Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Investments

v3.23.3
Fair Value of Investments
9 Months Ended
Sep. 30, 2023
Fair Value of Investments [Abstract]  
FAIR VALUE OF INVESTMENTS

NOTE 5 – FAIR VALUE OF INVESTMENTS

 

The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820 – “Fair Value Measurements and Disclosures” (“ASC 820”). See Note 2 for a discussion of the Company’s policies.

 

The following table presents information about the Company’s assets measured at fair value as of September 30, 2023 and December 31, 2022, respectively:

 

    As of September 30, 2023  
    Level 1     Level 2     Level 3     Total  
Portfolio Investments                        
First Lien Loans   $
     -
    $
     -
    $ 12,503,591     $ 12,503,591  
Second Lien Loans    
-
     
-
      11,759,414       11,759,414  
Equity    
-
     
-
      6,318,958       6,318,958  
Total Portfolio Investments    
-
     
-
      30,581,963       30,581,963  
Total Investments   $
-
    $
-
    $ 30,581,963     $ 30,581,963  

 

    As of December 31, 2022  
    Level 1     Level 2     Level 3     Total  
Portfolio Investments                        
First Lien Loans   $
      -
    $
      -
    $ 13,144,967     $ 13,144,967  
Second Lien Loans    
-
     
-
      10,976,647       10,976,647  
Equity    
-
     
-
      6,442,474       6,442,474  
Total Portfolio Investments    
-
     
-
      30,564,088       30,564,088  
Total Investments   $
-
    $
-
    $ 30,564,088     $ 30,564,088  

 

During the nine months ended September 30, 2023 and the year ended December 31, 2022, there were no transfers between Level 1, Level 2 or Level 3. During the year ended December 31, 2022, the Company’s investment in Dominion Medical Management, Inc. changed from a second lien loan to a first lien loan.

 

The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

 

Changes in Level 3 assets measured at fair value for the nine months ended September 30, 2023 are as follows:

 

    First Lien
Loans
    Second Lien
Loans
    Unsecured Loans     Equity     Total  
Fair value at beginning of period   $ 13,144,967     $ 10,976,647     $
        -
    $ 6,442,474     $ 30,564,088  
Purchases of investments    
-
     
-
     
-
     
-
     
-
 
Sales or repayment of investments    
-
     
-
     
-
     
-
     
-
 
Payment-in-kind interest    
-
      93,141      
-
     
-
      93,141  
Change in unrealized gain (loss) on investments     (641,376 )     689,626      
-
      (123,516 )     (75,266 )
Fair value at end of period   $ 12,503,591     $ 11,759,414     $
-
    $ 6,318,958     $ 30,581,963  
Change in unrealized gain (loss) on Level 3 investments still held as of September 30, 2023   $ (641,376 )   $ 689,626     $
-
    $ (123,516 )   $ (75,266 )

 

Changes in Level 3 assets measured at fair value for the year ended December 31, 2022 are as follows:

 

    First Lien
Loans
    Second Lien
Loans
    Unsecured
Loans
    Equity     Total  
Fair value at beginning of year   $ 19,400,200     $ 11,435,134     $
          -
    $ 3,471,758     $ 34,307,092  
Purchases of investments    
-
     
-
     
-
     
-
     
-
 
Sales or repayment of investments     (11,168,883 )    
-
     
-
     
-
      (11,168,883 )
Payment-in-kind interest    
-
     
-
     
-
     
-
     
-
 
Realized gain (loss) on investments     4,368,297      
-
     
-
     
-
      4,368,297  
Change in unrealized gain (loss) on investments     387,194       (300,328 )    
-
      2,970,716       3,057,582  
Transfers in/(out)     158,159       (158,159 )    
-
     
-
     
-
 
Fair value at end of year   $ 13,144,967     $ 10,976,647     $
-
    $ 6,442,474     $ 30,564,088  
Change in unrealized gain (loss) on Level 3 investments still held as of December 31, 2022   $ (1,400,513 )   $ (458,487 )   $
-
    $ 2,970,716     $ 1,111,716  

 

The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2023:

 

Description   Fair Value     Valuation Technique (1)     Unobservable Inputs   Range (Average (2))
                     
First Lien Loans   $ 12,329,569       Enterprise Value Coverage     EV / Store level EBITDAR   5.00x-5.50x (5.25x)
                    Location Value   $1,400,000-$1,600,000 ($1,500,000)
Total     12,329,569                  
                         
Second Lien Loans     11,759,414       Enterprise Value Coverage     EV / LTM Revenue   0.38x-0.43x (0.40x)
                    EV / PF EBITDA   5.25x-6.25x (5.75x)
Total     11,759,414                  
                         
Unsecured Loans    
-
      Enterprise Value Coverage     EV / LTM Revenue   0.38x-0.43x (0.40x)
Total    
-
                 
                         
Equity     4,725,572       Enterprise Value Coverage     EV / LTM Revenue   0.38x-0.43x (0.40x)
                    EV / PF EBITDA   5.25x-6.25x (5.75x)
                    EV / Store level EBITDAR   5.25x-5.75x (5.50x)
                    Location Value   $1,400,000-$1,600,000 ($1,500,000)
      1,592,186       Appraisal Value Coverage       Cost Approach   $1,413,000-$1,727,000 ($1,570,000)
                    Sales Comparison Approach   $1,458,000-$1,782,000 ($1,620,000)
Total     6,317,758                  
Total Level 3 Investments   $ 30,406,741                  

 

(1) There were no changes in the valuation technique for the Company’s investments from the prior quarter.

 

(2) The average represents the arithmetic average of the unobservable inputs and is not weighted by the relative fair value.

 

One of the Company’s remaining Level 3 investments, valued at $1,200, has been valued using unadjusted third party transactions.  The other remaining Level 3 investment, valued at $174,022, was an investment in a portfolio company that ceased operations in the 2nd quarter of 2022. This value consisted of an estimate of remaining cash available to distribute to priority lienholders. As a result, there were no unobservable inputs that have been internally developed by the Company in determining the fair values of these investments as of September 30, 2023.

 

The following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2022:

 

Description   Fair Value     Valuation Technique (1)   Unobservable Inputs   Range (Average (2))  
                     
First Lien Loans   $ 12,959,968     Enterprise Value Coverage   EV / Store level EBITDAR     5.00x-5.50x (5.25x)  
                Location Value     $1,450,000-$1,650,000 ($1,550,000)  
Total     12,959,968                  
                         
Second Lien Loans     10,976,647      Enterprise Value Coverage    EV / LTM Revenue      0.39x-0.44x (0.42x)  
                EV / PF EBITDA     5.50x-6.50x (6.00x)  
Total     10,976,647                  
                         
Unsecured Loans    
-
    Enterprise Value Coverage   EV / LTM Revenue     0.39x-0.44x (0.42x)  
Total    
-
                 
                         
Equity     4,742,945     Enterprise Value Coverage   EV / LTM Revenue     0.39x-0.44x (0.42x)  
                EV / PF EBITDA     5.50x-6.50x (6.00x)  
                EV / Store level EBITDAR     5.00x-5.50x (5.25x)  
                Location Value     $1,450,000-$1,650,000 ($1,550,000)  
      1,698,329     Appraisal Value Coverage   Cost Approach     $1,449,000-$1,771,000 ($1,610,000)  
                Sales Comparison Approach     $1,431,000-$1,749,000 ($1,590,000)  
Total     6,441,274                  
Total Level 3 Investments   $ 30,377,889                  

 

(1) There were no changes in the valuation technique for the Company’s investments from the prior quarter.

 

(2) The average represents the arithmetic average of the unobservable inputs and is not weighted by the relative fair value.

 

One of the Company’s remaining Level 3 investments in equity, valued at $1,200, has been valued using unadjusted third party transactions.  The other remaining Level 3 investment in a first lien loan, valued at $184,999, was an investment in a portfolio company that ceased operations in the 2nd quarter of 2022. This value consisted of an estimate of remaining cash available to distribute to priority lienholders. As a result, there were no unobservable inputs that have been internally developed by the Company in determining the fair values of these investments as of December 31, 2022.

 

As of September 30, 2023 and December 31, 2022, the Company used a market approach to value certain equity investments as the Company felt this approach better reflected the fair value of these investments. By considering multiple valuation approaches (and consequently, multiple valuation techniques), the valuation approaches and techniques are not likely to change from one period of measurement to the next; however, the weighting of each in determining the final fair value of a Level 3 investment may change based on recent events or transactions. Refer to “Note 2—Significant Accounting Policies” for more detail.

 

The Company considers all relevant information that can reasonably be obtained when determining the fair value of Level 3 investments. Due to any given portfolio company’s information rights, changes in capital structure, recent events, transactions, or liquidity events, the type and availability of unobservable inputs may change. Increases (decreases) in revenue multiples, earnings before interest and taxes (“EBIT”) multiples, time to expiration, and stock price/strike price would result in higher (lower) fair values all else equal. Decreases (increases) in discount rates, volatility, and annual risk rates, would result in higher (lower) fair values all else equal. The market approach utilizes market value (revenue and EBIT) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. In general, precedent transactions include recent rounds of financing, recent purchases made by the Company, and tender offers. Refer to “Note 2—Significant Accounting Policies” for more detail.

 

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien loans, second lien loans and unsecured loans), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income (discounted cash flow) or yield approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.

 

The primary significant unobservable inputs used in the fair value measurement of the Company’s equity investments are the EBITDA multiple and revenue multiple, which is used to determine the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.

 

The primary unobservable inputs used in the fair value measurement of the Company’s equity investments, when using an option pricing model to allocate the equity value to the investment, are the discount rate for lack of marketability and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of equity using an option pricing model.