The Investment Lawyer Covering Legal and Regulatory Issues of Asset Management

VOL. 21, NO. 7 • JULY 2014

Trends in BDC Formation Transactions By Jonathan H. Talcott and Janis F. Kerns

n the current economic environment of low inter- In the recovery from the fi nancial crisis, BDCs est rates, investors have been actively seeking have been successful in attracting increased attention Ialternative methods of achieving higher levels of from retail and institutional investors alike. Th e increas- current income. One method that has proven suc- ing appetite for these yield products has allowed under- cessful is investment in the publicly traded pass- writers to successfully conduct an increasing number through entities known as business development of initial public off erings (IPOs) for BDCs. In just the companies (BDCs). past two years, 26 new funds have fi led BDC elections BDCs are a publicly traded form of small with the Securities and Exchange Commission (SEC). business investing created by the Small Business Of those 26, 20 have commenced operations – 13 are Investment Incentive Act of 1980.1 BDCs make currently actively trading on NASDAQ or the NYSE, loans to lower middle-market issuers and receive four are trading over-the-counter, and at least three are pass-through tax treatment provided they distribute operating but are not publicly traded. at least 90 percent of their income to shareholders. BDCs have also been receiving increased atten- By investing in promising younger and growing pri- tion from fund managers. Managing a permanent vate companies that may have risk profi les outside capital vehicle such as a BDC can be very attractive. the limits of traditional banking, BDCs earn income However, accessing the public markets to raise capi- at a level that allows them to produce average yields tal can require careful structuring. of eight to nine percent for investors. Since BDCs have entered the marketplace, gen- Congress created BDCs to fi ll the fi nancing gap erally four diff erent approaches have been success- created by underserved sectors of the capital mar- fully employed in launching them: kets.2 BDCs are not traditional investment companies, but elect to be regulated under a separate Raising money in a blind pool off ering; portion3 of the Investment Company Act of 1940 Taking an existing private fund public; (1940 Act). As a result, BDCs must maintain at least Having an affi liated fund contribute assets in 70 percent of their invested assets in the securities of exchange for an equity stake in the BDC; and lower middle-market issuers or they lose the ability Having the newly formed BDC borrow money to make new (and follow-on) investments. BDCs are from a bank or an affi liate to purchase assets subject to a 1:1 asset coverage test limiting leverage immediately prior to going public. and other substantive restrictions on their operation in exchange for access to “permanent” capital in the Th ese trends in BDC formation transac- marketplace. tions have emerged as dominant themes as asset

Copyright © 2014 by CCH Incorporated. All Rights Reserved. 2 THE INVESTMENT LAWYER managers seek to add one or more BDCs to their equity-sponsored enterprises. Management of Th e platforms. Th is article reviews each type of transac- Carlyle Group launched both BDCs as their “exclu- tion in turn, and focuses particularly on the stra- sive” platform for deploying capital in U.S. middle- tegic and regulatory hurdles faced when a BDC is market debt investments. In its formation transaction, acquiring identifi ed pools of assets in the formation GMS Finance formed a wholly-owned “borrower” transaction. subsidiary, Carlyle GMS Finance SPV LLC, through which the BDC established its initial portfolio of Blind Pool Offerings investments. Shortly after the formation transactions, Before the fi nancial crisis, blind pools launched the borrower subsidiary closed a revolving credit facil- by proven management teams were among the ity that made available up to $500 million once the options readily available to specialty fi nanciers. borrower subsidiary held a minimum of $30 million During the late ‘80s and ‘90s through the run-up to in equity assets. NFIC similarly established a wholly- the fi nancial crisis, blind pools and special purpose owned “borrower” subsidiary with a line of credit. acquisition companies known as SPACs were popu- GMS Finance commenced operations on May 2, lar and relatively easy to bring to market. In a typical 2013, and NFIC commenced operations on August 21, initial public off ering, a management team with a 2013, by closing private placements of commit- reputation and proven track record could raise a pool ted and contributed capital from the investment of capital on a pledge to fi nd a suitable investment adviser, members of senior management, and certain target or develop an appropriate investment portfo- employees, partners, and affi liates of the investment lio within a fi xed period of time, usually not exceed- adviser. Companies targeted for investment by GMS ing 24-36 months, but sometimes over as long as Finance and NFIC are in many cases controlled by fi ve years. If the management team was unsuccessful, private equity investment fi rms. For the fi scal year investor monies would be returned and the company ended December 31, 2013, GMS Finance disclosed would wind down. in its most recently fi led Form 10-K that it held a Th e tightening of the credit markets in the wake portfolio of investments valued at $212.8 million in of the fi nancial crisis appears to have foreclosed the exclusively controlled and/or affi liated investments. blind pool option for BDC initial public off erings. GMS Finance has indicated that if it does not Underwriters in the current market environment are complete an initial public off ering that results in at favoring the use of fully formed asset pools that can least 15 percent unaffi liated public fl oat (based on be thoroughly evaluated and then marketed appro- its aggregate capital commitments at the time of priately in an IPO. the off ering) of the BDC by May 2, 2018 (approxi- Recently, the closest off erings to such true blind mately fi ve years after the fund’s inception), it will pools have been BDCs that are not publicly traded wind down and/or liquidate and dissolve. NFIC and have been launched exclusively with insider has not made a similar commitment, but disclosed contributions of capital. Carlyle GMS Finance Inc. that its investors will be released from any further (GMS Finance) and NF Investment Corp. (NFIC) obligation to purchase additional shares of com- are examples of such off erings, and were launched mon stock, subject to certain exceptions, upon the and are operated by management within Th e Carlyle earlier of August 6, 2018 (approximately fi ve years Group. Th e KKR-sponsored continuous off ering after the fund’s inception), or the completion of an BDC, Corporate Capital Trust, is another example IPO by GMS Finance. NFIC disclosed in its most of such off erings. recently fi led Form 10-K that as of December 31, GMS Finance and NFIC are both BDCs 2013, approximately 93.7 percent of its net assets that commenced operations in 2013 as private were owned by two stockholders.

Th e KKR-sponsored continuous off ering BDC, SBICs operate pursuant to a license granted Corporate Capital Trust, is another example of such by the SBA that allows the SBIC to borrow up to off erings. Launched in 2010, the company com- $150 million from the U.S. government in the form menced business operations on June 17, 2011 and of SBA debentures (up to $225 million for a family investment operations on July 1, 2011. It is notable of SBICs) for investment in the debt of small busi- that Corporate Capital Trust continuously off ers its ness issuers. SBA regulations permit licensed SBICs shares opportunistically into the marketplace, and to make long-term loans to small businesses, to currently manages over $2 billion in total assets. invest in the equity of such businesses and to pro- vide managerial assistance in the form of consulting Existing SBIC or Other Fund and advisory services. Th e mandate and investment Acquisition activities of SBICs strongly align with the mandate Acquiring an existing private fund can be a and investment activities of BDCs. Th e 1940 Act very eff ective way to launch a BDC. Small busi- permits BDCs to wholly own and operate SBICs, ness investment companies (SBICs) are particularly and to exclude the SBIC’s leverage from their own well-suited to establishing a base portfolio in a BDC leverage calculations upon obtaining exemptive formation transaction, due to their similarly aligned relief from the SEC.4 investment objectives and targeted segment of the Th e SBIC model is attractive in the specialty capital markets. However, any private fund with fi nance space in part because SBIC debentures are a portfolio of debt securities that would meet the off ered at interest rates advantageously lower than are BDC’s required criteria of “eligible portfolio com- otherwise generally available in the credit markets. pany” investments would also be very attractive for a BDCs can access this lower-cost capital by operating formation transaction. one or more SBICs up to the available capital limits Taking an existing partnership public can pres- set by the SBA. Currently those limits are $150 mil- ent a variety of logistical and regulatory issues. lion of SBA debentures for a single SBIC, and up to Among them: $225 million for related SBICs. SBICs are permitted leverage of up to 300 per- Th e partners must vote to agree to the conver- cent of net assets, whereas BDCs are limited to lever- sion from partnership form to corporate form; age of up to 200 percent of net assets. For BDCs, Th e valuation of assets in the partnership must with appropriate exemptive relief from the SEC, be deemed acceptable to the current partners SBA debentures are not included as senior securi- and must be acceptable to new investors; ties for purposes of the BDC asset coverage test. A general partner may need to be recast as an Although the capital available through SBA deben- external manager; and tures is capped, less equity is required to obtain it An SBIC fund will require approval from the and the borrowing costs are lower. Th ese limitations Small Business Administration (SBA) to partici- and features combine to make SBICs an attractive pate in the transaction. partner for launching the BDC and for continuing the SBIC’s business inside the BDC investment In recent years, several SBICs have elected to vehicle. convert from private partnerships to publicly traded Fidus Investment Corporation (Fidus) is a good BDCs. Fidus Investment Corporation, Capitala example of an existing partnership that was previously Finance Corp., Triangle Capital Corporation, and operated as an SBIC being converted into a BDC. Main Street Capital Corporation fall within this Fidus was formed as a Maryland Corporation to category. acquire all of the equity interests of Fidus Mezzanine

Capital, L.P. (Fidus SBIC), an SBIC licensed by for their carried interest in Fidus Mezzanine the SBA, and its general partner, Fidus Mezzanine Capital, L.P. Capital GP, LLC (Fidus SBIC GP). Fidus acquired Fidus Mezzanine Capital GP, LLC and the lim- both entities using the proceeds of its June 20, ited partners of Fidus Mezzanine Capital, L.P. each 2011 initial public off ering. approved the formation transactions. Prior to con- Th e limited partners held 91.3 percent of the summation of the formation transactions, Fidus had partnership interests of Fidus SBIC. In exchange for to receive the approval of the SBA. their partnership interests, Fidus issued 3,702,778 Upon consummation of the formation transac- shares of common stock, at the initial off ering price tions, Fidus Mezzanine Capital, L.P. terminated its of $15.00 per share, to the limited partners of Fidus management services agreement with Fidus Capital, SBIC, having an aggregate value of $55.5 million LLC, and entered into the Investment Advisory (which represented the limited partners’ share of the Agreement with Fidus Investment Advisors, LLC, net asset value of Fidus SBIC as of the most recent the BDC’s investment advisor. quarter end, plus any additional cash contributions Capitala Finance Corp. (Capitala) followed to Fidus SBIC by the limited partners following such Fidus’s lead less than one year ago. Capitala was quarter end, but prior to the closing of the merger, formed to acquire all of the equity interests of four less any cash distributions to the limited partners fol- related private funds, two of which operated as lowing such quarter end but prior to the closing of SBICs. Similar to the Fidus formation transaction, the merger). the two SBICs retained their licenses and contin- Fidus also acquired 100 percent of the equity ued operation as wholly-owned SBIC subsidiaries. interests in Fidus SBIC GP from the members of Th e other private funds also continued operation as Fidus SBIC GP through the merger of Fidus SBIC wholly-owned subsidiaries of the BDC. GP with and into Fidus Investment GP, LLC (Fidus Capitala noted in its disclosures that the BDC SBIC GP), a wholly-owned subsidiary of the BDC investment vehicle allowed it to continue BDC. As a result, Fidus acquired 100 percent of the and expand the business of the four legacy funds. general partnership interest in Fidus SBIC GP. Fidus Capitala acquired the four legacy funds and their directly held 91.3 percent of the SBIC’s interests, related managers using the proceeds of its September and indirectly held the remaining 8.7 percent of the 30, 2013 initial public off ering. partnership interests through its 100 percent owner- Triangle Capital Corporation, an internally ship of Fidus BDC SBIC GP. managed BDC, also took an SBIC public through In exchange for its partnership interests in formation of a BDC. Triangle Capital Corporation Fidus Mezzanine Capital, L.P., Fidus issued 353,743 was formed in October 2006 for the purpose of shares of common stock, at the initial off ering price acquiring 100 percent of the equity interests in an of $15.00 per share, to Fidus Mezzanine Capital SBIC fund and its general partner, raising capital, GP, LLC having an aggregate value of $5.3 mil- and thereafter operating as an internally managed lion (which consideration was calculated on the BDC. At the time of the closing of its IPO, Triangle same basis as the consideration paid to the limited Capital Corporation acquired 100 percent of the partners of Fidus Mezzanine Capital, L.P. described equity interests in each existing entity in exchange above). Such shares were distributed to the members for stock in the BDC. of Fidus Mezzanine Capital GP, LLC in exchange for Main Street Capital Corporation (Main Street) their equity interest in Fidus Mezzanine Capital GP, is yet another example of this strategic move. LLC. Th e members of Fidus Mezzanine Capital GP, Immediately prior to the IPO, newly formed Main LLC did not receive any consideration in exchange Street merged with and into Main Street Mezzanine

Fund, LP (the Fund), an SBIC with 98 limited pursuant to Section 54 under the 1940 Act to be partners and one general partner, pursuant to a regulated as a BDC. Th is raises the issue of how to merger agreement approved by the general partner obtain the funding for the transaction. and 95 percent of the limited partners. Th e shares A few BDCs have solved this problem by setting granted to the limited partner received a valuation up a line of credit with a bank or other independent at a 54.4 percent premium over the capital con- fi nancial institutions. Because the bank may be in tributions made by them to the Fund, as a result the syndicate underwriting the IPO of the BDC, the of cumulative retained earnings as well as unreal- lending institution may even be characterized as an ized appreciation in the assets of the Fund. Th e affi liate of the BDC. Th e fund selling the assets would general partner of the Fund received a premium defi nitely be characterized as an affi liate, as that term for its interests in the Fund to include estimated is defi ned under Section 2(a)(3) of the 1940 Act. present value of a 20 percent carried interest in the As an affi liate of a BDC, the fund selling the Fund. Main Street also acquired interests from the assets would clearly be prohibited from selling the members of the investment advisor of the Fund for assets to the BDC pursuant to the prohibitions under shares of Main Street’s common stock. Section 57(a) of the 1940 Act. To solve this problem, the assets must be sold to the newly formed BDC Purchasing Assets from Afﬁ liated just prior to its election to be treated as a BDC. As Funds for Cash a consequence, the lending institution must be per- Another possible formation transaction involves suaded to risk lending money to an entity that is the sale of assets to the BDC by one or more affi li- newly formed and that has no other assets. Th is has ated funds in exchange for cash. Th is option permits been accomplished using bridge fi nancing where a a management group to add a BDC to its platform limited purpose term loan or credit facility is estab- while retaining the current assets under manage- lished for a term commencing just prior to the IPO ment and continuing to grow them in the public and ending within a period of days after the transac- marketplace. tion. Th e fi nancing may combine a term loan with a Th e assets form the BDC’s initial portfolio longer term credit facility that is used to extinguish and usually must be sold at or close to fair market the term loan after the IPO. value to meet fi duciary obligations to shareholders, In such formation transactions, the sale of assets and other obligations, such as credit facility terms. is consummated with funds from the bridge fi nanc- Because this type of formation transaction involves ing, however structured. Th e BDC election is made affi liated entities, the formation documents or man- by fi ling the Form N-54A. Th e registration state- agement agreement governing the operation of the ment on Form N-2 is declared eff ective and the deal affi liated transaction will often require that the sale is then priced. Four days later (pursuant to T+3 set- of assets be for cash and not for an equity stake in the tlement procedures), the IPO is closed and the funds BDC to avoid certain affi liated transaction prohibi- are used to pay down the fi nancing. tions once the BDC election is made. Monroe Capital Corporation (Monroe) is an A particular challenge in these affi liated forma- example of such a formation transaction. Monroe tion transactions is how to fi nance them. Once a was formed for the purpose of going public as a BDC BDC elects to be regulated as such under the 1940 but had no prior operations. Monroe Capital BDC Act, certain affi liated transaction prohibitions apply, Advisors, LLC (Monroe Capital) was established and which would require an order from the SEC to over- registered with the SEC to manage Monroe’s assets. On come. As a result, certain transactions must be com- the date of pricing, Monroe purchased its initial portfo- pleted in advance of the BDC’s IPO and its election lio of loans for $67.5 million from MC Funding, Ltd.

Copyright © 2014 by CCH Incorporated. All Rights Reserved. 6 THE INVESTMENT LAWYER and Monroe Capital SBIC LP, each affi liated funds up to $100 million pursuant to an accordion feature) managed by entities affi liated with Monroe Capital. remained available to Monroe for a period of four years. On the date of purchase, the portfolio was comprised Alcentra Capital Corporation (Alcentra) took an of 16 loans that were either senior, unitranche or junior approach similar to Monroe. Immediately prior to secured debt obligations of various companies. the election by Alcentra to be regulated as a BDC, Th e day before pricing, Monroe entered into it purchased a portfolio of $155.9 million in debt a credit facility with ING Capital LLC. Th e credit and equity investments from BNY Mellon-Alcentra facility was comprised of a $67.5 million term loan, Mezzanine III, L.P. for $64.4 million in cash and which Monroe used to complete the acquisition of its $91.5 million in shares of common stock at the IPO initial portfolio, and a revolving line of credit initially price. Alcentra also acquired $29 million of debt equal to $25 million and up to $100 million pur- and equity investments from BNY Alcentra Group suant to an accordion feature. On the pricing date, Holdings, Inc., which were purchased under a ware- immediately following the acquisition of the initial house facility in anticipation of Alcentra’s IPO. Alcentra portfolio, Monroe had $67.5 million outstanding entered into a senior secured term loan agreement with under the term loan portion of the credit facility. ING Capital LLC as lender to fund the purchase of Both the term loan and revolving loan were the warehouse portfolio and to fund the cash portion secured by a lien on all of Monroe’s assets, includ- of the consideration paid to BNY Mellon-Alcentra ing its initial portfolio of loans and all other assets, Mezzanine III, L.P. Th e bridge facility was repaid in including cash on hand. In connection with the full using the proceeds of Alcentra’s IPO. credit facility, Monroe also agreed in the future to TriplePoint Venture Growth BDC Corp. pledge any portfolio investments that they made (TriplePoint) also used a credit facility as bridge after the consummation of the IPO. Pursuant to the fi nancing in its formation transaction. TriplePoint terms of the term loan, Monroe agreed to use a por- acquired its initial portfolio shortly before electing to tion of the net proceeds from the off ering to pay the be regulated as a BDC for approximately $102.5 mil- outstanding principal of, and accrued and unpaid lion in cash using borrowings under a $200 million interest on, the term loan as well as to pay the rea- short-term credit facility with Deutsche Bank AG, sonable transaction cost incurred by Monroe and the New York Branch. Th e bridge facility was repaid in lender in establishing the full credit facility. full with proceeds with TriplePoint’s IPO. Th e material terms of the term loan were: (1) total borrowing capacity of up to the purchase Borrowing from an Afﬁ liate price of the initial portfolio, of which $67.5 mil- Other BDCs have been formed by borrowing lion was drawn under the facility as of the date of money from an affi liate in connection with the forma- the pricing prospectus; and (2) interest accrues at a tion transaction. Both CM Finance Inc. and American rate equal to 2.75 percent per annum plus greater Capital Senior Floating, Ltd. used this approach. of the prime interest rate, the federal funds rate CM Finance Inc. (CMF) was originally capital- plus 0.5 percent or three-month London Interbank ized with a capital commitment of $50.0 million Off ered Rate, or LIBOR, plus 1.0 percent. Th e term from funds managed by Cyrus Capital (the Cyrus loan matured upon the earlier of four days following Funds) in an initial private placement. Immediately the pricing of the IPO and the data on which cash prior to the pricing of CMF’s IPO and prior to proceeds from this IPO are received. the time it elected to be regulated as a BDC, CM Upon payment in full of the term loan credit facil- Finance LLC merged with and into CMF (the ity and consummation of the IPO, $25 million of CM Finance Merger). In connection with the CM the revolving loan portion of the credit facility (and Finance Merger, CMF issued six million shares of

Copyright © 2014 by CCH Incorporated. All Rights Reserved. VOL. 21, NO. 7 • JULY 2014 7 common stock to the Cyrus Funds at the IPO price formation transaction, an independent, third-party and approximately $39.8 million in debt (the Cyrus valuation fi rm determined the fair value of the con- Funds Debt), having an aggregate value of approxi- tributed assets as of the date of contribution. mately $129.8 million. A portion of the proceeds of Immediately prior to the pricing of the IPO, the IPO was used to repay the Cyrus Funds Debt. WhiteHorse Finance, LLC converted into a Delaware Stifel Venture Corp. also made a capital contribu- corporation, WhiteHorse Finance, Inc., and all tion of $32.7 million which was used to repurchase of the outstanding units in WhiteHorse Finance, $32.7 million of the Cyrus Funds’ interest in CMF LLC were converted into shares of common stock immediately after the CM Finance Merger and prior in WhiteHorse Finance, Inc. As part of the BDC to the BDC election and IPO. At the time of the conversion, the members received an aggregate of IPO, Stifel Venture Corp. owned 17.2 percent of 7,826,284 shares of WhiteHorse Finance, Inc. com- the total outstanding common stock in CMF and mon stock in exchange for the 23,983,856 units the Cyrus Funds owned 30.1 percent. owned as of the date of the BDC conversion, repre- American Capital Senior Floating, Ltd. (ACSF) senting an equivalent price of $15.96 per share based was initially capitalized with a $1,000 contribu- on the fair value of the assets contributed by mem- tion by American Capital, Ltd. Eight months bers in connection with its formation, as determined later, American Capital, Ltd. contributed its stock by the BDC’s board of directors. in ACSF to its wholly-owned portfolio com- Golub Capital BDC, Inc. took a similar approach. pany, American Capital Asset Management, LLC Affi liates of GC Advisors LLC, an SEC-registered (ACAM). At the same time, ACSF entered into a investment adviser, owned membership interests $200 million revolving credit facility with ACAM in the issuer’s predecessor, Golub Capital Master to fi nance investments. Th is facility was repaid with Funding LLC. In 2009, they contributed these inter- proceeds from the IPO and terminated. ests into the newly formed Golub Capital BDC LLC for proportionate interests in Golub Capital BDC A Contribution of Assets LLC. Upon the conversion of Golub Capital BDC in Exchange for Equity LLC into a corporation immediately prior to its IPO, Another approach used in BDC formation such affi liates received shares in the issuer equivalent transactions is the contribution of assets from affi li- to $15.18 per share, based on the value of the contrib- ated funds to the newly formed BDC in exchange for uted assets as determined by the investment advisor equity interests in the BDC. Th is was the approach of Golub Capital Master Funding LLC at the time of taken in the WhiteHorse Finance, Inc. IPO and also the original contribution. In addition, at the time of the approach taken in the Golub Capital BDC, Inc. the conversion into a corporation, GEMS Fund, L.P. and Garrison Capital Inc. IPOs. received shares in the issuer equivalent to $14.27 per WhiteHorse Finance, Inc. was formed and share based on the $25 million cash investment made commenced operations as H.I.G. WhiteHorse by it in a private placement two months prior. Holdings, LLC, a Delaware limited liability com- Garrison Capital Inc. is another example of this pany. It changed its name to WhiteHorse Finance, method of formation. Garrison Capital LLC, the LLC. Th e members, two private funds affi liated with BDC’s predecessor entity, was formed in November H.I.G. Capital, contributed assets with a fair value of 2010. Shortly thereafter, Garrison Funding 2010-1 $176.3 million in exchange for units in WhiteHorse LLC (GF 2010-1) completed a $300 million debt Finance, LLC. Th ese assets were contributed far in securitization (the Debt Securitization). Immediately advance of the IPO in exchange for 11,752,383 units following completion of the Debt Securitization, in WhiteHorse Finance, LLC. For the initial Garrison Capital CLO Ltd. owned all of the

Copyright © 2014 by CCH Incorporated. All Rights Reserved. 8 THE INVESTMENT LAWYER subordinated notes of the Debt Securitization. In increasing frequency. Managers in search of new December 2010, Garrison Capital LLC completed sources of assets are increasingly turning to BDCs an $80 million private placement, using the pro- as an investment vehicle to attract those assets, rec- ceeds to invest in U.S. middle-market companies. ognizing the fl exibility available in bringing them to Subsequently, certain open-ended funds affi liated the public markets, and as an option that appeals to with Garrison Capital LLC’s investment adviser retail and institutional investors alike. contributed 100 percent of the stock of Garrison Capital CLO Ltd. to Garrison Capital LLC in exchange for $80.6 million in fair value of Garrison Jonathan H. Talcott is a partner and Co-Chair Capital LLC units. of the Securities Practice Group at Nelson As a result, Garrison Capital LLC indirectly held all Mullins Riley and Scarborough, LLP (Nelson of the subordinated notes in GF 2010-1. In May 2012, Mullins). He has represented BDCs as issuer’s Garrison Capital Funding 2012-1 LLC (GF 2012-1), and underwriter’s counsel for over 12 years. a newly formed wholly-owned indirect subsidiary, Janis F. Kerns is Of Counsel at Nelson Mullins entered into a $150 million credit facility with Natixis, and has represented BDC interests since 2006. New York Branch, as administrative agent. Proceeds Th e Nelson Mullins BDC practice has been from the initial draw of $125 million together with cash involved in BDC IPOs, follow-on off erings, on hand were used to redeem the secured notes and shelf registrations, and strategic portfolio-related subordinated notes of the Debt Securitization. In con- transactions for more than a decade. Th e authors nection with the execution of the credit facility, a major- acknowledge with appreciation the assistance ity of the loans and other assets held by GF 2010-1 of E. Peter Strand and Michael K. Bradshaw, were sold or contributed to GF 2012-1, and following Jr., associates of the fi rm, in the preparation of the closing of the credit facility, no assets remained in this article. Garrison Capital CLO Ltd. or GF 2010-1. GF 2012-1 Manager, a direct subsidiary of NOTES Garrison Capital LLC, owned 100 percent of the LLC 1 Public Law 96-477, 96th Congress (Oct. 21, 1980). interests of GF 2012-1. In October 2012, Garrison 2 H.R. Rep. No. 96-1341, at p. 2 under “Need for the Capital LLC converted into Garrison Capital Inc. Legislation” (Sept. 17, 1980). All of the outstanding units in Garrison Capital 3 See §§54-65 of the 1940 Act. LLC were converted into an aggregate of 10,707,221 4 Rule 60a-1 under the 1940 Act permits BDCs to shares of common stock in Garrison Capital Inc. wholly own SBICs. Th e relief granted by the SEC Of those shares, 5,440,554 shares were issued to exempts a BDC from the leverage calculation pro- eight funds affi liated with the investment adviser in visions of Section 18(a) of the 1940 Act, as modi- exchange for their units in Garrison Capital LLC. fi ed by Section 61(a) of the 1940 Act, such that any senior securities (SBA debentures) issued by a wholly Conclusion owned SBIC subsidiary that would be excluded BDCs continue to trend upward in popularity from its individual asset coverage ratio by Section as increasing numbers of investors discover the yield 18(k) if it were itself a BDC would also be excluded potential in these investment products. Fund man- from the BDC’s consolidated asset coverage ratio. agers are becoming increasingly comfortable with Because the SBIC subsidiary would be entitled to the variety of approaches available in bringing them rely on Section 18(k) if it were a BDC, applicants to market, and as a result, have been adding BDCs for the exemptive relief assert that there is no pol- to their platforms of investment off erings with icy reason to deny the benefi t of that exemption

Copyright © 2014 by CCH Incorporated. All Rights Reserved. VOL. 21, NO. 7 • JULY 2014 9 to the BDC. See, e.g., OFS Capital Corporation, (August 31, 2011) [notice] and IC29821 (Sept. 27, File No. 812-14185, IC-30771 (Oct. 30, 2013) 2011) [order]; Golub Capital BDC, Inc., File No. [notice] and IC-30812 (Nov. 26, 2013) [order]; 812-13794, IC-29756 (Aug. 16, 2011) [notice] and Medley Capital Corporation, File No. 812-14019, IC29786 (Sept. 13, 2011) [order]; and PennantPark IC-30234 (Oct. 16, 2012) [notice] and IC-30262 Investment Corporation, et al., File No. 812-13772, (November 14, 2012) [order]; Horizon Technology IC-29665 (May 6, 2011) [notice] and IC-29686 Finance Corporation, File No. 812-13876, IC-29777 (June 1, 2011) [order].

Copyright © 2014 CCH Incorporated. All Rights Reserved Reprinted from The Investment Lawyer July 2014, Volume 21, Number 7, pages 14–21, with permission from Aspen Publishers, Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com