Executive Summary / Key Takeaways

• Great Elm Capital Corp. ($GECC) has undergone a significant three-phase transformation, shifting from a cleanup phase to a robust growth and optimization strategy focused on high-quality, cash-generating investments, particularly in senior secured debt and Collateralized Loan Obligations (CLOs).
• The company achieved record total investment income in Q1 and Q2 2025, driven by its CLO joint venture and new deployments, demonstrating strong income-generating capability despite short-term fluctuations in CLO distributions.
• GECC maintains a strong liquidity position with over $25 million in deployable cash and $50 million in revolver availability, supported by recent equity raises and debt refinancing, enabling continued strategic capital deployment.
• While the Q3 2025 Net Asset Value (NAV) was impacted by unrealized losses from the First Brands bankruptcy and CoreWeave investment volatility, management is actively diversifying the portfolio, reducing position sizing, and expects a significant NII rebound in Q4 2025.
• GECC's competitive edge lies in its specialized expertise in middle-market direct lending and its unique CLO JV structure, which offers enhanced economics and diversification, positioning it for sustainable returns amidst a tightening private credit market.

The Evolution of a Business Development Company

Great Elm Capital Corp. ($GECC) operates as an externally managed, non-diversified closed-end management investment company, structured as a Business Development Company (BDC) since its inception in April 2016. Its core mandate is to generate current income and capital appreciation through strategic debt and income-generating equity investments, primarily targeting middle-market companies with enterprise values ranging from $100 million to $2 billion. This focus positions GECC within a dynamic segment of the financial services industry, where direct lending and structured finance play crucial roles in supporting growing enterprises.

Under the leadership of CEO Matt Kaplan, appointed in March 2022, GECC embarked on a strategic three-phase transformation. The initial phase in 2022 focused on "cleanup and repositioning," addressing portfolio concentration and reducing exposure to non-cash-generating assets. This foundational work was followed by an "upgrade" phase in 2023, which saw a deliberate shift towards higher-quality credit investments and the strategic formation of Great Elm Specialty Finance, LLC (GESF) in September 2023, a joint venture that brought in a strategic investor for a 12.50% equity stake. The current phase, spanning 2024 and 2025, emphasizes "optimization and growth," marked by significant capital raises and the establishment of the CLO Formation JV, LLC (CLO JV) in April 2024. This strategic evolution has been instrumental in shaping GECC's current market position and its response to prevailing industry trends, including a competitive private credit market and evolving interest rate environments.

Operational Differentiators and Strategic Structures

While GECC does not develop proprietary technology in the traditional sense, its operational model and strategic investment structures serve as key differentiators in the competitive BDC landscape. The company's "sourcing engine" and ability to structure unique investment opportunities, often with warrant packages for upside convexity, are central to its value proposition. A prime example is the investment in Nice-Pak, a wet wipes producer, which generated an approximate 38% Internal Rate of Return (IRR) over a three-year holding period upon its acquisition in Q3 2025.

The CLO Formation JV, LLC (CLO JV) represents a significant structural differentiator. This joint venture allows GECC to take majority equity positions in CLOs and participate in loan accumulation facilities (CLO warehouses), which can provide enhanced economics compared to simply purchasing CLO equity in the secondary market. This approach expands GECC's exposure to a diverse portfolio of broadly syndicated first lien loans, targeting high teens to 20% returns over time. The CLO JV's strategic intent is to leverage GECC's expertise in structured finance to generate robust, recurring income streams, contributing to its competitive moat by accessing a segment of the market with potentially higher returns.

Furthermore, the strategic repositioning of Great Elm Specialty Finance, LLC (GESF) enhances GECC's operational flexibility and income generation. The rebranding of Sterling as Great Elm Commercial Finance in April 2025, offering traditional asset-based lending, and the focus of Great Elm Healthcare Finance solely on healthcare real estate financing opportunities, streamline operations and aim for improved profitability. These specialized platforms allow GECC to cater to specific middle-market financing needs, providing tailored solutions that differentiate it from more generalized lenders. The successful exit of GESF's last equipment lease holding at a gain further underscores the company's commitment to optimizing its business model.

Financial Performance: A Trajectory of Growth and Resilience

GECC's financial performance in 2025 reflects both strong growth and the impact of market volatility. The first quarter of 2025 was a record-setting period, achieving the highest total investment income (TII) in the company's history at $12.5 million. This was also GECC's highest-ever cash income quarter, a testament to its strategic portfolio enhancements. The momentum continued into the second quarter of 2025, which recorded a TII of $14.3 million, with cash TII comprising approximately 90% of the total. This growth was largely driven by the success of the CLO JV and income from new investments.

Net Investment Income (NII) per share doubled to $0.40 in Q1 2025 from $0.20 in Q4 2024, and reached $0.51 in Q2 2025. However, NII per share stepped down to $0.20 in Q3 2025. This decrease was primarily due to the anticipated decline in CLO JV distributions (down to $1.5 million from $4.3 million in Q2 2025), the absence of a dividend from an insurance-related preference share investment (an annual event not expected until potentially Q2 2026), and elevated interest expense related to debt refinancing. Management emphasizes evaluating GECC on a four-quarter basis due to the inherent lumpiness of CLO distributions in their early stages and the short-term cash drag from equity raises. On a trailing 12-month basis as of Q2 2025, TII increased by 29% and NII grew by 32% year-over-year, demonstrating sustained earnings power.

Net Asset Value (NAV) per share saw an increase of over $0.60 in Q2 2025, reaching $12.10, primarily driven by unrealized gains on the investment in CW Opportunity 2 LP, a vehicle holding convertible preferred equity in CoreWeave, an AI hyperscaler that IPO-ed earlier in the year. This investment yielded an approximate 200% IRR from May 2024 funding through June 30, 2025. However, NAV per share declined to $10.01 in Q3 2025, largely due to approximately $16.3 million in unrealized losses on First Brands, Inc. investments following its bankruptcy filing, and an unrealized decline in the fair value of CW Opportunity 2 LP.

GECC maintains a robust liquidity profile. As of September 30, 2025, the company held approximately $88.70 million in short-term investments. It also entered Q4 2025 with over $25 million of deployable cash and $50 million of availability under its revolving credit facility. Recent capital-raising activities, including $27.30 million from common equity issuance and $48.40 million from GECCG Notes in the nine months ended September 30, 2025, further bolster its financial flexibility. The asset coverage ratio stood at approximately 168.20% as of September 30, 2025, comfortably above the 150% regulatory minimum.

Competitive Landscape and Strategic Positioning

GECC operates in a highly competitive BDC market, contending with both larger, more diversified players and niche specialists. Direct competitors include Ares Capital Corporation (ARCC), Hercules Capital (HTGC), Golub Capital BDC (GBDC), and Main Street Capital Corporation (MAIN). While these competitors often boast greater scale and broader market reach, GECC carves out its niche through specialized expertise and a focused investment approach.

GECC's strength lies in its agility and targeted deal sourcing within the middle market, particularly in sectors like specialty finance, technology, and insurance. Its ability to engage in private credit transactions, which often offer a yield premium compared to the tightening syndicated loan market, provides a competitive advantage. For instance, while public market spreads are currently tight, GECC is actively pursuing private credit opportunities that offer attractive risk-adjusted returns, sometimes with warrant upside. This contrasts with larger players that might be more exposed to broader market movements.

The CLO JV structure is a key competitive differentiator, allowing GECC to access enhanced economics by taking majority equity positions in CLOs, a strategy that may not be as readily available to BDCs that primarily purchase CLO equity in the secondary market. This provides exposure to a diversified pool of senior secured first lien loans, mitigating single-asset risk. GECC's focus on first lien loans, comprising two-thirds of its corporate portfolio as of Q3 2025, underscores its commitment to downside protection, a critical factor in a volatile economic environment.

However, GECC's smaller scale compared to industry giants like ARCC can present vulnerabilities, potentially leading to higher operational costs relative to asset base and limiting its capacity for very large deals. Its sector concentration, while enabling specialized expertise, also exposes it to specific industry downturns. For example, the recent bankruptcy of First Brands, Inc., a transportation equipment manufacturing company, significantly impacted GECC's NAV due to its concentrated exposure. GECC is addressing this by focusing on further portfolio diversification and reducing average position sizing.

The broader industry is also influenced by trends such as AI-driven demand for data centers, which GECC has exposure to through its CoreWeave investment, and ongoing tariff uncertainties. GECC's portfolio maintains a predominantly domestic focus with minimal exposure to China, positioning it defensively against tariff-related disruptions. The company also actively re-underwrites existing investments and new opportunities through a recessionary lens, prioritizing defensive positions and resilient businesses, such as its consumer exposure in private label products and laundry services, which tend to benefit from trade-down effects during economic slowdowns.

Risks and Outlook

Despite its strategic advancements, GECC faces several risks. The inherent uncertainty in valuing illiquid investments, particularly those without readily available market quotations, can lead to significant fluctuations in fair value. Interest rate risk is also present, with approximately $153.90 million of its debt investments bearing variable rates. While rising rates can increase gross investment income, this benefit could be offset by increased operating expenses or decreased spreads.

The recent bankruptcy of First Brands, Inc., which resulted in approximately $16.3 million in unrealized depreciation and placed the loans on non-accrual, highlights the risk of concentrated positions. As of September 30, 2025, non-accrual investments, including First Brands, Del Monte, and Maverick Gaming, represented 1.5% of the portfolio's fair value. GECC is actively working to mitigate this by driving further portfolio diversification and reducing average position sizing. The volatility of its CoreWeave-related investment, which is directionally correlated with the underlying publicly traded equity, also presents a risk to NAV.

Looking ahead, GECC's management is optimistic about a significant rebound in Net Investment Income for Q4 2025. This is predicated on increased CLO distributions, normalized interest expenses following recent refinancing, and income generated from new capital deployments. The company expects to harvest over $20 million from non-yielding assets, including its CoreWeave-related investment, into early 2026, to redeploy this capital into cash-generating investments. Management projects full-year 2025 NII per share to exceed 2024 levels and more than cover the annualized distribution rate of $1.48 per share. The Board has declared a $0.37 per share cash distribution for Q4 2025, payable on December 31, 2025. GECC believes it has sufficient liquidity to meet its short-term and long-term obligations for the foreseeable future, supported by its strong balance sheet and ample deployable capital.

Conclusion

Great Elm Capital Corp. has demonstrably transformed its operational and investment strategy, moving from a necessary period of portfolio cleanup to a focused growth trajectory. Its emphasis on senior secured debt, the innovative CLO JV structure, and the streamlined specialty finance platforms underpin a robust investment thesis centered on consistent income generation and capital appreciation. While the company has experienced short-term NAV and NII fluctuations due to specific credit events and the early-stage cadence of CLO distributions, its proactive approach to portfolio diversification, risk management, and strategic capital deployment positions it for long-term success.

GECC's ability to source unique, high-yield opportunities in the middle market, coupled with its commitment to enhancing portfolio quality and managing liquidity, provides a compelling investment narrative. As the company continues to execute its growth and optimization initiatives, leveraging its operational differentiators and disciplined investment approach, it aims to rebuild NAV and deliver attractive risk-adjusted returns to shareholders, making it a noteworthy consideration for discerning investors in the BDC space.