Great Elm Group, Inc. (NASDAQ:GEG) is a publicly-traded alternative asset management company focused on growing a scalable and diversified portfolio of long-duration and permanent capital vehicles across credit, real estate, specialty finance, and other alternative strategies. The company currently manages Great Elm Capital Corp. (NASDAQ:GECC), a publicly-traded business development company, and Monomoy UpREIT, an industrial-focused real estate investment trust, in addition to other investments. As of March 31, 2024, the combined assets under management of these entities was approximately $688.0 million.

Business Overview

Great Elm Group operates through its wholly-owned subsidiaries, including Great Elm Capital Management, Inc. (GECM), which serves as the investment manager, general partner, or managing member of certain private funds. The company also has direct investments in some of these funds. Great Elm Group's strategy is to grow its portfolio of long-duration and permanent capital vehicles, leveraging its expertise in credit, real estate, specialty finance, and other alternative strategies.

One of Great Elm Group's key managed entities is Great Elm Capital Corp. (GECC), a publicly-traded business development company. GECM serves as the investment manager for GECC and is responsible for managing its investment portfolio and providing administrative services. Great Elm Group earns management fees and potential incentive fees based on the performance of GECC's assets.

Another significant investment for Great Elm Group is Monomoy UpREIT, an industrial-focused real estate investment trust. GECM also serves as the investment manager for Monomoy UpREIT and earns management fees based on the assets under management as well as property management fees.

In addition to its two anchor fee-paying vehicles, Great Elm Group has been actively expanding its alternative asset management platform. During the fiscal second quarter of 2024, the company launched the Great Elm Credit Income Fund, a private fund focused on direct lending, syndicated credit, and special situations. Great Elm Group seeded this fund with a $6 million investment and is actively raising third-party capital to grow the fund's assets under management.

Financials

For the fiscal year ended June 30, 2023, Great Elm Group reported annual revenue of $8,663,000 and a net income of $27,730,000. The company's annual operating cash flow was -$2,373,000, and its annual free cash flow was -$2,426,000.

In the fiscal second quarter of 2024, Great Elm Group generated total revenue of $2,787,000, a 50% increase from the prior-year period. The company reported a net loss from continuing operations of $239,000 for the quarter, compared to net income from continuing operations of $29,638,000 in the prior-year period. The prior-year period's net income included $22,200,000 in net realized and unrealized gains on investments and a $10,500,000 gain related to the sale of the company's Forest subsidiary.

Adjusted EBITDA for the fiscal second quarter of 2024 was $600,000, up from $100,000 in the prior-year period. As of December 31, 2023, Great Elm Group had approximately $69 million of combined cash and marketable securities on its balance sheet, providing ample liquidity to deploy across the growing alternative asset management platform.

Segment Performance

Great Elm Group's business is currently organized as a single reportable segment, reflecting the company's focus on alternative asset management. However, the company's two key managed entities, GECC and Monomoy UpREIT, provide insight into the performance of the company's core investment management activities.

GECC had a solid quarter, with the business development company once again paying incentive fees to Great Elm Group. For the fiscal second quarter of 2024, Great Elm Group earned approximately $750,000 in incentive fees from GECC, bringing the total fees earned from GECC to $1,700,000 for the quarter. GECC's net asset value grew to $12.99 per share as of December 31, 2023, with a 30% return on equity.

Monomoy UpREIT also made significant progress during the quarter, acquiring three properties with in-place leases and deploying $4 million of capital. The REIT also amended nine existing tenant leases for meaningful term extensions and executed five-year renewal options on two properties with a key tenant. Additionally, Great Elm Group's build-to-suit business continued to make meaningful progress on its two construction projects in Florida and Mississippi, which are expected to be completed within the current fiscal year.

Liquidity

As of March 31, 2024, Great Elm Group had an unrestricted cash balance of $44,100,000 and $24,800,000 in marketable securities. The company also held 1,518,162 shares of GECC common stock with an estimated fair value of $16,800,000 as of the same date. Great Elm Group believes it has sufficient liquidity available to meet its short-term and long-term obligations for at least the next 12 months.

The company's long-term debt consists of $26,900,000 in aggregate principal amount of 7.25% notes due on June 30, 2027 (the "GEGGL Notes") and $38,900,000 in principal balance of convertible notes due on February 26, 2030 (the "Convertible Notes"), including $15,800,000 held by related parties.

Outlook

Great Elm Group is focused on enhancing its financial performance, broadening its alternative asset management platform, and increasing its assets under management. The company's recent strategic developments, such as the $24 million equity capital raise at GECC and the launch of the Great Elm Credit Income Fund, demonstrate its commitment to these goals.

The investment in GECC, where Great Elm Group provided $6 million alongside an institutional investor, is a significant step in growing the company's recurring asset management fee revenue and the potential to earn incentive fees. The credit income fund, seeded with a $6 million investment from Great Elm Group, provides another opportunity to raise third-party capital and expand the company's alternative asset management offerings.

Great Elm Group continues to evaluate multiple strategic M&A opportunities in its pipeline and remains steadfast in pursuing opportunities to expand its business and invest capital in new platform opportunities that offer attractive risk-adjusted returns. The company's strong liquidity position and diversified alternative asset management platform position it well to capitalize on future growth opportunities.

Risks and Challenges

As an alternative asset management company, Great Elm Group is subject to various risks and challenges, including:

1. Competitive landscape: The company faces competition from larger, well-financed organizations, both domestic and foreign, including operating companies, global asset managers, investment banks, commercial banks, and private equity funds.

2. Regulatory environment: Changes in laws and regulations governing the company's operations could have a material impact on its business.

3. Reliance on key personnel: The company's ability to attract, assimilate, develop, and retain key personnel is crucial to its success.

4. Market conditions: Volatility in the equity capital markets, debt capital markets, and the broader economy could affect the company's performance and growth prospects.

5. Concentration risk: A significant portion of Great Elm Group's revenue is derived from a limited number of large customers, such as GECC and Monomoy UpREIT.

6. Integration and execution risk: The company's ability to successfully integrate and execute on new acquisitions or strategic initiatives could impact its financial and operational performance.

Conclusion

Great Elm Group is a diversified alternative asset management company that is actively expanding its platform and pursuing growth opportunities. The company's recent strategic developments, such as the GECC capital raise and the launch of the Great Elm Credit Income Fund, demonstrate its commitment to enhancing its financial performance, broadening its alternative asset management offerings, and increasing its assets under management.

With a strong liquidity position, a diversified portfolio of managed entities, and a focus on attractive risk-adjusted returns, Great Elm Group is well-positioned to capitalize on future growth opportunities in the alternative asset management space. However, the company faces various risks and challenges, including competition, regulatory changes, and reliance on key personnel, which it must navigate effectively to achieve its long-term objectives.