Executive Summary / Key Takeaways

• Great Elm Group is executing a strategic transformation into a streamlined alternative asset management company focused on scaling its core credit and real estate platforms.
• Recent financial results reflect this pivot, with significant year-over-year revenue and AUM growth driven by capital raises at its BDC, GECC, and expansion in its real estate businesses, including the acquisition of Monomoy Construction Services.
• The company leverages innovative capital raising structures and unique sourcing capabilities to drive AUM growth and access differentiated investment opportunities.
• Strong liquidity and a commitment to share buybacks at a discount to book value underscore management's confidence in the intrinsic value and future growth potential.
• Outlook remains positive for continued growth in fee income and profitability across platforms, contingent on successful execution of development projects, further capital raising, and favorable market conditions.

A Strategic Evolution in Alternative Asset Management

Great Elm Group, Inc. ($GEG) is undergoing a deliberate transformation, shedding non-core businesses to focus squarely on building a scalable alternative asset management enterprise. This strategic pivot centers on expanding its presence across credit, real estate, specialty finance, and other alternative strategies, aiming to create long-duration and permanent capital vehicles. The company's narrative is one of focused execution, leveraging existing platforms and pursuing accretive opportunities to drive growth in assets under management (AUM) and enhance shareholder value.

The foundation of GEG's current structure includes Great Elm Capital Management, LLC (GECM), which manages Great Elm Capital Corp. (GECC), a publicly-traded business development company (BDC), and Monomoy CRE, LLC (MCRE), which manages Monomoy UpREIT, LLC, an industrial-focused real estate investment trust (REIT). These entities form the core fee-generating engines for GEG.

The competitive landscape for GEG is characterized by the presence of larger, well-financed organizations, including operating companies, global asset managers, investment banks, commercial banks, and private equity funds. In the alternative asset management space, firms like Ares Management Corporation (ARES) represent significant competitors with substantial scale and breadth of offerings. While GEG operates at a smaller scale compared to these giants, its strategy appears focused on leveraging specific niches and operational strengths within its chosen verticals.

GEG's competitive positioning relies not on a single, proprietary manufacturing technology, but rather on strategic and operational differentiators. An "innovative structure" involving Special Purpose Vehicles (SPVs) has been instrumental in facilitating capital raises for GECC, providing a template for future funding and investment opportunities. This approach has already contributed to a significant increase in GECC's fee-paying AUM. Furthermore, management highlights "unique sourcing capabilities" stemming from its experienced Board of Directors and broader network, enabling access to "unique investment opportunities" such as the convertible preferred financing for CoreWeave and investments managed by best-in-class third-party managers like Stone Ridge Asset Management. In the real estate segment, the recent acquisition and integration of construction management capabilities into Monomoy Construction Services (MCS) creates a "fully integrated, full-service construction vertical," bolstering the real estate platform and expected to add "accretive revenue opportunities and enhances operational efficiencies through the economies of scale." This integrated capability, leveraging existing talent and backlog, provides a competitive edge in serving the company's real estate entities and expanding its third-party consulting business.

Building Momentum Across Core Platforms

GEG's strategic focus is visibly translating into AUM growth and revenue generation across its core platforms. As of March 31, 2025, the combined AUM of the entities managed by GEG and its subsidiaries stood at approximately $768 million.

The credit platform, anchored by GECC, has been a primary driver of AUM expansion. GECC successfully raised approximately $147 million through equity and debt issuances in calendar year 2024, significantly boosting GEG's fee-paying AUM. GEG's direct participation in three GECC equity raises, with a combined investment of approximately $12 million, facilitated an increase in GECC's fee-paying AUM by over 40%. This increased capital base is crucial, expanding GEG's ability to earn both recurring management fees and potential incentive fees. Management noted that base management fees from GECC grew over 40% year-over-year to $1.3 million in the three months ended March 31, 2025, and expressed confidence that GECC is "well positioned to pay meaningful fees in the coming quarters," supported by its strong investment income and strategic portfolio enhancements, including expansion into CLOs through a joint venture. The launch of the Great Elm Credit Income Fund (GECIF) in November 2023, seeded with $13 million including a $6 million GEG investment, represents another avenue for AUM growth, with the fund delivering approximately 13.9% net returns since inception through March 2025.

The real estate platform, centered around Monomoy, is also demonstrating tangible progress. Monomoy REIT continues to execute, acquiring properties and amending/renewing tenant leases, with approximately 70% of its portfolio seeing rental rate increases in fiscal year 2024, contributing to property management fee growth. The build-to-suit (BTS) business achieved a significant milestone with its first property sale in June 2024, realizing a gain. A second development was completed in December 2024 with the lease commencing, and the company is actively progressing on its third and fourth projects from a "robust pipeline" of opportunities. The acquisition of Greenfield CRE assets in February 2025, forming MCS, is a strategic move to bolster this platform, creating an integrated construction vertical expected to drive profitability and deliver value. For the period from February 4, 2025, through March 31, 2025, MCS generated approximately $0.3 million in revenue, though it incurred an operating loss of approximately $0.2 million in this initial post-acquisition period.

Financial Performance Reflecting Transition and Growth

GEG's consolidated financial results for the three and nine months ended March 31, 2025, reflect the ongoing strategic evolution and growth initiatives.

For the three months ended March 31, 2025, revenues increased 15% year-over-year to $3.2 million, primarily driven by higher management fees from increased AUM at GECC and the addition of project management fees ($0.4 million) from the newly acquired construction services business. This growth was partially offset by a reduction in Incentive Fee revenue ($0.5 million) due to underlying fund performance metrics. Operating costs and expenses increased, notably investment management expenses (up $1.2 million), primarily due to increased personnel supporting business growth. Other selling, general and administrative expenses decreased ($0.3 million). The quarter saw a net loss of $4.5 million, primarily driven by unrealized losses on certain investment positions marked down amid broader market volatility, including investments in CoreWeave and GECC shares.

For the nine months ended March 31, 2025, revenues increased 20% year-over-year to $10.7 million. This increase was largely attributable to $1.2 million in real estate property sales (with no corresponding sales in the prior year), a $0.9 million increase in management fees from GECC AUM growth, and $0.5 million in project management fees from the construction services business. These gains were partially offset by a $1.1 million reduction in Incentive Fees. Investment management expenses increased $1.6 million, again driven by personnel growth. Other selling, general and administrative expenses decreased $0.7 million. The nine-month period showed a net income of $0.2 million, compared to $0.4 million in the prior year, influenced by changes in investment income and realized/unrealized gains and losses.

Liquidity remains a strength, with an unrestricted cash balance of $31.5 million as of March 31, 2025. Management believes this provides sufficient liquidity for both short-term and long-term obligations and positions the company to pursue attractive investment opportunities, especially during periods of market volatility. The company's debt structure includes $26.9 million in 7.25% GEGGL Notes due 2027 and $36.4 million in 5% Convertible Notes due 2030 (including cumulative paid-in-kind interest), with a portion held by related parties. The GEGGL Notes include covenants tied to a net consolidated debt to equity ratio, which stood at a healthy 0.60:1 as of March 31, 2025, well below the 2.0:1 limit. GEG has also actively repurchased shares under its buyback programs, acquiring approximately 4.8 million shares for $8.7 million through May 6, 2025, at an average cost of $1.84 per share, representing approximately a 15% discount to the quarter-end book value per share of $2.14. This buyback activity signals management's view that the stock is undervalued relative to its book value and future prospects.

Outlook and Key Considerations

Management's outlook is centered on accelerating growth in fiscal year 2025 by continuing to scale the core credit and real estate platforms. Key expectations include further AUM growth at GECC, potentially aided by the recently launched at-the-market offering, which is anticipated to provide an additional avenue for capital raising. GECC's strong performance and strategic initiatives, such as the CLO JV, are expected to drive increasing income and position GECC to pay "meaningful fees" to GEG in the coming quarters.

In real estate, management anticipates "continued profitability" across the Monomoy platform, driven by the execution of build-to-suit projects. The focus remains on completing and selling the second development property in the first half of fiscal 2025 and progressing on the third and fourth projects. The MCS acquisition is expected to contribute accretive revenue and operational efficiencies. Monomoy REIT is also expected to continue its growth through value-added acquisitions currently under contract.

The Great Elm Credit Income Fund, with its established track record, is seen as favorably positioned for future growth, and management plans to raise third-party capital for the fund in fiscal 2025. GEG also continues to evaluate strategic opportunities, including potential M&A, to expand its businesses and add differentiated product offerings.

Risks to this outlook include market volatility, which can impact investment valuations and potentially affect the ability of managed funds to pay incentive fees. Competition from larger, well-financed firms remains a factor. The ability to successfully execute on development projects, raise capital for managed funds, and integrate acquired businesses are also critical.

Conclusion

Great Elm Group's journey reflects a clear strategic shift towards becoming a focused alternative asset manager. By divesting non-core operations and concentrating on scaling its credit and real estate platforms, GEG is building a foundation for future growth. Recent performance highlights, including significant AUM increases driven by GECC capital raises, expansion in the real estate development business with successful property sales and new projects underway, and the strategic acquisition of construction management capabilities, demonstrate tangible progress against this strategy.

While recent periods have seen volatility impact investment valuations, leading to unrealized losses, management remains confident in the underlying value of these positions and the long-term trajectory of the business. The company's strong liquidity position, coupled with its unique sourcing capabilities and commitment to returning value through share buybacks, supports its ability to pursue growth initiatives and navigate market fluctuations. The outlook for continued AUM growth, increasing fee income from core platforms, and profitability in the real estate segment suggests that GEG is well-positioned to accelerate its growth in fiscal 2025, making it a compelling story for discerning investors focused on the alternative asset management space.