subject to risks associated with significant investments in one or more economic sectors and/or industries, including the business services sector, which includes our investment in our affiliate’s asset-based lending business

Risks Related to Our Operations as a BDC and a RIC

1. 44Regulations governing our operation as a BDC may limit our ability to, and the way in which we raise additional capital, which could have a material adverse impact on our liquidity, financial condition and results of operations
2. 45Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our business, results of operations or financial condition
3. 46As an internally managed BDC, we are subject to certain restrictions that may adversely affect our ability to offer certain compensation structures
4. 47We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business
5. 48Legislation that became effective in 2018 may allow the Company to incur additional leverage, which could increase the risk of investing in the Company
6. 49If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC, which would have a material adverse effect on our business, financial condition and results of operations
7. 50We would become subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or satisfy RIC distribution requirements

Risks Relating to an Investment in Our Securities

1. 51Investing in our securities may involve an above average degree of risk
2. 52Shares of closed-end investment companies, including business development companies, may, at times, trade at a discount to their NAV and the Company’s shares have not traded at or above NAV since the first quarter of 2015
3. 53The market price and liquidity of the market for shares of our common stock fluctuates and may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance
4. 54Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock
5. 55The NAV per share of our common stock may be diluted if 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 or securities to subscribe for or convertible into shares of our common stock
6. 56Any decision to sell shares of our common stock below its then current NAV per share or issue securities to subscribe for or convertible into shares of our common stock would be subject to the determination by our board of directors that such issuance is in our and our stockholders’ best interests
7. 57The terms of the Credit Facility place restrictions on our and/or our subsidiaries activities
8. 58If we issue preferred stock, the NAV and market value of our common stock may become more volatile
9. 59Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters
10. 60Our business and operations could be negatively affected if we become subject to any securities class actions and derivative lawsuits, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price

Risks Related to Life Insurance

1. 61Actual claims and benefits payments may differ from actuarial assumptions and may adversely affect NSG’s financial results, capitalization and financial condition
2. 62NSG makes assumptions regarding policyholder behavior, including with respect to guaranteed options, but those assumptions may be incorrect
3. 63If NSG’s actual claims experience differs from the assumptions used to establish reserves for its liabilities, NSG may be required to increase its reserves
4. 64Pricing accuracy depends on accurate morbidity and mortality estimates, but the data on which such estimates are based may be insufficient, incorrect or incomplete
5. 65Public health crises, extreme mortality events or similar occurrences may adversely impact NSG’s business, financial condition, or results of operations
6. 66Liquidity may be adversely affected by policyholder withdrawals and surrenders or if holders of whole life policies elect to receive lump sum distributions at greater-than-anticipated levels

Risks Related to Property & Casualty Insurance

1. 67If NSG is unable to accurately assess its underwriting risk, its financial condition and results of operations could be adversely affected
2. 68The usefulness of models as a tool to evaluate risk is subject to a high degree of uncertainty which could result in actual losses that are materially different from NSG’s estimates and could have a significant adverse impact on NSG’s financial results
3. 69NSG’s losses and loss expense reserves may be inadequate to cover its actual losses, which could have a material adverse effect on its financial conditions, results of operations and cash flows
4. 70Unexpected changes in the interpretation of NSG’s coverage or provisions, including loss limitations and exclusions, in its policies could have a material adverse effect on NSG’s financial condition and results of operations
5. 71NSG’s failure to accurately and timely pay claims could materially and adversely affect its business
6. 72The property and casualty insurance business is historically cyclical in nature, which may affect NSG’s financial performance, cause its operating results to vary from quarter to quarter and may not be indicative of future performance

Risks Related to the Insurance Business Generally

1. 73Competition for business in the insurance industry is intense
2. 74Because NSG’s business depends on insurance retail agents and brokers, NSG is exposed to certain risks arising out of its reliance on these distribution channels
3. 75Insurance companies are subject to extensive regulation, which varies from jurisdiction to jurisdiction and may change from time to time
4. 76NSG may be unable to purchase reinsurance in amounts desired on acceptable terms, and reinsurers may default or fail to perform
5. 77A downgrade or potential downgrade in NSG’s financial strength rating could adversely affect its business
6. 78Performance of NSG’s investment portfolio is subject to a variety of investment risks that could adversely affect its financial results
7. 79NSG’s actual claims losses may exceed reserves for claims and it may be required to establish additional reserves, which in turn may adversely impact its results of operations and financial condition
8. 80NSG is subject to minimum capital and surplus requirements, and failure to meeting these requirements could subject it to regulatory action or other restrictions
9. 81A decline in NSG’s risk-based capital (“RBC”) ratio could result in in increased scrutiny by insurance regulators and rating agencies and could have a material adverse effect on its financial condition and results of operations
10. 82Employees of NSG or its third-party service providers may take excessive risks which could negatively affect NSG’s financial condition and business
11. 83Difficult conditions in the capital markets and the U.S. economy generally could materially adversely affect NSG’s business and results of operations
12. 84Climate change could have a material adverse effect on NSG’s business