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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 4. Fair Value Measurements Investments The Board has established and documented processes and methodologies for determining the fair values of portfolio company investments on a recurring basis in accordance with ASC Topic 820 and consistent with the requirements of the 1940 Act. Fair value is the price, determined at the measurement date, that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques described below are applied. Under ASC Topic 820, portfolio investments recorded at fair value in the consolidated financial statements are classified within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value, as defined below: Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets as of the measurement date. Level 2 — Inputs include quoted prices for similar assets in active markets, or that are quoted prices for identical or similar assets in markets that are not active and inputs that are observable, either directly or indirectly, for substantially the full term, if applicable, of the investment. Level 3 — Inputs include those that are both unobservable and significant to the overall fair value measurement. An investment’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available, with the exception of money market funds and one portfolio company, which are valued using Level 1 inputs as of September 30, 2023. Therefore, the Company values such portfolio investments at fair value, as determined in good faith by the Board, using Level 3 inputs, with the exception of money market funds and one portfolio company that was valued using Level 1 inputs as of September 30, 2023. The degree of judgment exercised by the Board in determining fair value is greatest for investments classified as Level 3 inputs. Due to the inherent uncertainty of determining the fair values of investments that do not have readily available market quotations, the Board’s estimate of fair values may differ significantly from the values that would have been used had a ready market for the securities existed, and those differences may be material. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the amounts ultimately realized on these investments to be materially different than the valuations currently assigned. With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below: • the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Investment Advisor responsible for the portfolio investment; • preliminary valuation conclusions are then documented and discussed with the investment committee of the Investment Advisor; • the Board engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of our portfolio investments for which market quotations are not readily available. Each portfolio company investment is generally appraised by the valuation firm(s) at least once every calendar year and each new portfolio company investment is appraised at least once in the twelve-month period following the initial investment. In certain instances, the Company may determine that it is not cost-effective, and as a result it is not in the Company’s stockholders’ best interest, to request the independent appraisal of certain portfolio company investments. Such instances include, but are not limited to, situations where the Company determines that the fair value of the portfolio company investment is relatively insignificant to the fair value of the total portfolio. • the audit committee of the Board reviews the preliminary valuations of the Investment Advisor and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and • the Board discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Investment Advisor, the independent valuation firm(s) and the audit committee. In making the good faith determination of the value of portfolio investments, the Board starts with the cost basis of the security. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values. The Board consulted with the independent third-party valuation firm(s) in arriving at our determination of fair value for 17 and 14 of our portfolio company investments representing 27.6% and 29.5% of the total portfolio investments at fair value (exclusive of new portfolio company investments made during the nine months ended September 30, 2023 and 2022, respectively) as of nine months ended September 30, 2023 and 2022, respectively. Consistent with the policies and methodologies adopted by the Board, the Company performs detailed valuations of its debt and equity investments, including an analysis on the Company’s unfunded debt investment commitments, using both the market and income approaches as appropriate. Under the market approach, the Company typically uses the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which the Company derives a single estimate of enterprise value. Under the income approach, the Company typically prepares and analyzes discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself. The Company evaluates investments in portfolio companies using the most recent portfolio company financial statements and forecasts. The Company also consults with the portfolio company’s senior management to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development and other operational issues. For the Company’s debt investments the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The Company’s discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated debt investment agreements. The Company prepares a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. The Company may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties and other fees; estimated remaining life; the nature and realizable value of any collateral securing such debt investment; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. The Company estimates the remaining life of its debt investments to generally be the legal maturity date of the instrument, as the Company generally intends to hold its debt investments to maturity. However, if the Company has information available to it that the debt investment is expected to be repaid in the near term, it would use an estimated remaining life based on the expected repayment date. For the Company’s equity investments, including equity securities and warrants, the Company generally uses a market approach, including valuation methodologies consistent with industry practice, to estimate the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, net income, revenues, or in limited cases, book value. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. The Company may also utilize an income approach when estimating the fair value of its equity investments, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach. The Company typically prepares and analyzes discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. The Company considers various factors, including, but no t limited to, the portfolio company’s projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. The following tables present fair value measurements of investments by major class according to the fair value hierarchy:
|  | September 30, 2023 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
First Lien Debt | $ |  | — |  | $ |  | — |  | $ |  | 522,289 |  | $ |  | 522,289 |
Second Lien Debt |  |  | — |  |  |  | — |  |  |  | 154,765 |  |  |  | 154,765 |
Subordinated Debt |  |  | — |  |  |  | — |  |  |  | 120,981 |  |  |  | 120,981 |
Equity |  |  | 267 |  |  |  | — |  |  |  | 124,981 |  |  |  | 125,248 |
Warrants |  |  | — |  |  |  | — |  |  |  | 3,576 |  |  |  | 3,576 |
Money Market Funds |  |  | 78,578 |  |  |  | — |  |  |  | — |  |  |  | 78,578 |
Total | $ |  | 78,845 |  | $ |  | — |  | $ |  | 926,592 |  | $ |  | 1,005,437 |
|  | December 31, 2022 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
First Lien Debt | $ |  | — |  | $ |  | — |  | $ |  | 456,105 |  | $ |  | 456,105 |
Second Lien Debt |  |  | — |  |  |  | — |  |  |  | 182,948 |  |  |  | 182,948 |
Subordinated Debt |  |  | — |  |  |  | — |  |  |  | 101,456 |  |  |  | 101,456 |
Equity |  |  | 310 |  |  |  | — |  |  |  | 117,431 |  |  |  | 117,741 |
Warrants |  |  | — |  |  |  | — |  |  |  | 2,079 |  |  |  | 2,079 |
Money Market Funds |  |  | 61,076 |  |  |  | — |  |  |  | — |  |  |  | 61,076 |
Total | $ |  | 61,386 |  | $ |  | — |  | $ |  | 860,019 |  | $ |  | 921,405 |
The Company reviews the fair value hierarchy classifications on a quarterly basis. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. There were no transfers among Levels 1, 2, and 3 during the nine months ended September 30, 2023 and 2022. The following tables present a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2023 and 2022:
|  | First Lien |  |  | Second Lien |  |  | Subordinated |  |  |  |  |  |  |  |  |  |
|  | Debt |  |  | Debt |  |  | Debt |  |  | Equity |  |  | Warrants |  |  | Total |
Balance, December 31, 2021 |  | $ | 354,922 |  |  | $ | 158,815 |  |  | $ | 36,064 |  |  | $ | 165,762 |  |  | $ | 3,204 |  |  | $ | 718,767 |
Net realized gains (losses) on investments |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 65,220 |  |  |  | — |  |  |  | 65,220 |
Net change in unrealized appreciation (depreciation) on investments |  |  | (1,281 | ) |  |  | (13,048 | ) |  |  | 1,213 |  |  |  | (54,102 | ) |  |  | (556 | ) |  |  | (67,774 | )
Purchase of investments |  |  | 166,279 |  |  |  | 49,498 |  |  |  | 44,469 |  |  |  | 7,704 |  |  |  | — |  |  |  | 267,950 |
Proceeds from sales and repayments of investments |  |  | (31,574 | ) |  |  | (18,731 | ) |  |  | - |  |  |  | (77,950 | ) |  |  | — |  |  |  | (128,255 | )
Interest and dividend income paid-in-kind |  |  | 481 |  |  |  | 573 |  |  |  | 273 |  |  |  | — |  |  |  | — |  |  |  | 1,327 |
Proceeds from loan origination fees |  |  | (1,454 | ) |  |  | (115 | ) |  |  | (300 | ) |  |  | — |  |  |  | — |  |  |  | (1,869 | )
Accretion of loan origination fees |  |  | 943 |  |  |  | 111 |  |  |  | 40 |  |  |  | — |  |  |  | — |  |  |  | 1,094 |
Accretion of original issue discount |  |  | 18 |  |  |  | 119 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 137 |
Balance, September 30, 2022 |  | $ | 488,334 |  |  | $ | 177,222 |  |  | $ | 81,759 |  |  | $ | 106,634 |  |  | $ | 2,648 |  |  | $ | 856,597 |
Balance, December 31, 2022 |  | $ | 456,105 |  |  | $ | 182,948 |  |  | $ | 101,456 |  |  | $ | 117,431 |  |  | $ | 2,079 |  |  | $ | 860,019 |
Net realized gains (losses) on investments |  |  | — |  |  |  | (9,333 | ) |  |  | — |  |  |  | 13,600 |  |  |  | — |  |  |  | 4,267 |
Net change in unrealized appreciation (depreciation) on investments |  |  | (1,576 | ) |  |  | 3,226 |  |  |  | (1,314 | ) |  |  | (1,976 | ) |  |  | 1,497 |  |  |  | (143 | )
Purchase of investments |  |  | 135,283 |  |  |  | 25,000 |  |  |  | 29,041 |  |  |  | 14,725 |  |  |  | — |  |  |  | 204,049 |
Proceeds from sales and repayments of investments |  |  | (68,761 | ) |  |  | (48,607 | ) |  |  | (10,149 | ) |  |  | (18,799 | ) |  |  | — |  |  |  | (146,316 | )
Interest and dividend income paid-in-kind |  |  | 850 |  |  |  | 1,468 |  |  |  | 2,343 |  |  |  | — |  |  |  | — |  |  |  | 4,661 |
Proceeds from loan origination fees |  |  | (1,226 | ) |  |  | (331 | ) |  |  | (541 | ) |  |  | — |  |  |  | — |  |  |  | (2,098 | )
Accretion of loan origination fees |  |  | 1,563 |  |  |  | 106 |  |  |  | 140 |  |  |  | — |  |  |  | — |  |  |  | 1,809 |
Accretion of original issue discount |  |  | 51 |  |  |  | 288 |  |  |  | 5 |  |  |  | — |  |  |  | — |  |  |  | 344 |
Balance, September 30, 2023 |  | $ | 522,289 |  |  | $ | 154,765 |  |  | $ | 120,981 |  |  | $ | 124,981 |  |  | $ | 3,576 |  |  | $ | 926,592 |
Net change in unrealized appreciation/(depreciation) of $1,593 and $(4,505) for the three and nine months ended September 30, 2023, respectively, was attributable to Level 3 investments held at September 30, 2023. Net change in unrealized appreciation/(depreciation) of $(36,403) and $(42,882) for the three and nine months ended September 30, 2022, respectively, was attributable to Level 3 investments held at September 30, 2022. The following tables summarize the significant unobservable inputs by valuation technique used to determine the fair value of the Company’s Level 3 debt and equity investments as of September 30, 2023 and December 31, 2022. The tables are not intended to be all-inclusive, but instead capture the significant unobservable inputs relevant to the Company’s determination of fair values.
|  | Fair Value at |  |  | Valuation |  | Unobservable |  | Range
|  | September 30, 2023 |  |  | Techniques |  | Inputs |  | (weighted average)(1)
Debt investments: |  |  |  |  |  |  |  |  |
First Lien Debt |  | $ | 507,098 |  |  | Discounted cash flow |  | Weighted average cost of capital |  | 9.4% - 22.7% (16.0%)
|  |  | 12,416 |  |  | Enterprise value |  | Asset Coverage |  | 1.1 x - 1.1 x (1.1 x)
|  |  | 2,775 |  |  | Enterprise value |  | EBITDA multiples |  | 4.3 x - 4.3 x (4.3 x)
Second Lien Debt |  |  | 153,257 |  |  | Discounted cash flow (2) |  | Weighted average cost of capital |  | 12.0% - 30.0% (15.7%)
|  |  | 1,508 |  |  | Enterprise value |  | Asset Coverage |  | 0.6 x - 0.6 x (0.6 x)
Subordinated Debt |  |  | 120,782 |  |  | Discounted cash flow |  | Weighted average cost of capital |  | 10.2% - 20.0% (13.3%)
|  |  | 199 |  |  | Enterprise value |  | EBITDA multiples |  | 6.0 x - 6.0 x (6.0 x)
Equity investments: |  |  |  |  |  |  |  |  |
Equity |  |  | 118,670 |  |  | Enterprise value |  | EBITDA multiples |  | 4.0 x - 28.0 x (9.2 x)
|  |  | 6,311 |  |  | Enterprise value |  | Revenue multiples |  | 0.8 x - 7.5 x (6.2 x)
Warrants |  |  | 3,576 |  |  | Enterprise value |  | EBITDA multiples |  | 6.0 x - 6.0 x (6.0 x)
|  |  | - |  |  | Enterprise value |  | Revenue multiples |  | 4.0 x - 4.0 x (4.0 x)
(1) Unobservable inputs were weighted by the relative fair value of the instruments. (2) Includes $52.2 million of debt investments which were valued using a trading discount to par.
|  | Fair Value at |  |  | Valuation |  | Unobservable |  | Range
|  | December 31, 2022 |  |  | Techniques |  | Inputs |  | (weighted average)(1)
Debt investments: |  |  |  |  |  |  |  |  |
First Lien Debt |  | $ | 441,830 |  |  | Discounted cash flow |  | Weighted average cost of capital |  | 8.9% - 21.9% (15.5%)
|  |  | 11,000 |  |  | Enterprise value |  | Asset Coverage |  | 1.1 x - 1.1 x (1.1 x)
|  |  | 3,275 |  |  | Enterprise value |  | Revenue multiples |  | 4.3 x - 4.3 x (4.3 x)
Second Lien Debt |  |  | 180,825 |  |  | Discounted cash flow (2) |  | Weighted average cost of capital |  | 11.7% - 25.0% (14.5%)
|  |  | - |  |  | Enterprise value |  | EBITDA multiples |  | 5.0 x - 5.0 x (5.0 x)
|  |  | 2,123 |  |  | Enterprise value |  | Asset Coverage |  | 0.8 x - 0.8 x (0.8 x)
Subordinated Debt |  |  | 97,706 |  |  | Discounted cash flow |  | Weighted average cost of capital |  | 10.0% - 15.2% (12.5%)
|  |  | 3,750 |  |  | Enterprise value |  | EBITDA multiples |  | 8.5 x - 8.5 x (8.5 x)
Equity investments: |  |  |  |  |  |  |  |  |
Equity |  |  | 111,808 |  |  | Enterprise value |  | EBITDA multiples |  | 4.0 x - 16.8 x (8.1 x)
|  |  | 5,623 |  |  | Enterprise value |  | Revenue multiples |  | 0.9 x - 7.8 x (6.4 x)
Warrants |  |  | 1,949 |  |  | Enterprise value |  | EBITDA multiples |  | 6.0 x - 6.0 x (6.0 x)
|  |  | 130 |  |  | Enterprise value |  | Revenue multiples |  | 4.5 x - 4.5 x (4.5 x)
(1) Unobservable inputs were weighted by the relative fair value of the instruments. (2) Includes $18.0 million of debt investments which were valued using a trading discount to par. The significant unobservable input used in determining the fair value under the discounted cash flow technique is the weighted average cost of capital of each security. Significant increases (or decreases) in this input would likely result in significantly lower (or higher) fair value estimates. The significant unobservable inputs used in determining fair value under the enterprise value technique are revenue and EBITDA multiples, as well as asset coverage. Significant increases (or decreases) in these inputs could result in significantly higher (or lower) fair value estimates. Other Financial Assets and Liabilities ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash and cash equivalents, interest receivable and accounts payable and other liabilities approximate the fair value of such items due to the short maturity of such instruments. The Company’s borrowings under the Credit Facility (as defined in Note 6), the SBA debentures, and the Notes (as defined in Note 6) are recorded at their respective carrying values. The following tables summarize the carrying value and fair value of the Company’s debt obligations as of September 30, 2023 and December 31, 2022.
|  | September 30, 2023(5) |  |  | December 31, 2022(5) |
|  | Carrying Value (1) |  |  | Fair Value |  |  | Carrying Value (1) |  |  | Fair Value |
SBA debentures (2) |  | $ | 188,000 |  |  | $ | 188,000 |  |  | $ | 153,000 |  |  | $ | 153,000 |
Credit Facility borrowings (3) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
January 2026 Notes (4) |  |  | 125,000 |  |  |  | 112,417 |  |  |  | 125,000 |  |  |  | 111,854 |
November 2026 Notes (4) |  |  | 125,000 |  |  |  | 104,619 |  |  |  | 125,000 |  |  |  | 103,963 |
Total |  | $ | 438,000 |  |  | $ | 405,036 |  |  | $ | 403,000 |  |  | $ | 368,817 |
(1) Carrying value represents the outstanding principal balance of the debt obligation. (2) The fair value of the SBA debentures is estimated by discounting the remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to prepay the debentures, which are Level 3 inputs under ASC Topic 820. (3) The fair value of borrowings under the Credit Facility, if valued under ASC Topic 820, are based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model. (4) The fair value of the January 2026 Notes (as defined in Note 6) and the November 2026 Notes (as defined in Note 6) are estimated by discounting the remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date, which are Level 3 inputs under ASC Topic 820. (5) Totals exclude $16,319 and $16,880 of Secured Borrowings as of September 30, 2023 and December 31, 2022, respectively. The following table summarizes the inputs used to value the Company’s debt obligations if measured at fair value as of September 30, 2023 and December 31, 2022.
|  | Fair Value |
|  | September 30, |  |  | December 31, |
Valuation Inputs |  | 2023 |  |  | 2022 |
Level 1 |  | $ | — |  |  | $ | — |
Level 2 |  |  | — |  |  |  | — |
Level 3 |  |  | 405,036 |  |  |  | 368,817 |
Total |  | $ | 405,036 |  |  | $ | 368,817 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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