424B3 1 cnl_424b3-102521.htm PROSPECTUS

 

 

 

Prospectus Filed pursuant to Rule 424(b)(3)
Registration No. 333-253295
   

 

CNL STRATEGIC CAPITAL, LLC

Maximum Offering of up to $1,100,000,000
in shares of Limited Liability Company Interests

CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We are externally managed by CNL Strategic Capital Management, LLC (“CNL” or the “Manager”) and sub-managed by Levine Leichtman Strategic Capital, LLC (the “Sub-Manager”), an affiliate of Levine Leichtman Capital Partners, LLC (“LLCP”). This is our second public offering. We commenced our initial public offering on March 7, 2018 and terminated our initial public offering on November 1, 2021, after having raised aggregate gross offering proceeds of approximately $264,707,387 from the sale of common shares in the initial public offering.

We are offering up to $1,000,000,000 of shares of our limited liability company interests, or our shares, on a best efforts basis, which means that CNL Securities Corp., or the Managing Dealer, will use its best efforts but is not required to sell any specific amount of shares. We are offering, in any combination, four classes of our shares in this offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in our shares. There are differing selling fees and commissions for each class. We also pay distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in this primary offering. The current public offering prices for our shares are $33.66 per Class A share, $32.18 per Class T share, $30.27 per Class D share and $31.18 per Class I share. Such prices may be adjusted by our board of directors. Our board of directors determines our net asset value for each class of our shares on a monthly basis. If our net asset value per share on such valuation date increases above or decreases below our net proceeds per share as stated in this prospectus, we will adjust the offering price of any of the classes of our shares, effective five business days after such determination is published, to ensure that no share is sold at a price, after deduction of upfront selling commissions and dealer manager fees, that is above or below our net asset value per share on such valuation date. We are also offering, in any combination, up to $100,000,000 of Class A shares, Class T shares, Class D shares and Class I shares to be issued pursuant to our distribution reinvestment plan. We reserve the right to reallocate the shares between our distribution reinvestment plan and our primary offering.

We currently intend to sell shares in this offering until November 1, 2023 (two years after the date of this prospectus) and we may extend this offering one additional year if all of the shares we have registered are not yet sold within two years; however, we may suspend or terminate this offering sooner, or extend this offering as permitted under applicable securities laws, in each case with respect to any class of shares, and we would announce such event in a prospectus supplement. In addition, several states will require us to renew our registration annually in order to continue offering our shares beyond the initial registration period in such states.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended, and will be subject to reduced public company reporting requirements.

Investing in our shares involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 17. Significant risks relating to your investment in our shares include, among others:

We have a limited operating history and limited established financing sources and may be unable to successfully implement our business and acquisition strategies or generate sufficient cash flow to make distributions to our shareholders.

 

 

Our success will be dependent on the performance of the Manager and the Sub-Manager, but you should not rely on the past performance of the Manager, the Sub-Manager and their respective affiliates as an indication of future success. Prior to this offering, affiliates of CNL have only sponsored real estate and credit investment programs.
We pay substantial fees and expenses to the Manager, the Sub-Manager, the Managing Dealer or their respective affiliates. These payments increase the risk that you will not earn a profit on your investment.
We have held our current businesses for only a short period of time and you will not have the opportunity to evaluate the assets we acquire before we make them, which makes an investment in us more speculative. We face risks with respect to the evaluation and management of future acquisitions.
This is a “best efforts” offering and if we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make, and the value of your investment in us will fluctuate with the performance of the assets we acquire.
Our shares sold in this offering will not be listed on an exchange or quoted through a national quotation system for the foreseeable future, if ever. Therefore, if you purchase shares in this offering, you will have limited liquidity and may not receive a full return of your invested capital if you sell your shares.
The purchase price for our shares is based on our most recently determined net asset value and is not based on any public trading market.  While our board of directors has engaged an independent valuation firm to assist with the valuation of our businesses, the valuation of our assets is inherently subjective, and our net asset value may not accurately reflect the actual price at which our assets could be liquidated on any given day.
The amount of any distributions we may pay is uncertain. We may not be able to pay you distributions and our distributions may not grow over time. We may pay distributions from any source, including from cash resulting from expense support and fee deferrals and/or waivers from the Manager and the Sub-Manager as needed, and there are no limits on the amount of offering proceeds we may use to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have less funds available for investments, and your overall return may be reduced. We believe the likelihood that we will pay distributions from sources other than cash flow from operations will be higher in the early stages of this offering.
The Manager, the Sub-Manager and their respective affiliates, including our officers and some of our directors, will face conflicts of interest including conflicts that may result from compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our shareholders.
If we were to become taxable as a corporation for U.S. federal income tax purposes, we would be required to pay income tax at corporate rates on our net income and would reduce the amount of cash available for distribution to our shareholders. Such distributions, if any, by us to shareholders would constitute dividend income taxable to such shareholders, to the extent of our earnings and profits.
Our board of directors may change our business and acquisition policies and strategies without prior notice or shareholder approval, the effects of which may be adverse to you.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete, or determined whether the securities offered hereby can be sold in compliance with applicable conduct standards, including the standard imposed under Regulation Best Interest. In addition, the Attorney General of the State of New York has not passed on or endorsed the merits of this offering. Any representation to the contrary is unlawful.

 

The use of forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in our shares is not permitted.

 

 

 

 

   Maximum Aggregate Price to Public  Maximum Selling Commissions  Maximum Dealer Manager Fees 

Proceeds to Us Before Expenses(1)(5)(6)

Maximum Offering   $1,000,000,000   $27,000,000(2)  $12,750,000(2)  $960,250,000 
Class A Shares, Per Share   $33.66   $2.02   $0.84   $30.80 
Class T Shares, Per Share(3)   $32.18   $0.97   $0.56   $30.65 
Class D Shares, Per Share(3)   $30.27   $—     $—     $30.27 
Class I Shares, Per Share   $31.18   $—     $—     $31.18 
Distribution Reinvestment Plan(4)   $100,000,000   $—     $—     $100,000,000 
Class A Shares, Per Share   $30.80   $—     $—     $30.80 
Class T Shares, Per Share   $30.65   $—     $—     $30.65 
Class D Shares, Per Share   $30.27   $—     $—     $30.27 
Class I Shares, Per Share   $31.18   $—     $—     $31.18 

________________ 

(1)The proceeds to us before expenses are calculated without deducting certain organization and offering expenses. The total of the other organization and offering expenses, excluding selling commissions, dealer manager fees and distribution and shareholder servicing fees, are estimated to be approximately $10,000,000 if the maximum primary offering amount is sold.
(2)The maximum selling commissions and dealer manager fee assume that 30%, 30%, 10% and 30% of the gross offering proceeds from this primary offering are from sales of Class A, T, D and I shares, respectively. The selling commissions are equal to 6.00% and 3.00% of the sale price for Class A and Class T shares, respectively, with discounts available to some categories of investors, and the dealer manager fee is equal to 2.50% and 1.75% of the sale price for Class A and Class T shares, respectively, with discounts available to some categories of investors.”
(3)We pay the Managing Dealer a distribution and shareholder servicing fee, subject to certain limits, with respect to our Class T and Class D shares sold in this primary offering (excluding Class T Shares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of our current net asset value per share, as disclosed in our periodic or current reports, payable on a monthly basis. See “Plan of Distribution.”
(4)We will not pay selling commissions and dealer manager fees, or reimburse issuer costs, in connection with our shares issued through our distribution reinvestment plan. For participants in the distribution reinvestment plan, distributions paid on Class A shares, Class T shares, Class D shares and Class I shares, as applicable, will be used to purchase Class A shares, Class T shares, Class D shares and Class I shares, respectively.
(5)The total of the above fees, plus other organizational and offering expenses and fees, are estimated to be approximately $49,750,000 if we raise $1,000,000,000.
(6)We are offering certain volume discounts resulting in reductions in selling commissions payable with respect to sales of our Class A shares for certain minimum aggregate purchase amounts to an investor. See “Plan of Distribution—Volume Discounts (Class A Shares Only).”

 

 

 

The date of this prospectus is November 1, 2021.

 

 

SUITABILITY STANDARDS

 

Our shares offered through this prospectus are suitable only as a long-term investment for persons of adequate financial means such that they do not have a need for liquidity in this investment. We have established financial suitability standards for initial shareholders in this offering which require that a purchaser of shares have either:

a gross annual income of at least $70,000 and a net worth of at least $70,000, or
a net worth of at least $250,000.

For purposes of determining the suitability of an investor, net worth in all cases should be calculated excluding the value of an investor’s home, home furnishings and automobiles. In the case of sales to fiduciary accounts, these minimum standards must be met by the beneficiary, the fiduciary account or the donor or grantor who directly or indirectly supplies the funds to purchase the shares if the donor or grantor is the fiduciary.

Those selling shares on our behalf or participating broker-dealers and registered investment advisers recommending the purchase of shares in this offering are required to make every reasonable effort to determine that the purchase of shares in this offering is a suitable and appropriate investment for each investor based on information provided by the investor regarding the investor’s other holdings, financial situation, tax status and investment objectives and must maintain records for at least six years of the information used to determine that an investment in the shares is suitable and appropriate for each investor. In making this determination, your participating broker-dealer, authorized investment representative or other person selling shares on our behalf will, based on a review of the information provided by you, consider whether you:

meet the minimum income and net worth standards established by us and by your state;
can reasonably benefit from an investment in our shares based on your overall investment objectives and portfolio structure;
are able to bear the economic risk of the investment based on your overall financial situation, including the risk that you may lose your entire investment; and
have an apparent understanding of the following:
the fundamental risks of your investment;
the lack of liquidity of your shares;
the restrictions on transferability of your shares;
the background and qualification of the Manager and the Sub-Manager; and
the tax consequences of your investment.

In purchasing shares, custodians or trustees of employee pension benefit plans or individual retirement accounts, or IRAs, may be subject to the fiduciary duties imposed by the Employee Retirement Income Security Act of 1974, as amended, or ERISA, or other applicable laws and to the prohibited transaction rules prescribed by ERISA and related provisions of the Internal Revenue Code of 1986, as amended, or the Code. In addition, prior to purchasing shares, the trustee or custodian of an employee pension benefit plan or an IRA should determine that such an investment would be permissible under the governing instruments of such plan or account and applicable law.

 

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The following states have established additional suitability requirements that are more stringent than the standards that we have established and described above. Shares will be sold to investors residing in these states only if those investors represent that they meet the additional suitability standards. In each case, these additional suitability standards exclude from the calculation of net worth the value of an investor’s home, home furnishings and personal automobiles.

Alabama – In addition to the general suitability standards, Alabama investors may not invest more than 10% of their liquid net worth in us and our affiliates.

California – California investors must have either (i) an estimated gross income of at least $65,000 during the current tax year and a net worth of at least $250,000, or (ii) a net worth of at least $500,000. In addition, California investors should limit their investment in us to 10% of the investor’s net worth. For these purposes, “net worth” is exclusive of an investor’s home, home furnishings, and automobiles.

Idaho – Investors who reside in the state of Idaho must have either (i) a liquid net worth of $85,000 and annual gross income of $85,000 or (ii) a net worth of $300,000 (excluding the value of a purchaser’s home, furnishings and automobiles). Additionally, an Idaho investor’s total investment in us shall not exceed 10% of his or her liquid net worth. Liquid net worth is defined as that portion of net worth consisting of cash, cash equivalents and readily marketable securities.

Iowa – Iowa investors must have either (i) a minimum of $100,000 annual gross income and a net worth of $100,000, or (ii) a net worth of at least $350,000 (exclusive of home, home furnishings and automobiles). In addition, Iowa investors may not invest in aggregate more than 10% of their liquid net worth in us and in the securities of other non-traded direct participation programs (DPPs). “Liquid net worth” is defined as the portion of net worth that consists of cash, cash equivalents, and readily marketable securities.

Kansas – It is recommended by the Office of the Kansas Securities Commissioner that Kansas investors limit their aggregate investment in our shares and other direct participation programs to not more than 10% of their liquid net worth.  For these purposes, liquid net worth shall be defined as that portion of total net worth (total assets minus liabilities) that is comprised of cash, cash equivalents and readily marketable securities.

Kentucky – A Kentucky investor may not invest more than 10% of their liquid net worth in us or our affiliates. “Liquid net worth” is defined as that portion of net worth that is comprised of cash, cash equivalents and readily marketable securities.

Maine – The Maine Office of Securities recommends that an investor’s aggregate investment in this offering and similar direct participation investments not exceed 10% of the investor’s liquid net worth. For this purpose, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.

Massachusetts – Massachusetts investors may not invest more than 10% of their liquid net worth in us and in other illiquid direct participation programs. Liquid net worth is that portion of an investor’s net worth (assets minus liabilities) that is comprised of cash, cash equivalents and readily marketable securities.

Missouri – No more than ten percent (10%) of any one Missouri investor’s liquid net worth shall be invested in this offering of our shares.

Nebraska – Nebraska investors must have either (i) an annual gross income of at least $70,000 and a net worth of at least $70,000, or (ii) a net worth of at least $250,000. In addition, investors must limit their aggregate investment in us and in the securities of other non-publicly traded programs to 10% of their net worth. Investors who are accredited investors as defined in Regulation D under the Securities Act of 1933, as amended, are not subject to this investment concentration limit.

New Jersey – New Jersey investors must have either (i) a minimum liquid net worth of at least $100,000 and a minimum annual gross income of at least $85,000, or (ii) a minimum liquid net worth of $350,000. In addition, investors must limit their investment in us, our affiliates and other non-publicly traded direct investment programs (including real estate investment trusts, business development companies, oil and gas programs, equipment leasing programs and commodity pools, but excluding unregistered, federally and state exempt private offerings) to 10% of their liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth (total assets exclusive of home, home furnishings and automobiles, minus total liabilities) that consists of cash, cash equivalents and readily marketable securities.

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New Mexico – It shall be unsuitable for New Mexico residents to invest more than 10% of their liquid net worth in the issuer, affiliates of the issuer, and in any other non-traded direct participation programs. “Liquid net worth” is defined as that portion of net worth (total assets exclusive of primary residence, home furnishings, and automobiles, minus total liabilities) comprised of cash, cash equivalents, and readily marketable securities.

North Dakota – In addition to the stated net income and net worth standards, North Dakota investors must also have a net worth of at least ten times their investment in us.

Ohio – It shall be unsuitable for Ohio residents to invest more than 10% of their liquid net worth in the issuer, affiliates of the issuer, and in any other non-traded direct participation programs. “Liquid net worth” is defined as that portion of net worth (total assets exclusive of primary residence, home furnishings, and automobiles, minus total liabilities) comprised of cash, cash equivalents and readily marketable securities.

Oklahoma – Oklahoma investors cannot invest more than 10% of their liquid net worth in us and our affiliates. Net worth for this purpose is exclusive of an investor’s home, home furnishings and automobiles.

Oregon – In addition to the suitability standards set forth above, Oregon investors must limit their investment in us to no more than 10% of their liquid net worth.

Pennsylvania – Pennsylvania investors must limit their investment in us to no more than 10% of their net worth, exclusive of home, furnishings and automobiles.

Puerto Rico – Residents of Puerto Rico may not invest more than 10% of their liquid net worth in the issuer, affiliates of the issuer, and in any other non-traded direct participation programs. “Liquid net worth” is defined as that portion of net worth (total assets exclusive of primary residence, home furnishings, and automobiles, minus total liabilities) comprised of cash, cash equivalents and readily marketable securities.

Tennessee – In addition to meeting the general suitability standards set forth above, Tennessee investors who are not “accredited investors” may not invest more than 10% of their liquid net worth in us. “Net worth” for this purpose is exclusive of an investor’s home, home furnishings, and automobiles.

Vermont – In addition to the suitability standards set forth above, non-accredited Vermont investors may not purchase an amount in us that exceeds 10% of their liquid net worth. For these purposes, “liquid net worth” is defined as an investors’ total assets (not including home, home furnishings, or automobiles) minus total liabilities. Vermont residents who are “accredited investors” as defined in 17 C.F.R. § 230.501 are not subject to the limitation described in this paragraph.

 

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Regulation Best Interest

 

The SEC has adopted Regulation Best Interest under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Regulation Best Interest establishes a new standard of conduct for broker-dealers and their associated persons when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. A retail customer is any natural person, or the legal representative of such person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer and uses the recommendation primarily for personal, family, or household purposes. When making such a recommendation, a broker-dealer and its associated persons must act in the best interest of such retail customer when making a recommendation to purchase shares in this offering, without placing their financial or other interest ahead of the retail customer’s interests, and should consider reasonable alternatives in determining whether the broker dealer and its associated persons have a reasonable basis for making the recommendation. This standard is different and higher than the quantitative suitability standards we require for an investment in our shares and the current suitability standard applied by the Financial Industry Regulatory Authority, a self-regulatory organization for broker-dealers. In addition to Regulation Best Interest, certain states, including Massachusetts, have adopted or may adopt state-level standards that seek to further enhance the broker-dealer standard of conduct to a fiduciary standard for all broker-dealer recommendations made to retail customers in their states. In comparison to the standards of Regulation Best Interest, the Massachusetts fiduciary standard, for example, requires broker-dealers to adhere to the duties of utmost care and loyalty to customers. The Massachusetts fiduciary standard requires a broker-dealer to make recommendations without regard to the financial or any other interest of any party other than the retail customer, and that broker-dealers must make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated. Listed entities may be reasonable alternatives to an investment in us, as listed entities may feature characteristics like lower cost, nominal commissions at the time of the initial purchase, less complexity and lesser or different risks. Under Regulation Best Interest, the SEC rules, the broker-dealer must meet four component obligations:

 

Disclosure Obligation: The broker-dealer must provide certain required disclosures, including details about their services and fee structures, before or at the time of the recommendation about the recommendation and the relationship between the broker-dealer and its retail customer. The disclosure includes a customer relationship summary on Form CRS. The broker-dealer’s disclosures are separate from the disclosures we provide to investors in this prospectus.

 

Care Obligation: The broker-dealer must exercise reasonable diligence, care, and skill in making the recommendation.

 

Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest.

 

Compliance Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

 

There is no case or administrative law under Regulation Best Interest because it recently became effective.

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TABLE OF CONTENTS

Page

ABOUT THIS PROSPECTUS 1
PROSPECTUS SUMMARY 2
RISK FACTORS 17
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 45
ESTIMATED USE OF PROCEEDS 46
DISTRIBUTION POLICY 50
DETERMINATION OF NET ASSET VALUE 52
PRIOR PERFORMANCE OF THE MANAGER, THE SUB-MANAGER AND THEIR RESPECTIVE AFFILIATES 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 64
BUSINESS 80
OUR PORTFOLIO 93
MANAGEMENT 105
COMPENSATION OF THE MANAGER, THE SUB-MANAGER AND THE MANAGING DEALER 130
SECURITY OWNERSHIP 135
CONFLICTS OF INTEREST AND CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 136
SUMMARY OF OUR LLC AGREEMENT 143
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES 153
ERISA CONSIDERATIONS 163
LIQUIDITY STRATEGY 166
DISTRIBUTION REINVESTMENT PLAN 167
SHARE REPURCHASE PROGRAM 170
PLAN OF DISTRIBUTION 173
REPORTS TO SHAREHOLDERS 183
SHAREHOLDER PRIVACY NOTICE 184
REINVESTMENT AGENT, REPURCHASE AGENT, TRANSFER AGENT AND REGISTRAR, AND ESCROW AGENT 185
SUPPLEMENTAL SALES MATERIAL 186
LEGAL MATTERS 187
EXPERTS 188
INCORPORATION BY REFERENCE 189
AVAILABLE INFORMATION 190
APPENDIX A:  PRIOR PERFORMANCE TABLES A-1
APPENDIX B: FORM OF SUBSCRIPTION AGREEMENT B-1

 

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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with the United States Securities and Exchange Commission, or the SEC, to register a continuous offering of our shares. Periodically, as we make material investments or have other material developments, we will provide a prospectus supplement or amend this prospectus that may add, update or change information contained in this prospectus. We will endeavor to avoid interruptions in this offering, but may, to the extent permitted or required under the rules and regulations of the SEC, supplement the prospectus or file an amendment to the registration statement with the SEC when we adjust the prices of our shares because our net asset value per share declines or increases from the amount of the net proceeds per share as stated in the prospectus on the date we publish our net asset value per share. In addition, we will file an amendment to the registration statement with the SEC on or before such time as the new offering price per share for any of the classes of our shares being offered by this prospectus represents more than a 20% change in the per share offering price of our shares from the most recent offering price per share. While we will attempt to file such amendment on or before such time in order to avoid interruptions in this offering, there can be no assurance, however, that this offering will not be suspended while the SEC reviews any such amendment and until it is declared effective.

Any statement that we make in this prospectus may be modified or superseded by us in a subsequent prospectus supplement. The registration statement we have filed with the SEC includes exhibits that provide more detailed descriptions of certain matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC and any prospectus supplement, together with the additional information described in the section entitled “Available Information” in this prospectus. In this prospectus, we use the term “day” to refer to a calendar day, and we use the term “business day” to refer to any day other than Saturday, Sunday, a legal holiday or a day on which banks in New York City are authorized or required to close.

You should rely only on the information contained in this prospectus. Neither we nor the Managing Dealer has authorized any other person to provide you with different information from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the Managing Dealer is not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is complete and accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or sale of our shares. If there is a material change in the affairs of the company, we will amend or supplement this prospectus.

For information on the suitability standards that investors must meet in order to purchase shares in this offering, see “Suitability Standards.”

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PROSPECTUS SUMMARY

This summary highlights all material summary information contained elsewhere in this prospectus, and does not contain all of the information that you may want to consider when making your investment decision. To understand this offering fully, you should read the entire prospectus carefully, including the section entitled “Risk Factors,” before making a decision to invest in our shares. CNL Strategic Capital, LLC is a Delaware Limited Liability Company formed on August 9, 2016. Unless the context requires otherwise or as otherwise noted, the terms “we,” “us,” “our,” and “company” refer to CNL Strategic Capital, LLC; the term the “Manager” or “CNL” refers to CNL Strategic Capital Management, LLC; the term the “Sub-Manager” refers to Levine Leichtman Strategic Capital, LLC; the term “LLCP” refers to Levine Leichtman Capital Partners, LLC, an affiliate of the Sub-Manager; the term the “Managing Dealer” refers to CNL Securities Corp.; the term “CFG” refers to CNL Financial Group, LLC; the term “CNL Financial Group” refers to CNL Financial Group, Inc. and CNL Financial Group Investment Management LLC; the term the “Administrator” refers to the Manager, in its capacity as Administrator; the term the “Sub-Administrator” refers to the Sub-Manager in its capacity as a sub-administrator; the term “shareholder” refers to a holder of shares of the company’s limited liability company interests; the term “LLC Agreement” refers to the company’s fifth amended and restated limited liability company operating agreement, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part; the term “primary offering” refers to this offering (excluding our distribution reinvestment plan) to which we are initially allocating $1,000,000,000 in any combination of Class A shares, Class T shares, Class D shares and Class I shares; the term “initial public offering” refers to our public offering of our Class A shares, Class T shares, Class D shares and Class I shares that terminated upon the effectiveness of this offering; the term “this offering” refers to our follow-on public offering of our Class A shares, Class T shares, Class D shares and Class I shares that commenced upon the initial effective date of the registration statement of which this prospectus is part; the term “founder shares” refers to Class FA shares and Class S shares; the term “non-founder shares” refers to Class A, Class T, Class D and Class I shares; the term “our shares” refers to Class A, Class FA, Class T, Class D, Class I and Class S shares, collectively; the term “our businesses” refers to the equity and debt investments we have made in portfolio companies as discussed under “Our Portfolio.”

Q:Who is CNL Strategic Capital, LLC?
A:CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We refer to the strategy of owning both the debt and equity of our target private companies as a “private capital” strategy. We intend to target businesses that are highly cash flow generative, with annual revenues primarily between $15 million and $250 million and whose management teams seek an ownership stake in the company. Our business strategy is to acquire controlling equity interests in combination with debt positions and in doing so, provide long-term capital appreciation and current income while protecting invested capital. We define controlling equity interests as companies in which we own more than 50% of the voting securities of such companies. This business strategy, which has been used by affiliates of the Sub-Manager over many different business cycles, will provide us with a high level of operational control and the opportunity to receive current cash income in the form of monthly coupon payments from our debt and periodic cash distributions from our equity ownership in the businesses we acquire. We believe that our business strategy also allows us to partner with management teams that are highly incentivized to support the growth and profitability of our businesses. We will use the global origination networks of the Manager and the Sub-Manager to identify potential acquisitions and management teams that embrace our transaction structure and management philosophy.

We intend for a significant majority of our total assets to be comprised of long-term controlling equity interests and debt positions in the businesses we acquire. In addition, and to a lesser extent, we may acquire other debt and minority equity positions, which may include acquiring debt in the secondary market and minority equity interests in combination with other funds managed by LLCP from co-investments with other partnerships managed by LLCP or its affiliates. We expect that these positions will comprise a minority of our total assets. See “Business—Business Strategy.”

We commenced operations on February 7, 2018, following a private offering of $81.7 million of our Class FA shares. On March 7, 2018, we commenced our initial public offering of up to $1.1 billion in our common shares, consisting of Class A shares, Class T shares, Class D shares and Class I shares. Through September 1, 2021, we had issued 7,488,574 common shares in our initial public offering consisting of 1,324,464 Class A shares, 1,191,058 Class T shares, 833,229 Class D shares and 4,139,823 Class I shares issued in this offering (including 79,624 Class A shares, 19,891 Class T shares, 24,235 Class D shares and 67,408 Class I shares issued pursuant to our distribution reinvestment plan) and we had received aggregate gross offering proceeds of $217.5 million. As of September 30, 2021, we had invested in eight businesses, consisting of approximately $217.2 million of equity investments and approximately $115.0 million of debt investments.

 

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 Q:

Who is CNL?

   
A:We are managed by the Manager, CNL, under a management agreement, as currently amended and as may be amended in the future (the “Management Agreement”) pursuant to which the Manager is responsible for the overall management of our activities. The Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). CNL is controlled by CFG, a private investment management firm specializing in alternative investment products. Anchored by over 45 years of investing in relationships, CFG or its affiliates have formed or acquired companies with more than $34 billion in assets. Performance-driven, CFG strives to achieve investment returns by identifying emerging trends, accessing capital through its national distribution channels, and investing shareholder capital in a variety of real estate, credit and private capital investment products. Over its history, CFG has invested through various market cycles in a broad range of industries, asset classes and geographies. Its sponsorship and management of a wide range of investment programs have fostered experience investing in and lending to companies operating in the retail, restaurant, health care, hotel, leisure, recreation, financial services and insurance industries.

CFG’s disciplined investment approach concentrates on underserved, undercapitalized markets. By championing a long-term perspective that concentrates on building partnerships that extend beyond one transaction or one idea, CFG has developed a broad network of business relationships, which we will have access to and from which we will benefit. CFG partners with prominent investment organizations to provide shareholders access to a distinctive platform of products.

Q:Who are Levine Leichtman Strategic Capital, LLC and LLCP?
A:The Manager has engaged the Sub-Manager, Levine Leichtman Strategic Capital, LLC, under a sub-management agreement, as currently amended and as may be amended in the future (the “Sub-Management Agreement”), pursuant to which the Sub-Manager is responsible for the day-to-day management of our assets. The Sub-Manager is registered as an investment adviser under the Advisers Act.

The Sub-Manager is an affiliate of LLCP. LLCP is an asset manager that has made private capital investments in middle-market companies located primarily in the United States for 38 years. Since its inception in 1984 through June 30, 2021, LLCP and the LLCP Senior Executives have managed approximately $12.2 billion of capital. From 1994 through June 30, 2021, LLCP has sponsored and managed fifteen private funds in addition to our company, raised a total of approximately $9.9 billion of capital commitments from over 175 institutional and other investors, and invested approximately $6.4 billion in 96 middle-market companies across various industries, including franchisors, business services, and light manufacturing and engineered products. LLCP currently has a team of more than 58 transactional and supporting professionals.  As of June 30, 2021, LLCP had approximately $8.7 billion under management. LLCP was managed by a tenured, seven-person Executive Committee, comprised of Lauren B. Leichtman, Arthur E. Levine, Matthew G. Frankel, Michael B. Weinberg, Stephen J. Hogan, David I. Wolmer and Andrew M. Schwartz (together, the “LLCP Senior Executives”), an experienced team supported by approximately 27 Corporate Finance professionals and 7 Originations professionals.

LLCP’s track record is a result of (i) having a cohesive Investments team (defined below) that has successfully acquired and managed middle-market companies through all economic cycles, (ii) executing a differentiated strategy that is attractive to business owners and creates a risk-adjusted capital structure, (iii) providing value-added expertise to its businesses, and (iv) having an established middle-market presence and experience acquiring and managing middle-market companies. Through our Sub-Manager, we believe we will benefit from LLCP’s experience and expertise in acquiring U.S. middle-market businesses.

Q:How will we identify assets to acquire and make decisions on whether to make such acquisitions?
A:We believe we will benefit from the Manager’s and the Sub-Manager’s combined business and industry-specific knowledge and experience in the middle market and the Sub-Manager’s transaction expertise and acquisition capabilities. The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisition and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions. To facilitate communication and coordination, the Manager and the Sub-Manager hold, and intend to continue to hold, regular meetings to plan and discuss our business strategy, potential acquisition and finance opportunities, current market developments and strategic goals. We believe the Manager’s and the Sub-Manager’s middle-market expertise provide us with substantial market insight and valuable access to acquisition and financing opportunities. Our board of directors, including a majority of our independent directors, oversee and monitor the performance of our business.

For a discussion of our businesses, see “Our Portfolio” and “Conflicts of Interest and Certain Relationships and Related Party Transactions—The Acquisitions of Our Initial Businesses.”

 

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Q:Are there any risks involved in an investment in our shares?
A:Yes, an investment in our shares involves material risks. Investing in our shares may be considered speculative and involves a high degree of risk, including the risk of the loss of your investment. Our shares are illiquid and appropriate only as a long-term investment.
We have a limited operating history and limited established financing sources and may be unable to successfully implement our business and acquisition strategies or generate sufficient cash flow to make distributions to our shareholders.
Our success will be dependent on the performance of the Manager and the Sub-Manager, but you should not rely on the past performance of the Manager, the Sub-Manager and their respective affiliates as an indication of future success. Prior to this offering, affiliates of CNL have only sponsored real estate and credit investment programs.
We pay substantial fees and expenses to the Manager, the Sub-Manager, the Managing Dealer or their respective affiliates. These payments increase the risk that you will not earn a profit on your investment.
We have held our current businesses for only a short period of time and you will not have the opportunity to evaluate the assets we acquire before we make them, which makes an investment in us more speculative. We face risks with respect to the evaluation and management of future acquisitions.
This is a “best efforts” offering and if we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make, and the value of your investment in us will fluctuate with the performance of the assets we acquire.
Our shares sold in this offering will not be listed on an exchange or quoted through a national quotation system for the foreseeable future, if ever. Therefore, if you purchase shares in this offering, you will have limited liquidity and may not receive a full return of your invested capital if you sell your shares.
The purchase price for our shares is based on our most recently determined net asset value, and will not be based on any public trading market.  While our board of directors has engaged an independent valuation firm to assist with the valuation of our businesses, the valuation of our assets is inherently subjective, and our net asset value may not accurately reflect the actual price at which our assets could be liquidated on any given day.
The amount of any distributions we may pay is uncertain. We may not be able to pay you distributions and our distributions may not grow over time. We may pay distributions from any source, including from cash resulting from expense support and fee deferrals and/or waivers from the Manager and the Sub-Manager as needed, and there are no limits on the amount of offering proceeds we may use to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have less funds available for investments, and your overall return may be reduced. We believe the likelihood that we will pay distributions from sources other than cash flow from operations will be higher in the early stages of this offering.
The Manager, the Sub-Manager and their respective affiliates, including our officers and some of our directors, will face conflicts of interest including conflicts that may result from compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our shareholders.
If we were to become taxable as a corporation for U.S. federal income tax purposes, we would be required to pay income tax at corporate rates on our net income and would reduce the amount of cash available for distribution to our shareholders. Such distributions, if any, by us to shareholders would constitute dividend income taxable to such shareholders, to the extent of our earnings and profits.
Our board of directors may change our business and acquisition policies and strategies without prior notice or shareholder approval, the effects of which may be adverse to you.

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Q:Will you use leverage?
A:We will not use leverage in excess of 35% of our gross assets (not including borrowings of our businesses) unless a majority of our independent directors approves any excess above such limit and determines that such borrowing is in the best interests of our company. Any excess in leverage over such 35% limit shall be disclosed to shareholders in our next quarterly or annual report, along with the reason for such excess. In any event, we expect that the amount of our aggregate borrowings will be reasonable in relation to the value of our assets and will be reviewed by our board of directors at least quarterly.

Financing a portion of the acquisition price of our assets will allow us to broaden our business by increasing the funds available for acquisition. Financing a portion of our acquisitions is not free from risk. Using borrowings requires us to pay interest and principal, referred to as “debt service,” all of which decrease the amount of cash available for distribution to our shareholders or other purposes. We may also be unable to refinance the borrowings at maturity on favorable or equivalent terms, if at all, exposing us to the potential risk of loss with respect to assets pledged as collateral for loans. Certain of our borrowings may be floating rate and the effective interest rates on such borrowings will increase when the relevant interest benchmark increases.

See “Risk Factors—Risks Related to Our Business—To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders, and result in losses.”

As discussed below in “Certain U.S. Federal Income Tax Consequences—Tax Exempt Organizations,” income that would not otherwise be treated as unrelated business taxable income, or UBTI (including interest and dividends), is generally treated as UBTI in whole or in part if leverage is used to acquire or hold the assets generating such income. We intend to manage the recognition of UBTI by tax-exempt investors by making levered investments and investments in entities taxed as partnerships through subsidiaries taxed as corporations for U.S. federal income tax purposes.

Q:What are our potential competitive strengths?
A:We believe that the following potential competitive strengths will enable us to capitalize on the significant acquisition opportunities in the markets we target, including:
LLCP’s and the LLCP Senior Executives’ proven track record and 38-year tenure of acquiring businesses in the middle-market;
a differentiated acquisition strategy that is attractive to entrepreneurs;
a strategy that involves partnering with strong management teams;
proactive generation of proprietary deal flow;
leveraging the Manager’s and the Sub-Manager’s established middle-market presence;
a cohesive team of investment professionals;
a business strategy that involves a tiered transaction review process with acquisition structuring that combines current income and long-term capital appreciation, while protecting invested capital;
the Manager’s and the Sub-Manager’s role as active partners to the businesses we acquire and their management teams; and
a strategy that provides us the flexibility to make acquisitions with a long-term perspective.

See “Business—Potential Competitive Strengths” beginning on page 85 for more discussion.

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Q:What is the current ownership structure of CNL Strategic Capital, LLC?
A:The following chart illustrates the general structure and ownership of the company and the management relationship between the Manager, the Sub-Manager and us.(1)

 

(1)We have entered into the Management Agreement with the Manager and the Sub-Management Agreement with the Manager and the Sub-Manager. We have entered into a managing dealer agreement (the “Managing Dealer Agreement”) with the Managing Dealer. We have also entered into an administrative services agreement with the Administrator, as currently amended and as may be amended in the future (the “Administrative Services Agreement”) and a sub-administration agreement with the Administrator and the Sub-Administrator, as currently amended and as may be amended in the future (the “Sub-Administration Agreement”). Please see the disclosure below under “Compensation of the Manager, the Sub-Manager and the Managing Dealer” and “Management—Administrative Services” for a description of the compensation, reimbursements and distributions we contemplate paying (directly or indirectly) to the Manager, the Sub-Manager, the Managing Dealer, the Administrator, the Sub-Administrator and other affiliates in exchange for services provided to us.
(2)Represents shareholders who purchased common shares in our private offerings, and includes affiliates of the Manager and the Sub-Manager as well as purchasers of any future private offering we may complete.
Q:What conflicts of interest exist between us, the Manager, the Sub-Manager and their respective affiliates?
A:The Manager, the Sub-Manager and their respective affiliates will experience conflicts of interest in connection with the management of our business affairs, including the following:
Our executive officers and certain members of our board of directors serve as directors and/or officers of various entities affiliated with the Manager and the Sub-Manager, as applicable.
The Manager, the Sub-Manager, the Administrator, the Sub-Administrator and their respective affiliates provide services to us. The Administrator and the Sub-Administrator also oversee the performance of other administrative and professional services provided to us by others, including by their respective affiliates.
Regardless of the quality of our assets, the services provided to us or whether we pay distributions to our shareholders, the Manager and the Sub-Manager receive certain fees and expense reimbursements in connection with their services to us as the Manager and the Sub-Manager, respectively. Additionally, we may pay third parties directly or reimburse the costs or expenses of third parties paid by the Administrator and the Sub-Administrator for providing us with certain administrative services.

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The agreements between us and the Manager, the Sub-Manager or their respective affiliates are not arm’s length agreements. In addition, as a result of the fact that we have some common management, including on our board of directors, with the Manager and the Sub-Manager, our board of directors may encounter conflicts of interest in enforcing our rights against the Manager, the Sub-Manager and their respective affiliates in the event of a default by, or disagreement with, any of the Manager, the Sub-Manager and their respective affiliates or in invoking powers, rights or options pursuant to any agreement between any of them and us.
Our board of directors is responsible for determining the net asset value of our assets (with the assistance from the Manager, the Sub-Manager and the independent valuation firm) and, because the base management fee is payable monthly and for a certain month is calculated based on the average value of our gross assets at the end of that month and the immediately preceding calendar month, a higher net asset value of our assets would result in a higher base management fee to the Manager and the Sub-Manager.
We value our assets monthly at fair value as determined in good faith by our board of directors based on input from the Manager, the Sub-Manager, and an independent valuation firm engaged by our board of directors and our audit committee, Alvarez & Marsal Valuation Services, LLC. The determination of the average value of our gross assets reflects changes in the fair market value of our businesses. See “Determination of Net Asset Value.”
The Manager does not currently manage other clients; however, the Manager is not prohibited from doing so and the Manager may determine it is appropriate for us and one or more other clients managed in the future by the Manager or any of its affiliates to participate in an opportunity together. These co-opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other clients. The Manager will consider whether the transaction complies with the terms of our LLC Agreement or the partnership or limited liability company agreement of such other programs.
The Sub-Manager and its affiliates currently manage various other clients and accounts. The Sub-Manager and its affiliates may (i) give advice and take action with respect to any of its other clients that may differ from advice given or the timing or nature of action taken with respect to us, so long as it is consistent with the provisions of the Sub-Manager’s allocation policy and its obligations under the Sub-Management Agreement, and (ii) subject to an exclusivity agreement, or the Exclusivity Agreement, between the Manager and the Sub-Manager and its obligations thereunder, engage in activities that overlap with or compete with those in which the company and its subsidiaries, directly or indirectly, may engage. The company, on its own behalf and on behalf of its subsidiaries, has renounced any interest or expectancy in, or right to be offered an opportunity to participate in, any business opportunity which may be a corporate opportunity for another client of the Sub-Manager or its affiliates to the extent such opportunity has been determined in good faith by the Sub-Manager not to be allocated to the company, all in accordance with the company’s and the Sub-Manager’s allocation policy. Certain of our officers and directors have made, and may from time to time in the future make, passive investments in private funds or other investment vehicles sponsored and/or managed by the Sub-Manager or one of its affiliates.
Subject to the company’s investment policy and its obligations under the Sub-Management Agreement, the Sub-Manager shall not have any obligation to recommend for purchase or sale any securities or loans which its principals, affiliates or employees may purchase or sell for its or their own accounts or for any other client or account if, in the opinion of the Sub-Manager, such transaction or investment appears unsuitable, impractical or undesirable for the Manager (on behalf of the company).

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The Manager and the Sub-Manager will experience conflicts of interest in connection with the management of our business affairs relating to the allocation of business opportunities by the Manager, the Sub-Manager and their respective affiliates to us and other clients. The Sub-Manager or its affiliates currently manage other clients that have a similar business strategy as us. The Sub-Manager will determine which opportunities it presents to us or another client with a similar business objective. The Sub-Manager may determine that an opportunity is more appropriate for another client managed by the Sub-Manager or any of its affiliates than it is for us and present such opportunity to the other client. In certain cases, the Sub-Manager, subject to approval by the Manager that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, may determine it is appropriate for us to participate in an acquisition opportunity alongside one or more other clients managed by the Sub-Manager or any of its affiliates. These co-opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other clients. To the extent the Sub-Manager identifies such co-opportunities, the Sub-Manager has developed an allocation policy to ensure that we are treated fairly and equitably. The Sub-Manager and its affiliates will utilize this allocation policy to determine how to allocate opportunities that may be appropriate for us or other of the Sub-Manager’s or its affiliates’ clients. As part of this policy, the Sub-Manager will consider a variety of factors in making allocation decisions, including a client’s stated investment objectives, scope, criteria, guidelines, business strategy and available capital for investment. As a result, the Sub-Manager and its affiliates may determine, in its discretion, that it is appropriate to allocate opportunities to other clients in whole or in part as co-opportunities. The Sub-Manager will also consider whether the transaction complies with the terms of our LLC Agreement or the partnership or limited liability company agreement of such other programs and our investment policy. Our board of directors has adopted its own allocation policy, which incorporates the Sub-Manager’s allocation policy by reference. If we invest in a general partnership or joint venture with affiliates, management fees payable in connection with such an investment will be proportional to our respective interest in the investment or the value of services provided, as applicable. All acquisitions of our businesses will be approved by our board of directors. The independent directors of our board of directors will be responsible for oversight of the allocation process.
Consistent with our allocation policy, in the event that a co-investment opportunity that the Manager has approved for potential participation does not close and the Sub-Manager and its affiliates accumulate broken deal costs in connection with the co-investment opportunity, the Sub-Manager and its affiliates will be required to allocate such broken deal costs among us and the other participating accounts. Broken deal costs will generally be allocated to us by the Sub-Manager pro rata based on our allocation in a proposed co-investment opportunity if our allocation in such co-investment opportunity has been determined; however, in the event that we expect to participate in a co-investment opportunity with Levine Leichtman Capital Partners VI, L.P. (“LLCP VI”), LLCP Lower Middle Market Fund, L.P. (“LMM II Fund”), or LLCP Lower Middle Market Fund III, L.P. (“LMM III Fund”) which accumulates broken deal costs and our allocation in such co-investment opportunity has not yet been determined, we will be allocated 5% of the broken deal costs with respect to a co-investment with LLCP VI, 12.5% of the broken deal costs with respect to a co-investment with LMM II Fund, or 10% of the broken deal costs with respect to a co-investment with LMM III Fund, subject to annual review by the Sub-Manager. We may similarly act as a dedicated co-investor for other Private Acquisition Funds advised by affiliates of the Sub-Manager that are formed in the future, with our allocation percentage being determined at or prior to the time we begin pursuing co-investment opportunities with such vehicles and subject to annual review by the Sub-Manager. Additionally, on a quarterly basis, the Sub-Manager will identify third party broken deal costs for opportunities that were not presented to the Manager for prior approval but which are determined in the Sub-Manager’s reasonable judgment and in a manner consistent with the Sub-Manager’s fiduciary obligations to have qualified as a potential investment opportunity for us on a direct or co-investment basis (such opportunity, a “lookback broken deal”). Subject to approval by the Manager, we will reimburse the Sub-Manager for our allocable portion of third party broken deal expenses incurred in connection with a lookback broken deal. In the case of a lookback broken deal identified as an opportunity on a co-investment basis with LLCP VI, LMM Fund, or LMM III Fund, our allocable portion of such third party broken deal expenses will be 5%, 12.5%, or 10%, respectively. Unless our board of directors approves otherwise, in no event will our portion of the aggregate lookback broken deal expenses exceed $75,000 on a calendar year basis.
Our businesses may pay transaction fees to the Sub-Manager for services it provides to them and therefore our shareholders may be indirectly subject to such fees (except that no such transaction fees were charged on our acquisition of the initial businesses). These fees may be paid before we realize any income or gain. The Manager and the Sub-Manager may face conflicts of interest with respect to services performed for our businesses, on the one hand, and opportunities recommended to us, on the other hand.

See “Conflicts of Interest and Certain Relationships and Related Party Transactions.”

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Q:How does a “best efforts” offering work?
A:When securities are offered to the public on a “best efforts” basis, this means that the Managing Dealer is only required to use its best efforts to sell our shares and does not have a firm commitment or obligation to purchase any of the shares we are offering.
Q:How long will this offering last?
A:This is a continuous offering of our shares as permitted by the federal securities laws. We currently intend to sell shares in this offering until November 1, 2023 (two years after the date of this prospectus) and we may extend this offering one additional year if all of the shares we have registered are not yet sold within two years; however, we may suspend or terminate this offering sooner, or extend this offering as permitted under applicable securities laws, in each case with respect to any class of shares, and we would announce such event in a prospectus supplement. In addition, some states will require us to renew our registration annually in order to continue offering our shares beyond the initial registration period in such states. Your ability to purchase shares and submit shares for repurchase will not be affected by the expiration of this offering and the commencement of a new one.
Q:Will you receive a certificate for your shares?
A:No. Our board of directors has authorized the issuance of shares of our limited liability company interest without certificates. We do not expect to issue shares in certificated form, although we may decide to issue certificates in the future. We anticipate that all shares will be issued in book-entry form only. The use of book-entry registration protects against loss, theft or destruction of share certificates and reduces the offering costs.
Q:Who can buy shares in this offering?
A:In general, you may buy shares pursuant to this prospectus if you have either (1) a gross annual income of at least $70,000 and a net worth of at least $70,000, or (2) a net worth of at least $250,000. Additionally, certain states have established requirements for investors residing in those states. For this purpose, net worth does not include your home, home furnishings and automobiles. See “Suitability Standards.”
Q:For whom may an investment in our shares be appropriate?
A:An investment in our shares may be appropriate for you if you:
meet the minimum suitability standards described above under “Suitability Standards;”
seek to receive the potential benefit of current income through regular distribution payments;
wish to obtain the potential benefit of long-term capital appreciation; and
are able to hold your shares as a long-term investment and do not need liquidity from your investment quickly in the near future.

We cannot assure you that an investment in our shares will allow you to realize any of these objectives. An investment in our shares is only intended for investors who do not need the ability to sell their shares quickly in the future since we are not obligated to repurchase any of our shares and may choose to repurchase only some, or even none, of the shares that have been requested to be repurchased in any particular quarter in our discretion, and the opportunity to have your shares repurchased under our share repurchase program may not always be available. See “Share Repurchase Program.”

Q:What is the purchase price for each share and how will you communicate changes to the purchase price for each share?
A:The current public offering prices for our shares are $33.66 per Class A share, $32.18 per Class T share, $30.27 per Class D share and $31.18 per Class I share. Such prices may be adjusted by our board of directors. Our board of directors determines our net asset value for each class of our shares on a monthly basis. If our net asset value per share on such valuation date increases above or decreases below our net proceeds per share as stated in this prospectus, we will adjust the offering price per share of any of the classes of our shares, effective five business days after such determination is published, to ensure that no share is sold at a price, after deduction of upfront selling commissions and dealer manager fees, that is above or below our net asset value per share on such valuation date.
   
  We will file a prospectus supplement or post-effective amendment to the registration statement with the SEC disclosing the adjusted offering prices and the effective date of such adjusted offering prices, and we will also post the updated pricing information on our website at www.cnlstrategiccapital.com. You may also obtain the current offering price by calling us by telephone at (866) 650-0650. If the new offering price per share for any of the classes of our shares being offered by this prospectus represents more than a 20% change in the per share offering price of our shares from the most recent offering price per share, we will file an amendment to the registration statement with the SEC to be declared effective by the SEC. We will attempt to file the amendment on or before such time in order to avoid interruptions in this offering; however, there can be no assurance that this offering will not be suspended while the SEC reviews any such amendment and until it is declared effective.

 

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Q:How much time do investors have to withdraw their subscriptions if the price changes after they subscribed?
A:The monthly closing date on which we will accept subscriptions is expected to be the last business day of each month. Subscribers are not committed to purchase shares at the time their subscription orders are submitted and any subscription may be withdrawn at any time before the time it has been accepted by us. The purchase price per share to be paid by each investor will be equal to the price that is in effect on the date we accept such investor’s subscription agreement in connection with our monthly closing. Generally, an investor will know the monthly closing date that applies to their subscription. In the event we adjust the offering price after an investor submits their subscription agreement and before the date we accept such subscription, such investor will not be provided with direct notice by us of the adjusted offering price but will need to check our website or our filings with the SEC prior to the closing date of their subscription. In this case, an investor will have at least five business days after we publish the adjusted offering price to consider whether to withdraw their subscription request before they are committed to purchase shares upon our acceptance. Funds received in connection with a subscription will be placed in a non-interest-bearing escrow account pending our monthly closing. However, there is no assurance that your subscription will be accepted or close on a succeeding month following your subscription date. See “Determination of Net Asset Value” and “Plan of Distribution.”
Q:What is the difference between the Class A, Class T, Class D, Class I, Class FA and Class S shares?
A:We are offering four classes of shares to provide investors with more flexibility in making their investment in us and to provide broker dealers with more flexibility to facilitate investment in us. Class FA shares and Class S shares are not being offered in this offering. Each of our shares, regardless of class, will be entitled to one vote per share on matters presented to the shareholders for approval. The differences between the classes being offered in this offering relate to the sales load and shareholder fees payable in respect of each class. Specifically, we will pay a selling commission of up to 6.00% and pay the Managing Dealer a fee of up to 2.50% of the sale price for each Class A share sold in this offering. For Class T shares sold in this offering, we will pay a selling commission of up to 3.00% and pay the Managing Dealer a fee of up to 1.75% of the sale price for each Class T share sold in this offering. We will not pay an upfront selling commission with respect to Class D or Class I shares. We pay the distribution and shareholder servicing fee to our Managing Dealer, subject to certain limits, among other things, the 10% limit on total underwriting compensation, on the Class T and Class D shares sold in this primary offering (excluding Class T Shares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of our current net asset value per share, as disclosed in our periodic or current reports, payable on a monthly basis. Distributions on the non-founder shares may be lower than distributions on the founder shares because we are required to pay higher management and incentive fees to the Manager and the Sub-Manager with respect to the non-founder shares. Additionally, distributions on Class T shares and Class D shares may be lower than distributions on the Class A, Class FA, Class I and Class S shares because we are required to pay ongoing distribution and shareholder servicing fees with respect to the Class T shares and Class D shares sold in this offering. In determining which class of shares you are eligible to purchase, you should consult with your investment or financial advisor and consider, among other factors, the amount of your investment, the anticipated length of time you intend to hold our shares assuming you are able to redeem, transfer or otherwise dispose of your shares, the applicable sales load and/or ongoing distribution and servicing fees with a particular class, your investment objective, investment account type, or the existence of applicable volume or other discounts. See “Summary of Our LLC Agreement—Classes of Shares” and “Plan of Distribution” for a discussion of the differences between our classes of shares.

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Q:What are the fees that we pay to the Manager, the Sub-Manager, their respective affiliates and the Managing Dealer in connection with this offering?
A:There are three types of fees that you will incur. First, for Class A shares and Class T shares, there are shareholder transaction expenses that are a one-time up-front fee calculated as a percentage of the public offering price. Second, for Class T shares and Class D shares, there are ongoing distribution and shareholder servicing fees that are calculated as a percentage of net asset value. Third, we also will incur other offering costs and various recurring expenses, including organizational and offering costs, the management fees and incentive fees that are payable under the Management Agreement and the Sub-Management Agreement, as applicable, and administrative costs that are payable under the Administrative Services Agreement between us and CNL and the Sub-Administration Agreement between us, CNL and the Sub-Manager. Such other offering costs and various recurring expenses are applicable to all of our share classes. See “Compensation of the Manager, the Sub-Manager and the Managing Dealer.” Our businesses may pay transaction fees to the Sub-Manager for services it provides to them and therefore our shareholders may be indirectly subject to such fees (except that no such transaction fees were charged on our acquisition of the initial businesses). These fees may be paid before we realize any income or gain. See “Management—Sub-Management Agreement—Transaction Fees.”
Q:If I buy shares, will I receive distributions and how often?
A:Subject to our board of director’s discretion and applicable legal restrictions, our board of directors has declared, and intends to continue to declare, cash distributions to shareholders based on monthly record dates and we have paid, and intend to continue to pay, such distributions on a monthly basis. However, there can be no assurance that we will pay distributions at a specific rate or at all. Distributions will be paid out of funds legally available. See “Distribution Policy.”
Q:May I reinvest my cash distributions in additional shares?
A:Yes. We have adopted a distribution reinvestment plan in which shareholders (other than shareholders who are residents of Alabama, Arkansas, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Vermont and Washington (collectively the “Opt-in States”), holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan) will have their cash distributions automatically reinvested in additional shares unless they elect to receive their distributions in cash. Shareholders who are residents of Opt-in States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan will automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. If you participate in our distribution reinvestment plan, the cash distributions attributable to the class of shares that you own will be automatically invested in additional shares of the same class (except for the holders of Class FA shares who may elect to have their cash distributions reinvested in Class A shares).

The purchase price for shares purchased under our distribution reinvestment plan will be equal to the most recently determined and published net asset value per share of the applicable class of shares. Holders of Class FA shares who elect to have their cash distributions reinvested in Class A shares will be issued on the same date that we hold our next monthly closing for Class A shares. We will not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T and Class D shares sold in this offering will be allocated among all Class T and Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.

Q:How do I subscribe for shares?
A:If you meet the suitability standards and choose to purchase shares in this offering, you should proceed as follows:
Read this entire prospectus, including the section entitled “Risk Factors,” and all appendices and supplements accompanying this prospectus.
Complete and execute a copy of the subscription agreement. Subscription agreements may be manually executed by investors with either a physical signature or, where permitted by your financial intermediary, completed and executed electronically. A specimen copy of the subscription agreement, including instructions for completing it, is included in this prospectus as Appendix B. By signing the subscription agreement, you will be making the representations and warranties contained in the subscription agreement and you will be bound by all of the terms of the subscription agreement and of our LLC Agreement.

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Deliver a check or arrange for a wire payment for the full purchase price of the shares being subscribed for along with the completed subscription agreement to your participating broker-dealer. You should make your check payable to “UMB Bank, N.A., Escrow Agent for CNL Strategic Capital, LLC.” After you have satisfied the applicable minimum purchase requirement of $5,000, additional purchases must be in amounts of at least $500, except for purchases made pursuant to our distribution reinvestment plan.
By executing the subscription agreement and paying the total purchase price for the shares subscribed for, each investor attests that he or she meets the suitability standards as stated in the subscription agreement and agrees to be bound by all of its terms.

We will schedule monthly closings on subscriptions received and accepted by us. However, there is no assurance that your subscription will close on the next succeeding month following your subscription date. The monthly closing date on which we will accept subscriptions is expected to be the last business day of each month. Subscribers are not committed to purchase shares at the time their subscription orders are submitted and any subscription may be withdrawn at any time before the time it has been accepted by us. Subscriptions will be effective only upon our acceptance, and we reserve the right, in our sole discretion, to accept or reject any subscription in whole or in part. In the event we adjust the offering price after an investor submits their subscription agreement and before the date we accept such subscription, such investor will not be provided with direct notice by us of the adjusted offering price but will need to check our website or our filings with the SEC prior to the closing date of their subscription. In this case, an investor will have at least five business days after we publish the adjusted offering price to consider whether to withdraw their subscription request before they are committed to purchase shares upon our acceptance. If the offering price is adjusted after an investor submits their subscription agreement and before the date we accept such subscription, the number of shares that an investor ultimately receives may vary. Funds received in connection with a subscription will be placed in a non-interest-bearing escrow account pending our monthly closing. We are not permitted to accept a subscription for our shares until at least five (5) business days after the date you receive this prospectus. Subscriptions will be accepted or rejected within thirty (30) calendar days of receipt by us. If your subscription is rejected, all subscription funds will be returned to you, without deduction for any expenses, within ten (10) business days from the date the subscription is rejected. If we accept your subscription, either your financial intermediary or our transfer agent will mail you a confirmation statement. See “Plan of Distribution.”

Q:If you buy shares in this offering, how may you later sell them?
A:We do not intend to list any of our shares on any exchange or include them in any national quotation system and do not expect a public market to develop for our shares in the foreseeable future. Because of the lack of a trading market for our shares, shareholders may not be able to sell their shares promptly or at a desired price. If you are able to sell your shares, you may have to sell them at a discount to the purchase price of your shares.

We have adopted a share repurchase program to conduct quarterly share repurchases, but only a limited number of shares are eligible for repurchase. The aggregate amount of funds under our share repurchase program will be determined on a quarterly basis in the sole discretion of our board of directors. During any calendar quarter, the total amount of aggregate repurchases will be limited to the aggregate proceeds from our distribution reinvestment plan during the previous quarter unless our board of directors determines otherwise. At the discretion of our board of directors, we may also use cash on hand, offering proceeds, cash available from borrowings, and cash from the sale of assets as of the end of the applicable period to repurchase shares. Our share repurchase program also limits the total amount of aggregate repurchases of Class A, Class FA, Class T, Class D, Class S and Class I shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The timing, amount and terms of our share repurchase program will include certain restrictions intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes. Our board of directors may amend or suspend the share repurchase program upon 30 days’ prior notice to our shareholders. The repurchase price for your shares through the share repurchase program will generally be based on our most recently determined and published net asset value, and will not be based on any public trading market.  To the extent the repurchase price for the applicable quarter is not made available by the tenth business day prior to the repurchase date, we may, in our sole discretion, extend the repurchase date into the immediately subsequent month to ensure such notice period is satisfied. Otherwise, no repurchase requests will be accepted for such quarter and shareholders who wish to have their shares repurchased the following quarter must resubmit their repurchase requests. All shares purchased by us pursuant to the terms of each repurchase will be retired and thereafter will be authorized and unissued shares. See “Share Repurchase Program.”

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Q:Will there be a liquidity event for shareholders?
A:Our board of directors intends to contemplate a liquidity event for our shareholders on or before November 1, 2027 (which is within six years from the date we terminated our initial public offering); however, our board of directors is under no obligation to pursue or complete any particular liquidity event during this timeframe or otherwise. We expect that our board of directors, in the exercise of its fiduciary duty to our shareholders, will decide to pursue a liquidity event when it believes that then-current market conditions are favorable for a liquidity event, and that such an event is in the best interests of our shareholders. There can be no assurance that a suitable transaction will be available or that market conditions for a transaction will be favorable during that timeframe. A liquidity event could include, among other transactions: (i) a sale of all or substantially all of our assets, either on a complete portfolio basis or individually, followed by a liquidation; (ii) subject to an affirmative vote of a two-thirds (2/3) super-majority of our outstanding shares, a decision to continue as a perpetual-life company with a self tender offer for a minimum of twenty-five percent (25%) of our outstanding shares; (iii) a merger or other transaction approved by our board of directors in which our shareholders will receive cash or shares of another publicly traded company; or (iv) a listing of our shares on a national securities exchange or a quotation through a national quotation system. However, there can be no assurance that we will complete a liquidity event within such time or at all.

If a liquidity event does not occur, shareholders may have to hold their shares for an extended period of time, or indefinitely. In making a determination of what type of liquidity event is in the best interest of our shareholders, our board of directors, including our independent directors, may consider a variety of criteria, including, but not limited to, asset diversification and performance, our financial condition, potential access to capital as a listed company, market conditions for the sale of our assets or listing of our shares, internal management requirements to become a perpetual life company and the potential for investor liquidity. Notwithstanding the shareholder approval requirement in connection with a determination to continue as a perpetual-life company as discussed above in (ii), nothing shall prevent our board of directors from exercising its fiduciary duty on behalf of our company and our shareholders, including any limitation on our board of directors to conduct self tender offers or seek shareholder approval through multiple proxy attempts.

Q:Is there any minimum initial investment required?
A:Yes. To purchase shares in this offering, you must make an initial purchase of at least $5,000. Once you have satisfied the minimum initial purchase requirement, any additional purchases of our shares in this offering must be in amounts of at least $500, except for additional purchases pursuant to our distribution reinvestment plan. See “Plan of Distribution.”
Q:Can I invest through my IRA, SEP or after-tax deferred account?
A:Yes, subject to the suitability standards. An approved trustee must process and forward to us subscriptions made through IRAs, Keogh plans and 401(k) plans. In the case of investments through IRAs, Keogh plans and 401(k) plans, our transfer agent will send the confirmation and notice of our acceptance to the trustee. Please be aware that in purchasing shares, custodians or trustees of employee pension benefit plans or IRAs may be subject to the fiduciary duties imposed by Title I of ERISA or other applicable laws and to the prohibited transaction rules prescribed by Title I of ERISA and related provisions of Section 4975 of the Code. In addition, prior to purchasing shares, the trustee or custodian of an employee pension benefit plan or an IRA should determine that such an investment would be permissible under the governing instruments of such plan or account and applicable law. See “Suitability Standards” for more information.

While tax-exempt organizations generally are exempt from U.S. federal, state and local income taxation, tax-exempt shareholders may be subject to such taxation on their share of UBTI, which generally includes income or gain derived (either directly or through a partnership) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organization’s exempt purpose or function. See “Certain U.S. Federal Income Tax Consequences—Tax Exempt Organizations” for more information.

Q:How will the payment of fees and expenses affect my invested capital?
A:The payment of fees and expenses will reduce the funds available to us to execute our business strategy as well as funds available for distribution to shareholders. The payment of fees and expenses will also reduce the value of your shares. For a summary of the fees and expenses that we will incur, see “Compensation of the Manager, the Sub-Manager and the Managing Dealer.”

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Q:Will the distributions I receive be taxable?
A:As discussed below, we intend to be characterized as a partnership for U.S. federal income tax purposes. As a partnership, our shareholders will be allocated and taxed on their respective share of our items of income gain, loss, deduction and credit on an annual basis whether or not actual cash distributions are made by us. Accordingly, non-liquidating distributions on our shares generally will not be taxable to a shareholder. However, cash distributions in excess of a U.S. shareholder’s adjusted tax basis in the shares generally will be treated as gain from the sale or exchange of the shares. See “Certain U.S. Federal Income Tax Consequences.”
Q:When will I get my detailed tax information?
A:Because we will file a partnership return, tax information will be reported to investors on an IRS Schedule K-1 for each calendar year as soon as reasonably practicable after the end of each such year, and we will use our best efforts to provide such information no later than 75 days after the end of such year. Each K-1 provided to a holder of shares will set forth the holder’s share of our items of income, gain, deduction, loss and credit for such year in a manner sufficient for a shareholder to complete its tax return with respect to its investment in the shares.
Q:What is the impact of being an “emerging growth company”?
A:We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act, or the JOBS Act, enacted on April 5, 2012. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. Although these exemptions will be available to us, we do not expect these exemptions to have a material impact on our public reporting and disclosure. Because we are not a “large accelerated filer” or an “accelerated filer” under the Exchange Act, and will not be so for so long as our shares are not traded on a securities exchange, we are not subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. In addition, because we have no employees, we do not have any executive compensation or golden parachute payments to report in our periodic reports and proxy statements.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;
the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering;
the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and
the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates as of the last day of our most recently completed second fiscal quarter, (ii) been a public company for at least 12 months and (iii) filed at least one annual report with the SEC. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. However, we are choosing to opt out of that extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

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Q:Are there any Investment Company Act of 1940 considerations?
A:We are organized as a holding company that conducts its business primarily through its wholly- and majority-owned subsidiaries. We conduct and intend to continue to conduct our operations so that the company and each of its subsidiaries do not fall within, or are excluded from the definition of an “investment company” under the Investment Company Act of 1940, as amended, or the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. We believe that we are not to be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not and will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we have and continue to intend to acquire stable and growing U.S. middle-market businesses with a focus on business services, consumer products, education, franchising, light manufacturing / specialty engineering, non-FDA regulated healthcare and safety companies. In addition, through the Manager and the Sub-Manager, we have been and intend to continue to be engaged with the acquired businesses in several areas, including (i) strategic direction and planning, (ii) supporting add-on acquisitions and introducing senior management to new business contacts, (iii) balance sheet management, (iv) capital markets strategies, and (v) optimization of working capital. We monitor the critical success factors of our acquired businesses on a daily/weekly basis and meet monthly with senior management of the companies we acquire in an operating committee environment to discuss their respective strategic, financial and operating performance. As a consequence, we primarily engage and hold ourselves out as being primarily engaged in the non-investment company businesses of these companies, which are or will become our wholly- or majority-owned subsidiaries.

Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” Excluded from the term “investment securities,” among other instruments, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exceptions under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We conduct operations, and intend to continue to conduct our operations, so that on an unconsolidated basis we and most of our subsidiaries will comply with the 40% test and no more than 40% of the assets of those subsidiaries will consist of investment securities. We expect that most, if not all, of our wholly- and majority-owned subsidiaries will fall outside the definitions of investment company under Section 3(a)(1)(A) and Section 3(a)(1)(C) or rely on an exception or exemption from the definition of investment company other than the exceptions under Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. Consequently, interests in these subsidiaries (which currently constitute and are expected to continue to constitute most, if not all, of our assets) generally will not constitute “investment securities.” Accordingly, we believe that we are not considered and will not be considered an investment company under Section 3(a)(1)(C) of the Investment Company Act. We monitor our holdings on an ongoing basis and in connection with each of our business acquisitions to determine compliance with the 40% test.

The determination of whether an entity is our majority-owned subsidiary is made by us. Under the Investment Company Act, a majority-owned subsidiary of a person means a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment of any company as a majority-owned subsidiary and the SEC has not done so. If the SEC, or its staff, were to disagree with our treatment of one of more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.

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Additionally, we conduct and intend to continue to conduct operations so that we are not treated as a “special situation investment company” as such term has been interpreted by the SEC and by courts in judicial proceedings under the Investment Company Act. Special situation investment companies generally are companies which secure control of other companies primarily for the purpose of making a profit in the sale of the controlled company’s securities. The types of companies that have been characterized by the SEC in SEC releases, the SEC staff or by courts in judicial proceedings under the Investment Company Act as “special situation investment companies” are those that, as part of their history and their stated business purpose, engage in a pattern of acquiring large or controlling blocks of securities in companies, attempting to control or to exert a controlling influence over these companies, improving their performance and then disposing of acquired share positions after a short-term holding period at a profit once the acquired shares increase in value. Special situation investment companies also follow a policy of shifting from one investment to another because greater profits seem apparent elsewhere. We monitor our business activities, including our acquisitions and divestments, on an ongoing basis to avoid being deemed a special situation investment company. One of the factors that distinguishes us from a “special situation investment company” is our policy of acquiring middle-market businesses with the expectation of operating these businesses over a long-term basis that for us will involve a minimum holding period of four to six years. See “Business—Business Strategy.”

A change in the value of our assets could cause us or one or more of our wholly- or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exclusion from registration under the Investment Company Act. To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to acquire businesses with an intention of disposing of them on a short-term basis. In addition, we may in other circumstances be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. We also may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our business strategy.

If we become obligated to register the company or any of its subsidiaries as an investment company pursuant to the Investment Company Act, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

If we were required to register the company as an investment company pursuant to the Investment Company Act but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business, all of which would have a material adverse effect on us.

Q:Are there any restrictions on the transfer of shares?
A:Subject to the restrictions in our LLC Agreement, our shares offered in this offering will be freely transferable, except where their transfer is restricted by federal and state tax laws, securities laws or by contract. We will not charge for transfers of shares except for necessary and reasonable costs actually incurred by us. See “Summary of Our LLC Agreement—Transfer of Our Shares—Restrictions on the Transfer of Shares and Withdrawal” for a detailed description of the transfer restrictions on our shares.
Q:Who can help answer my questions?
A:If you have more questions about this offering or if you would like additional copies of this prospectus, you should contact your investment representative or us by mail at Shareholder Services, CNL Strategic Capital, LLC, 450 S. Orange Ave., Suite 1400, Orlando, FL 32801, or by telephone at (866) 650-0650.

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RISK FACTORS

Investing in our shares involves a number of significant risks. In addition to the other information contained in this prospectus, investors should consider carefully the following information before making an investment in our shares. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the value of our shares could decline, and investors may lose part or all of their investment.

Risks Related to this Offering and Our Shares

The offering prices may change on a monthly basis and investors may not know the offering price when they submit their subscription agreements.

The offering prices for our classes of shares may change on a monthly basis and investors will need to determine the price by checking our website at www.cnlstrategiccapital.com or reading a supplement to this prospectus. A subscriber may also obtain our current offering price by calling us by telephone at (866) 650-0650. In addition, if there are issues processing an investor’s subscription, the offering price may change prior to the acceptance of such subscription. In the event we adjust the offering price after an investor submits their subscription agreement and before the date we accept such subscription, such investor will not be provided with direct notice by us of the adjusted offering price but will need to check our website or our filings with the SEC prior to the closing date of their subscription. In this case, an investor will have at least five business days after we publish the adjusted offering price to consider whether to withdraw their subscription request before they are committed to purchase shares upon our acceptance. See “Determination of Net Asset Value—Net Asset Value Determinations in Connection with this Continuous Offering.”

We have held our current businesses for only a short period of time and investors will not have the opportunity to evaluate the assets we acquire before we make them, which makes an investment in us more speculative.

We have held our current businesses for only a short period of time and we are not able to provide investors with information to evaluate the economic merit of the acquisitions we intend to make prior to our making them and investors will be relying entirely on the ability of the Manager, the Sub-Manager and our board of directors to select or approve, as the case may be, such acquisitions. Future opportunities may include the acquisition of businesses that are currently owned and/or controlled by the Sub-Manager or its affiliates. In connection with any acquisition of a business that involves the Sub-Manager or its affiliates (excluding co-investment opportunities acquired directly from third parties other than the Sub-Manager or its affiliates), we would seek a valuation from a third-party valuation firm, and such acquisition would be subject to approval of a majority of our independent directors.

Additionally, the Manager and the Sub-Manager, subject to oversight by our board of directors, have broad discretion to review, approve, and oversee our business and acquisition policies, to evaluate our acquisition opportunities and to structure the terms of such acquisitions and investors will not be able to evaluate the transaction terms or other financial or operational data concerning such acquisitions. Because of these factors, this offering may entail more risk than other types of offerings. Our board of directors has also delegated broad discretion to both of the Manager and Sub-Manager to implement our business and acquisitions strategies, which includes delegation of the duty to approve certain decisions consistent with the business and acquisition policies approved by our board of directors, our board of directors’ fiduciary duties and securities laws. This additional risk may hinder investors’ ability to achieve their own personal investment objectives related to portfolio diversification, risk-adjusted returns and other objectives.

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The shares sold in this offering, our initial public offering and any of our private offerings will not be listed on an exchange or quoted through a national quotation system for the foreseeable future, if ever. Therefore, investors in this offering will have limited liquidity and may not receive a full return of their invested capital if investors sell their shares.

The shares offered by us are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in the future. The ability to transfer shares is limited. Pursuant to our LLC Agreement, we have the discretion under certain circumstances to prohibit transfers of shares, or to refuse to consent to the admission of a transferee as a shareholder. See “Summary of Our LLC Agreement—Transfer of Our Shares—Restrictions on the Transfer of Shares and Withdrawal.” We have adopted a share repurchase program to conduct quarterly share repurchases but only a limited number of shares are eligible for repurchase. Moreover, investors should not rely on our share repurchase program as a method to sell shares promptly because our share repurchase program includes numerous restrictions that limit their ability to sell their shares to us, and our board of directors may amend or suspend our share repurchase program upon 30 days’ prior notice to our shareholders if in its reasonable judgment it deems such action to be in our best interest and the best interest of our shareholders, such as when repurchase requests would place an undue burden on our liquidity, adversely affect our operations, risk having an adverse impact on us that would outweigh the benefit of repurchasing our shares or risk our ability to qualify as a partnership for U.S. federal income tax purposes. Upon suspension of our share repurchase program, our share repurchase program requires our board of directors to consider at least quarterly whether the continued suspension of the plan is in our best interest and the best interest of our shareholders; however, we are not required to authorize the recommencement of the share repurchase program within any specified period of time. Our board of directors cannot terminate our share repurchase program absent a liquidity event or where otherwise required by law. In such an event, we will notify our shareholders of such developments in a current report on Form 8-K or in our annual or quarterly reports, which will be posted on our website, and will also provide a separate communication to our shareholders. The aggregate amount of funds under our share repurchase program will be determined on a quarterly basis in the sole discretion of our board of directors. During any calendar quarter, the total amount of aggregate repurchases will be limited to the aggregate proceeds from our distribution reinvestment plan during the previous quarter, unless our board of directors determines otherwise. At the discretion of our board of directors, we may also use cash on hand, cash available from borrowings, and cash from the sale of assets as of the end of the applicable period to repurchase shares. Our share repurchase program also limits the total amount of aggregate repurchases of Class A, Class FA, Class T, Class D, Class I and Class S shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The timing, amount and terms of our share repurchase program will include certain restrictions intended to maintain our ability to qualify as a partnership for U.S. federal income tax purposes. Therefore, it will be difficult for investors to sell their shares promptly or at all. If investors are able to sell their shares, investors may only be able to sell them at a substantial discount for the price they paid. Investor suitability standards imposed by certain states may also make it more difficult to sell their shares to someone in those states. The shares should be purchased as a long-term investment only.

Our board of directors intends to contemplate a liquidity event for our shareholders on or before November 1, 2027 (which is within six years from the date we terminated our initial public offering); however, our board of directors is under no obligation to pursue or complete any particular liquidity event during this timeframe or otherwise. We expect that our board of directors, in the exercise of its fiduciary duty to our shareholders, will decide to pursue a liquidity event when it believes that then-current market conditions are favorable for a liquidity event, and that such an event is in the best interests of our shareholders. There can be no assurance that a suitable transaction will be available or that market conditions for a transaction will be favorable during that timeframe. A liquidity event could include, among other transactions: (i) a sale of all or substantially all of our assets, either on a complete portfolio basis or individually, followed by a liquidation; (ii) subject to an affirmative vote of a two-thirds (2/3) super-majority of our outstanding shares, a decision to continue as a perpetual-life company with a self-tender offer for a minimum of twenty-five percent (25%) of our outstanding shares; (iii) a merger or other transaction approved by our board of directors in which our shareholders will receive cash or shares of another publicly traded company; or (iv) a listing of our shares on a national securities exchange or a quotation through a national quotation system. However, there can be no assurance that we will complete a liquidity event within such time or at all.

If a liquidity event does not occur, shareholders may have to hold their shares for an extended period of time, or indefinitely. In making a determination of what type of liquidity event is in the best interest of our shareholders, our board of directors, including our independent directors, may consider a variety of criteria, including, but not limited to, asset diversification and performance, our financial condition, potential access to capital as a listed company, market conditions for the sale of our assets or listing of our shares, internal management requirements to become a perpetual life company and the potential for investor liquidity. Notwithstanding the shareholder approval requirement in connection with a determination to continue as a perpetual-life company as discussed above in (ii), nothing shall prevent our board of directors from exercising its fiduciary duty on behalf of our company and our shareholders, including any limitation on our board of directors to conduct self-tender offers or seek shareholder approval through multiple proxy attempts.

 

This is a “best efforts” offering and if we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make, and the value of your investment in us will fluctuate with the performance of the assets we acquire.

 

This is a “best efforts,” as opposed to a “firm commitment” offering. This means that the Managing Dealer is not obligated to purchase any shares, but has only agreed to use its “best efforts” to sell the shares to investors. As a result, if we are unable to raise substantial funds, we will make fewer acquisitions resulting in less diversification in terms of the number of assets owned and the types of assets that we acquire. Effective June 30, 2020, participating broker-dealers in this offering are required to comply with Regulation Best Interest, which enhances the broker-dealer standard of conduct beyond current suitability obligations and requires participating broker-dealers in this offering to act in the best interest of each investor when making a recommendation to purchase shares in this offering, without placing their financial or other interest ahead of the investor’s interests. See “Suitability Standards – Regulation Best Interest.” The application of this enhanced standard of conduct may impact whether a broker-dealer recommends our shares for investment and consequently may adversely affect our ability to raise substantial funds in this offering. In particular, under SEC guidance concerning Regulation Best Interest, a broker-dealer recommending an investment in our shares should consider a number of factors under the care obligation of Regulation Best Interest, including but not limited to cost and complexity of the investment and reasonably available alternatives, which alternatives are likely to exist, in determining whether there is a reasonable basis for the recommendation. As a result, high cost, high risk and complex products may be subject to greater scrutiny by broker-dealers. Broker-dealers may recommend a more costly or complex product as long as they have a reasonable basis to believe is in the best interest of a particular retail customer. However, if broker-dealers choose alternatives to our shares, such as listed entities, which may be a reasonable alternative to an investment in us as such investments may feature characteristics like lower cost, nominal commissions at the time of initial purchase, less complexity and lesser or different risks, our ability to raise capital will be adversely affected. If Regulation Best Interest reduces our ability to raise capital in this offering, it would also harm our ability to create a diversified portfolio of investments and ability to achieve our objectives.

 

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In such event, the likelihood of our profitability being affected by the performance of any one of our assets will increase. Your investment in our shares will be subject to greater risk to the extent that we lack asset diversification. In addition, our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our financial condition and ability to pay distributions could be adversely affected.

You should not assume that we will sell the maximum offering made by this prospectus, or any other particular offering amount. See “Plan of Distribution” and “Estimated Use of Proceeds.”

Under our share repurchase program, our ability to make new acquisitions of businesses or increase the current distribution rate may become limited if, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, which may adversely affect our flexibility and our ability to achieve our investment objectives.

If, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, we will not make any new acquisitions of businesses (excluding short-term cash management investments under 90 days in duration) and we will use all available investable assets (as defined below) to satisfy repurchase requests (subject to the limitations under our share repurchase program) until all outstanding repurchase requests (“Unfulfilled Repurchase Requests”) have been satisfied. Additionally, during such time as there remains any requests under our share repurchase plan outstanding from such period, the Manager and the Sub-Manager will defer their total return incentive fee until all such Unfulfilled Repurchase Requests have been satisfied. If triggered, this requirement may prevent us from pursuing potentially accretive investment opportunities and may keep us from fully realizing our investment objectives. In addition, this requirement may limit our ability to pay distributions to our shareholders. “Investable assets” includes net proceeds from new subscription agreements, unrestricted cash, proceeds from marketable securities, proceeds from the distribution reinvestment plan, and net cash flows after any payment, accrual, allocation, or liquidity reserves or other business costs in the normal course of owning, operating or selling our acquired businesses, debt service, repayment of debt, debt financing costs, current or anticipated debt covenants, funding commitments related to our businesses, customary general and administrative expenses, customary organizational and offering costs, asset management and advisory fees, performance or actions under existing contracts, obligations under our organizational documents or those of our subsidiaries, obligations imposed by law, regulations, courts or arbitration, or distributions or establishment of an adequate liquidity reserve as determined by our board of directors.

The ongoing offering price may not accurately reflect the value of our assets.

Our board of directors determines our net asset value for each class of our shares on a monthly basis. If our net asset value per share on such valuation date increases above or decreases below our net proceeds per share as stated in this prospectus, we will adjust the offering price of any of the classes of our shares, effective five business days after such determination is published, to ensure that no share is sold at a price, after deduction of upfront selling commissions and dealer manager fees, that is above or below our net asset value per share on such valuation date. Ongoing offering prices for the shares in this offering will take into consideration other factors such as selling commissions, dealer manager fees, distribution and shareholder servicing fees and organization and offering expenses so the offering price will not be the equivalent of the value of our assets.

Valuations and appraisals of our assets are estimates of fair value and may not necessarily correspond to realizable value.

Our board of directors, with assistance from the Manager and the Sub-Manager, is ultimately responsible for determining in good faith the fair value of our assets for which market prices are not readily available. Our board of directors, including a majority of our independent directors and our audit committee, has adopted a valuation policy that provides for methodologies to be used to determine the fair value of our assets for purposes of our net asset value calculation. Our board of directors makes this determination on a monthly basis, and any other time when a decision is required regarding the fair value of our assets. Our board of directors has retained an independent valuation firm, Alvarez & Marsal Valuation Services, LLC, to assist the Manager and the Sub-Manager in preparing their recommendations with respect to our board of directors’ determination of the fair values of assets for which market prices are not readily available. For a discussion of this process, see “Determination of Net Asset Value.”

However, it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of assets or liabilities between valuations, or to obtain quickly complete information regarding any such events. As a result, the net asset value per share may not reflect a material event until such time as sufficient information is available and analyzed, and the financial impact is fully evaluated, such that our net asset value may be appropriately adjusted in accordance with our valuation procedures.

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Within the parameters of our valuation procedures, the valuation methodologies used to value our assets involves subjective judgments and projections and may not be accurate. Valuation methodologies also involve assumptions and opinions about future events, which may or may not turn out to be correct. Valuations of our assets are only estimates of fair value. Ultimate realization of the value of an asset depends to a great extent on economic, market and other conditions beyond our control and the control of the Manager, the Sub-Manager and the independent valuation firm. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. As such, the carrying value of an asset may not reflect the price at which the asset could be sold in the market, and the difference between carrying value and the ultimate sales price could be material. In addition, accurate valuations are more difficult to obtain in times of low transaction volume because there are fewer market transactions that can be considered in the context of the valuation. The determinations of fair value by our board of directors may differ materially from the values that would have been used if an active market and market prices existed for these assets. Furthermore, through the valuation process, our board of directors may determine that the fair value of our assets that differs materially from the values that were provided by the independent valuation firm. There will be no retroactive adjustment in the valuation of such assets, the offering price of our shares, the price we paid to repurchase shares or net asset value-based fees we paid to the Manager, the Sub-Manager or the Managing Dealer to the extent such valuations prove to not accurately reflect the realizable value of our assets. Because the price investors will pay for our shares in this offering, and the price at which their shares may be repurchased by us pursuant to our share repurchase program are generally based on our most recently determined net asset value per share, they may pay more than realizable value or receive less than realizable value for their investment.

Our net asset value per share may change materially if the valuations of our assets materially change from prior valuations or the actual operating results for a particular month differ from what we originally budgeted for that month.

When the valuations of our assets are reflected in our net asset value calculations, there may be a material change in our net asset value per share for each class of our shares from those previously reported. In addition, actual operating results for a given month may differ from what we originally budgeted for that month, which may cause a material increase or decrease in the net asset value per share. We will not retroactively adjust the net asset value per share of each class of shares reported for the previous month. Therefore, because a new monthly valuation may differ materially from the prior valuation or the actual results from operations may be better or worse than what we previously budgeted, the adjustment to reflect the new valuation or actual operating results may cause the net asset value per share for each class of our shares to increase or decrease, and such increase or decrease will occur on the day the adjustment is made.

The amount of any distributions we may pay is uncertain. We may not be able to pay investors distributions, and our distributions may not grow over time.

Subject to our board of directors’ discretion and applicable legal restrictions, our board of directors has declared, and intends to continue to declare cash distributions to shareholders. We intend to pay these distributions to our shareholders out of assets legally available for distribution. We cannot assure investors that we will achieve operating results that will allow us to make a targeted level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of the risks described in this prospectus. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, compliance with applicable regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure investors that we will pay distributions to our shareholders in the future. We may pay all or a substantial portion of our distributions from various sources of funds available to us, including from expense support from the Manager and the Sub-Manager, borrowings, the offering proceeds and other sources, without limitation. In the early stages of our company, we are likely to pay some, if not all, of our distributions from offering proceeds, borrowings, or from other sources, including cash resulting from expense support from the Manager and the Sub-Manager pursuant to an expense support and conditional reimbursement agreement (the “Expense Support and Conditional Reimbursement Agreement”), which became effective on February 7, 2018. If we fund distributions from financings, then such financings will need to be repaid, and if we fund distributions from offering proceeds, then we will have fewer funds available for business opportunities, which may affect our ability to generate future cash flows from operations and, therefore, reduce their overall return. In addition, if we fund distributions from borrowings, or other sources like expense support from the Manager and Sub-Manager, such sources may result in a liability to us which would cause our net asset value to decline more sharply than it otherwise would if we had not borrowed or used expense support to fund our distributions, which would negatively affect the price per share of our shares. We cannot predict when distribution payments sourced from debt and from proceeds will occur, and an extended period of such payments would likely be unsustainable. Distributions on the non-founder shares will likely be lower than distributions on Class FA shares because we are required to pay higher management and incentive fees to the Manager and the Sub-Manager with respect to the non-founder shares. Additionally, distributions paid to our shareholders of share classes with ongoing distribution and shareholder servicing fees may be lower than distributions on certain other of our classes without such ongoing distributions and shareholder servicing fees that we are required to pay. We also believe the likelihood that distributions will be paid from sources other than cash flow from operations may be higher in the early stages of the offering. These risks will be greater for persons who acquire our shares relatively early in this offering, before a significant portion of the offering proceeds have been deployed. Accordingly, shareholders who receive the payment of a distribution from us should not assume that such distribution is the result of a net profit earned by us.

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Because the Managing Dealer is an affiliate of the Manager, investors will not have the benefit of an independent review of this offering or us customarily performed in underwritten offerings.

The Managing Dealer, CNL Securities Corp., is an affiliate of the Manager, and will not make an independent review of us or this offering. Accordingly, investors will have to rely on their own broker-dealer or distribution intermediary to make an independent review of the terms of this offering. If an investor’s broker-dealer or distribution intermediary does not conduct such a review, they will not have the benefit of an independent review of the terms of this offering. Further, the due diligence investigation of us by the Managing Dealer cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker. In addition, we do not, and do not expect to, have research analysts reviewing our performance or our securities on an ongoing basis. Therefore, investors will not have an independent review of our performance and the value of our shares relative to publicly traded companies.

We may be unable to use a significant portion of the net proceeds of this offering on acceptable terms in the timeframe contemplated by the prospectus relating to this offering.

Delays in using the net proceeds of this offering may impair our performance. We cannot assure an investor that we will be able to identify any acquisition opportunities in a manner consistent with our business strategy or that any acquisition that we make will produce a positive return. We may be unable to use the net proceeds of this offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

Before we have raised sufficient funds to deploy the proceeds of this offering in acquisitions that are consistent with our business strategy, we will deploy the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements, certain leveraged loans and high-quality debt instruments maturing in one year or less from the time of acquisition, which may produce returns that are significantly lower than the returns which we expect to achieve in relation to the businesses and other assets we will seek to acquire. As a result, any distributions that we pay during this period may be substantially lower than the distributions that we may be able to pay in a manner consistent with our business strategy.

Investors’ interest in us will be diluted if we issue additional shares, which could reduce the overall value of the investment.

Potential investors in this offering do not have pre-emptive rights to any shares we issue in the future. Our LLC Agreement authorizes us to issue 1,000,000,000 shares. Pursuant to our LLC Agreement, a majority of our entire board of directors may amend our LLC Agreement from time to time to increase or decrease the aggregate number of authorized shares or the number of authorized shares of any class or series without shareholder approval. After an investor’s purchase in this offering, our board of directors may elect to sell additional shares in this or future public offerings, issue equity interests in private offerings or issue share-based awards to our independent directors, the Manager, the Sub-Manager and/or employees of the Manager or the Sub-Manager. To the extent we issue additional equity interests after an investor’s purchase in this offering, their percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our assets, an investor may also experience dilution in the net asset value and fair value of their shares.

Investors will experience substantial dilution in the net tangible book value of their shares equal to the offering costs and sales load associated with their shares and will encounter substantial on-going fees and expenses.

If investors purchase our shares in this offering, there are substantial fees and expenses which will be borne by the investor initially and ongoing as an investor. Also, investors will incur immediate dilution in the net tangible book value of their shares equal to the offering costs and the sales load associated with their shares. There are also certain offering costs associated with the shares in this offering, which will be reimbursed to the Manager and the Sub-Manager. This means that the investors who purchase shares will pay a price per share that substantially exceeds the per share value of our assets after subtracting our liabilities.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and therefore are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that normally are applicable to public companies. For so long as we remain an emerging growth company, we will not be required to (i) comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) submit certain executive compensation matters to stockholder advisory votes pursuant to the “say on frequency” and “say on pay” provisions of Section 14A(a) of the Exchange Act (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions of Section 14A(b) of the Exchange Act (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations), (iii) disclose more than two years of audited financial statements in a registration statement filed with the SEC, (iv) disclose selected financial data pursuant to the rules and regulations of the Securities Act (requiring selected financial data for the past five years or for the life of the issuer, if less than five years) in our periodic reports filed with the SEC for any period prior to the earliest audited period presented in this registration statement, and (v) disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Once we are no longer an “emerging growth company,” because we are not a “large accelerated filer” or an “accelerated filer” under the Exchange Act, and will not be so long as our shares are not traded on a securities exchange, we are not subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. In addition, because we have no employees, we do not have any executive compensation or golden parachute payments to report in our periodic reports and proxy statements. We cannot predict if investors will find our shares less attractive because we choose to rely on any of the exemptions discussed above.

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Additionally, under Section 107 of the JOBS Act, an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we are electing to “opt out” of such extended transition period, and therefore will comply with new or revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. This election is irrevocable.

We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our annual gross revenues exceed $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our shares that is held by non-affiliates equals or exceeds $700 million after we have been publicly reporting for at least 12 months and have filed at least one annual report on Form 10-K with the SEC.

Our business could be adversely affected if we fail to maintain our qualification as a “venture capital operating company,” or VCOC, under the Plan Asset Regulation.

We used a substantial portion of the net proceeds from our offerings to acquire our businesses and we currently operate our business in a manner so that it is intended to qualify as a venture capital operating company, or VCOC, under the U.S. Department of Labor regulation at 29 C.F.R. § 2510.3-101, as modified by Section 3(42) of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (the “Plan Asset Regulation”), and therefore are not subject to the ERISA fiduciary requirements with respect to our assets. However, if we fail to satisfy the requirements to qualify as a VCOC for any reason and no other exception under the Plan Asset Regulation applies, such failure could materially interfere with our activities or expose us to risks related to our failure to comply with the requirements and the fiduciary responsibility standards of Title I of ERISA would apply to us, including the requirement of investment prudence and diversification, and certain transactions that we enter into, or may have entered into, in the ordinary course of business, might constitute or result in non-exempt prohibited transactions under Section 406 of ERISA or Section 4975 of the Code. A non-exempt prohibited transaction, in addition to imposing potential fiduciary liabilities, may also result in the imposition of an excise tax under the Code upon a “party in interest” (as defined in Section 3(14) of ERISA) or “disqualified person” (as defined in Section 4975 of the Code) (collectively, “Parties in Interest”) with whom we engaged in the transaction. Therefore, our business could be adversely affected if we fail to quality as a VCOC under the Plan Asset Regulation.

Risks Related to Our Organization and Structure

We may be unable to successfully implement our business and acquisition strategies or generate sufficient cash flow to make distributions to our shareholders.

We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will be unable to implement and execute our business strategy as described in this prospectus and that the value of our shares could decline substantially and, as a result, investors may lose part or all of their investment. Our financial condition and results of operations will depend on many factors including the availability of acquisition opportunities, readily accessible short and long-term financing, financial markets and economic conditions generally and the performance of the Manager and the Sub-Manager. There can be no assurance that we will be able to generate sufficient cash flow over time to pay our operating expenses and make distributions to shareholders.

Our ability to implement and execute our business strategy depends on the Manager’s and the Sub-Manager’s ability to manage and support our business operations. If the Manager or the Sub-Manager were to lose any members of their respective senior management teams, our ability to implement and execute our business strategy could be significantly harmed.

We have no internal management capacity or employees other than our appointed executive officers and will be dependent on the diligence, skill and network of business contacts of the Manager’s and the Sub-Manager’s senior management teams to implement and execute our business strategy. We also depend, to a significant extent, on the Manager’s and the Sub-Manager’s access to its investment professionals and the information and deal flow generated by these professionals. The Manager’s and the Sub-Manager’s senior management teams will evaluate, negotiate, structure, close, and monitor the assets we acquire. The departure of any of the Manager’s or the Sub-Manager’s senior management teams could have a material adverse effect on our ability to implement and execute our business strategy. We do not anticipate maintaining any key person insurance on any of the Manager’s or the Sub-Manager’s senior management teams.

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Our board of directors may change our business and acquisition policies and strategies without prior notice or shareholder approval, the effects of which may be adverse to investors.

Our board of directors has the authority to modify or waive our current business and acquisition policies, criteria and strategies without prior notice and without shareholder approval. In such event, we will promptly file a prospectus supplement and a current report on Form 8-K, disclosing any such modification or waiver. We cannot predict the effect any changes to our current business and acquisition policies, criteria and strategies would have on our business, operating results and value of our shares. However, the effects might be adverse, which could negatively impact our ability to pay investors distributions and cause investors to lose all or part of their investment. Moreover, we will have significant flexibility in deploying the net proceeds of this offering and may use the net proceeds from this offering in ways with which investors may not agree or for purposes other than those contemplated at the time of this offering.

If we internalize our management functions, investors’ interest in us could be diluted, and we could incur other significant costs and face other significant risks associated with being self-managed.

Our board of directors may decide in the future to internalize our management functions. If we do so, we may elect to negotiate to acquire the Manager’s or the Sub-Manager’s assets and personnel. At this time, we cannot anticipate the form or amount of consideration or other terms relating to any such internalization transaction. Such consideration could take many forms, including cash payments, promissory notes and shares. The payment of such consideration could result in dilution of an investor’s interests as a shareholder and could reduce the earnings per share attributable to their investment.

In addition, while we would no longer bear the costs of the various fees and expenses we expect to pay to the Manager under the Management Agreement (50% of which is paid to the Sub-Manager under the Sub-Management Agreement), we would incur the compensation and benefits as well as the costs of our officers and other employees and consultants that we now expect will be paid by the Manager, the Sub-Manager or their respective affiliates. In addition, we may issue equity awards to officers, employees and consultants, which awards would decrease net income and may further dilute an investor’s investment. We cannot reasonably estimate the amount of fees we would save or the costs we would incur if we became self-managed. If the expenses we assume as a result of internalization are higher than the expenses we avoid paying to the Manager and the Sub-Manager, our earnings per share would be lower as a result of the internalization than they otherwise would have been, potentially decreasing the amount of funds available to distribute to our shareholders and the value of our shares. As currently organized, we do not expect to have any employees. If we elect to internalize our operations, we would employ personnel and would be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances.

If we internalize our management functions, we could have difficulty integrating these functions as a stand-alone entity. In addition, we could have difficulty retaining such personnel employed by us. We expect individuals employed by the Manager and the Sub-Manager to perform asset management and general and administrative functions, including accounting and financial reporting for us. These personnel have a great deal of know-how and experience. We may fail to properly identify the appropriate mix of personnel and capital needs to operate as a stand-alone entity. An inability to manage an internalization transaction effectively could result in our incurring excess costs and/or suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our assets.

In some cases, internalization transactions involving the acquisition of a manager have resulted in litigation. If we were to become involved in such litigation in connection with an internalization of our management functions, we could be forced to spend significant amounts of money defending ourselves in such litigation, regardless of the merit of the claims against us, which would reduce the amount of funds available to acquire additional assets or make distributions to our shareholders.

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Anti-takeover provisions in our LLC Agreement could inhibit a change in control.

Provisions in our LLC Agreement may make it more difficult and expensive for a third party to acquire control of us, even if a change of control would be beneficial to our shares. Under our LLC Agreement, our shares have only limited voting rights on matters affecting our business and therefore have limited ability to influence management’s decisions regarding our business. In addition, our LLC Agreement contains a number of provisions that could make it more difficult for a third party to acquire, or may discourage a third party from acquiring control of the company. These provisions include:

restrictions on our ability to enter into certain transactions with major holders of our shares modeled on the limitation contained in Section 203 of the Delaware General Corporation Law, or the DGCL;
allowing only the company’s board of directors to fill vacancies, including newly created directorships;
requiring that directors may be removed, with or without cause, only by a vote of a majority of the issued and outstanding shares;
requiring advance notice for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by holders of our shares at a meeting of shareholders;
permitting each of the Manager and Sub-Manager, respectively, to initially appoint a non-independent director and, thereafter, to nominate such non-independent director’s replacement upon such non-independent director’s failure to stand for re-election, resignation, removal from office, death or incapacity;
our ability to issue additional securities, including securities that may have preferences or are otherwise senior in priority to our shares; and
limitations on the ability of our shareholders to call special meetings of the shareholders.

We may have conflicts of interest with the noncontrolling shareholders of our businesses.

The boards of directors of the businesses we acquire controlling interests in will have fiduciary duties to all their shareholders, including the company and noncontrolling shareholders. As a result, they may make decisions that are in the best interests of their shareholders generally but which are not necessarily in the best interest of the company or our shareholders. In dealings with the company, the directors of these businesses may have conflicts of interest and decisions may have to be made without the participation of directors appointed by us, and such decisions may be different from those that we would make.

An investor’s investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

We are organized as a holding company that conducts its business primarily through its wholly- and majority-owned subsidiaries. We conduct and intend to continue to conduct our operations so that the company and each of its subsidiaries do not fall within, or are excluded from the definition of an “investment company” under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. We believe that we are not to be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not and will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, we have and continue to intend to acquire stable and growing middle-market U.S. businesses with a focus on business services, consumer products, education, franchising, light manufacturing / specialty engineering, non-FDA regulated healthcare and safety companies. In addition, through the Manager and the Sub-Manager, we have been and intend to continue to be engaged with the acquired businesses in several areas, including (i) strategic direction and planning, (ii) supporting add-on acquisitions and introducing senior management to new business contacts, (iii) balance sheet management, (iv) capital markets strategies, and (v) optimization of working capital. We monitor the critical success factors of our acquired businesses on a daily/weekly basis and meet monthly with senior management of the companies we acquire in an operating committee environment to discuss their respective strategic, financial and operating performance. As a consequence, we primarily engage and hold ourselves out as being primarily engaged in the non-investment company businesses of these companies, which are or will become our wholly- or majority-owned subsidiaries.

Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” Excluded from the term “investment securities,” among other instruments, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exceptions under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We conduct operations, and intend to continue to conduct our operations, so that on an unconsolidated basis we and most of our subsidiaries will comply with the 40% test and no more than 40% of the assets of those subsidiaries will consist of investment securities. We expect that most, if not all, of our wholly- and majority-owned subsidiaries will fall outside the definitions of investment company under Section 3(a)(1)(A) and Section 3(a)(1)(C) or rely on an exception or exemption from the definition of investment company other than the exceptions under Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. Consequently, interests in these subsidiaries (which currently constitute and are expected to continue to constitute most, if not all, of our assets) generally will not constitute “investment securities” for purposes of Section 3(a)(1)(C) of the Investment Company Act. Accordingly, we believe that we are not considered and will not be considered an investment company under Section 3(a)(1)(C) of the Investment Company Act. We monitor our holdings on an ongoing basis and in connection with each of our business acquisitions to determine compliance with the 40% test.

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The determination of whether an entity is our majority-owned subsidiary is made by us. Under the Investment Company Act, a majority-owned subsidiary of a person means a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment of any company as a majority-owned subsidiary and the SEC has not done so. If the SEC, or its staff, were to disagree with our treatment of one of more companies as majority-owned subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us. See “Risk Factors—Risks Related to this Offering and Our Shares—If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment company under the Investment Company Act.”

Additionally, we conduct and intend to continue to conduct operations so that we are not treated as a “special situation investment company” as such term has been interpreted by the SEC and its staff and by courts in judicial proceedings under the Investment Company Act. Special situation investment companies generally are companies which secure control of other companies primarily for the purpose of making a profit in the sale of the controlled company’s securities. The types of companies that have been characterized by the SEC in SEC releases, the SEC staff or by courts in judicial proceedings under the Investment Company Act as “special situation investment companies” are those that, as part of their history and their stated business purpose, engage in a pattern of acquiring large or controlling blocks of securities in companies, attempting to control or to exert a controlling influence over these companies, improving their performance and then disposing of acquired share positions after a short-term holding period at a profit once the acquired shares increase in value. Special situation investment companies also follow a policy of shifting from one investment to another because greater profits seem apparent elsewhere. We monitor our business activities, including our acquisitions and divestments, on an ongoing basis to avoid being deemed a special situation investment company. One of the factors that distinguishes us from a “special situation investment company” is our policy of acquiring middle-market U.S. businesses with the expectation of operating these businesses over a long-term basis that for us will involve a minimum holding period of four to six years. See “Business—Business Strategy.”

A change in the value of our assets could cause us or one or more of our wholly- or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exclusion from registration under the Investment Company Act. To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to acquire businesses with an intention of disposing of them on a short-term basis. In addition, we may in other circumstances be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. We also may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our business strategy.

If we become obligated to register the company or any of its subsidiaries as an investment company pursuant to the Investment Company Act, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

If we were required to register the company as an investment company pursuant to the Investment Company Act but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business, all of which would have a material adverse effect on us and the returns generated for shareholders.

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If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment company under the Investment Company Act.

Under the terms of our LLC Agreement, we have the latitude to acquire equity interests in businesses that we will not operate or control. If we make significant acquisitions of equity interests in businesses that we do not operate or control or cease to operate and control such businesses, we may be deemed to be an investment company under the Investment Company Act. If we were deemed to be an investment company under the Investment Company Act, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our equity interests and debt positions or organizational structure or our contract rights to fall outside the definition of an investment company under the Investment Company Act. Registering as an investment company pursuant to the Investment Company Act could, among other things, materially adversely affect our financial condition, business and results of operations, materially limit our ability to borrow funds or engage in other transactions involving leverage and require us to add directors who are independent of us, the Manager and the Sub-Manager and otherwise will subject us to additional regulation that will be costly and time-consuming. See “Risk Factors—Risks Related to Our Organization and Structure—An investor’s investment return may be reduced if we are required to register as an investment company under the Investment Company Act” for more information.

Risks Related to the Manager, the Sub-Manager and Their Respective Affiliates

Our success will be dependent on the performance of the Manager and the Sub-Manager and their respective affiliates, but investors should not rely on the past performance of the Manager, the Sub-Manager and their respective affiliates as an indication of future success. Prior to this offering, affiliates of CNL have only sponsored real estate and credit investment programs.

The Manager was formed in August 2016 and has a limited operating history. The Sub-Manager was formed in September 2016 and has limited experience managing a business under guidelines designed to allow us to avoid registration as an investment company under the Investment Company Act, which may hinder our ability to take advantage of attractive acquisition opportunities and, as a result, implement and execute our business strategy. In addition, the Sub-Manager has limited experience complying with regulatory requirements applicable to public companies. We cannot guarantee that we will be able to find suitable acquisition opportunities and our ability to implement and execute our business strategy and to pay distributions will be dependent upon the performance of the Manager and the Sub-Manager in the identification and acquisition of such opportunities and the management of our businesses and other assets. Additionally, investors should not rely on the past performance of investments by other CNL- or LLCP-affiliated entities to predict our future results. Our business strategy and key employees differ from the business strategies and key employees of certain other CNL- or LLCP-affiliated programs in the past, present and future. Prior to this offering, affiliates of CNL have only sponsored real estate and credit investment programs. If either the Manager or the Sub-Manager fails to perform according to our expectations, we could be materially adversely affected.

The Manager, the Sub-Manager and their respective affiliates, including our officers and some of our directors, will face conflicts of interest including conflicts that may result from compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our shareholders.

The Manager, the Sub-Manager and their respective affiliates will receive substantial fees from us (directly or indirectly) in return for their services, and these fees could influence the advice provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to public and private offerings of equity by us, which allow the Managing Dealer to earn additional dealer manager fees and the Manager and the Sub-Manager to earn increased management fees. The Administrator and the Sub-Administrator will also face conflicts of interests with respect to their performance of various administrative services that we require, including, but not limited to, conflicts that may arise from the Administrator’s and the Sub-Administrator’s decisions with respect to the allocation of their time and resources as they relate to their recommendations and oversight of the personnel, facilities and services provided to us, and the quality of professional and administrative services rendered by their respective affiliates to us. The Manager, the Sub-Manager and their respective affiliates, including certain of our officers and some of our directors, will face conflicts of interest including conflicts that may result from compensation arrangements. The Manager compensates the members of its management committee with incentive-based compensation, asset-based compensation and/or bonuses and awards which will vary based on the Manager’s performance.

The incentive fees that we may pay to the Manager (50% of which would be paid to the Sub-Manager) may create an incentive for the Manager and the Sub-Manager to make acquisitions on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee is determined may encourage the Manager and the Sub-Manager to use leverage to increase the return on our assets. In addition, the fact that our base management fee for a certain month is calculated based on the average value of our gross assets at the end of that month and the immediately preceding calendar month, which would include any borrowings for investment purposes, may encourage the Manager and the Sub-Manager to use leverage or to acquire additional assets. The use of leverage increases the volatility of assets by magnifying the potential for gain or loss on invested equity capital. In addition, we and our shareholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management fees payable to the Manager. Our businesses may pay fees to the Sub-Manager for services it provides to them and therefore our shareholders may be indirectly subject to such fees. These fees may be paid before we realize any income or gain. The Manager and the Sub-Manager may face conflicts of interest with respect to services performed for our businesses, on the one hand, and opportunities recommended to us, on the other hand. Furthermore, our board of directors is responsible for determining the net asset value of our assets (with the assistance from the Manager, the Sub-Manager and the independent valuation firm) and, because the base management fee is payable monthly and for a certain month is calculated based on the average value of our gross assets at the end of that month and the immediately preceding calendar month, a higher net asset value of our assets would result in a higher base management fee to the Manager and the Sub-Manager. See “Conflicts of Interest and Certain Relationships and Related Party Transactions.”

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We pay substantial fees and expenses to the Manager, the Sub-Manager, the Managing Dealer or their respective affiliates. These payments increase the risk that investors will not earn a profit on their investment.

The Manager and the Sub-Manager perform services for us in connection with the identification, selection and acquisition of our assets, and the monitoring and administration of our assets. We pay the Manager and the Sub-Manager certain fees for management services, including a base management fee that is not tied to the performance of our assets. We pay fees and commissions to the Managing Dealer in connection with the offer and sale of the shares. We may pay third parties directly or reimburse the costs or expenses of third parties paid by the Administrator and the Sub-Administrator for providing us with certain administrative services. Since the Administrator and the Sub-Administrator are affiliates of the Manager and the Sub-Manager, respectively, they may experience conflicts of interests when seeking expense reimbursement from us. Similarly, our businesses may pay fees to the Sub-Manager for services it provides to them and therefore our shareholders may be indirectly subject to such fees. These fees reduce the amount of cash available for acquisitions or distribution to our shareholders. These fees also increase the risk that the amount available for distribution to shareholders upon a liquidation of our assets would be less than the purchase price of the shares in this offering and that investors may not earn a profit on their investment. For additional information regarding these fees and expense reimbursements, see “Compensation of the Manager, the Sub-Manager and the Managing Dealer.”

The time and resources that individuals associated with the Manager and the Sub-Manager devote to us may be diverted.

We currently expect the Manager, the Sub-Manager and their respective officers and employees to devote such time as shall be necessary to conduct our business affairs in an appropriate manner. However, the Manager, the Sub-Manager and their respective officers and employees are not required to do so. Moreover, neither the Manager, the Sub-Manager nor their affiliates are prohibited from raising money for and managing another entity that competes with us or our businesses, except as agreed to by the Manager and the Sub-Manager. Accordingly, the respective management teams of the Manager and the Sub-Manager may have obligations to investors in entities they work at or manage in the future, the fulfillment of which might not be in the best interests of us or our shareholders or that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. In addition, we may compete with any such investment entity for the same investors and acquisition opportunities.

We do not have a policy that expressly prohibits our directors, officers, or affiliates from engaging for their own account in business activities of the types conducted by us.

We do not have a policy that expressly prohibits our directors, officers, or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct contains a conflicts of interest policy that prohibits our directors and executive officers, as well as personnel of the Manager and the Sub-Manager who provide services to us, from engaging in any transaction that involves an actual conflict of interest with us without the approval of a majority of our independent directors. In addition, the Management Agreement and the Sub-Management Agreement do not prevent the Manager, the Sub-Manager and their respective affiliates from engaging in additional business opportunities, some of which could compete with us, except as agreed to by the Manager and the Sub-Manager.

The Manager and the Sub-Manager will experience conflicts of interest in connection with the management of our business affairs, our businesses and their respective other accounts and clients.

The Manager and the Sub-Manager will experience conflicts of interest in connection with the management of our business affairs relating to the allocation of business opportunities by the Manager, the Sub-Manager and their respective affiliates to us and other clients; compensation to the Manager, the Sub-Manager and their respective affiliates; services that may be provided by the Manager, the Sub-Manager and their respective affiliates to our businesses; co-investment opportunities for us and the allocation of such opportunities to us and other clients of the Manager and the Sub-Manager; the formation of investment vehicles by the Manager or the Sub-Manager; differing recommendations given by the Manager and the Sub-Manager to us versus other clients; the Manager’s and the Sub-Manager’s use of information gained from our businesses for investments by other clients, subject to applicable law; and restrictions on the Manager’s and the Sub-Manager’s use of “inside information” with respect to potential acquisitions by us.

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In connection with the services that the Sub-Manager or its affiliates may provide to the businesses we acquire, the Sub-Manager may be paid transaction fees in connection with services customarily performed in connection with the management of such businesses (except that no such transaction fees were charged on our acquisition of the initial businesses). Any transaction fees received by the Sub-Manager up to $1.5 million to $3.5 million annually (dependent on our total assets at the time of receipt of such transaction fees) will not be shared with us. Any transaction fees charged to businesses in excess of $3.5 million will be paid to us. See “Management—Sub-Management Agreement—Transaction Fees.” Additionally, these fees may be paid before we realize any income or gain. We may also reimburse the Sub-Manager for certain transactional expenses (e.g. research costs, due diligence costs, professional fees, legal fees and other related items) related to businesses that we acquire as well as transactional expenses related to deals that do not close, often referred to as “broken deal costs.” The Manager and the Sub-Manager may face conflicts of interest with respect to services performed for our businesses, on the one hand, and opportunities recommended to us, on the other hand.

The Sub-Manager may experience conflicts of interests in their management of other clients that may have a similar business strategy as us.

The Sub-Manager and its affiliates currently manage other clients and may in the future manage new clients that may have a similar business strategy as us. The Sub-Manager will determine which opportunities it presents to us or another client with a similar business objective. The Sub-Manager may determine it is more appropriate for one or more other clients managed by the Sub-Manager or any of its affiliates than it is for us and present such opportunity to the other client. These co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts, including the amount of such co-investment opportunity allocated to us.

 

The Sub-Manager and its affiliates may (i) give advice and take action with respect to any of its other clients that may differ from advice given or the timing or nature of action taken with respect to us, so long as it is consistent with the provisions of the Sub-Manager’s allocation policy and its obligations under the Sub-Management Agreement, and (ii) subject to the Exclusivity Agreement and its obligations thereunder, engage in activities that overlap with or compete with those in which the company and its subsidiaries, directly or indirectly, may engage. The company, on its own behalf and on behalf of its subsidiaries, has renounced any interest or expectancy in, or right to be offered an opportunity to participate in, any business opportunity which may be a corporate opportunity for another client of the Sub-Manager or its affiliates to the extent such opportunity has been determined in good faith by the Sub-Manager not to be allocated to the company, all in accordance with the company’s and the Sub-Manager’s allocation policy. Furthermore, subject to the company’s investment policy and its obligations under the Sub-Management Agreement, the Sub-Manager shall not have any obligation to recommend for purchase or sale any securities or loans which its principals, affiliates or employees may purchase or sell for its or their own accounts or for any other client or account if, in the opinion of the Sub-Manager, such transaction or investment appears unsuitable, impractical or undesirable for the Manager (on behalf of the company).

 

Consistent with our allocation policy, in the event that a co-investment opportunity that the Manager has approved for potential participation does not close and the Sub-Manager and its affiliates accumulate broken deal costs in connection with the co-investment opportunity, the Sub-Manager and its affiliates will be required to allocate such broken deal costs among us and the other participating accounts. Broken deal costs will generally be allocated to us by the Sub-Manager pro rata based on our allocation in a proposed co-investment opportunity if our allocation in such co-investment opportunity has been determined; however, in the event that we expect to participate in a co-investment opportunity with LLCP VI, LMM II Fund, or LMM III Fund, which accumulates broken deal costs and our allocation in such co-investment opportunity has not yet been determined, we will be allocated 5% of the broken deal costs with respect to a co-investment with LLCP VI, 12.5% of the broken deal costs with respect to a co-investment with LMM II Fund, or 10% of the broken deal costs with respect to a co-investment with LMM III Fund, subject to annual review by the Sub-Manager. We may similarly act as a dedicated co-investor for other Private Acquisition Funds advised by affiliates of the Sub-Manager that are formed in the future, with our allocation percentage being determined at or prior to the time we begin pursuing co-investment opportunities with such vehicles and subject to annual review by the Sub-Manager. Additionally, on a quarterly basis, the Sub-Manager will identify third party broken deal costs for opportunities that were not presented to the Manager for prior approval but which are determined in the Sub-Manager’s reasonable judgment and in a manner consistent with the Sub-Manager’s fiduciary obligations to have qualified as a potential investment opportunity for us on a direct or co-investment basis (such opportunity, a “lookback broken deal”). Subject to approval by the Manager, we will reimburse the Sub-Manager for our allocable portion of third party broken deal expenses incurred in connection with a lookback broken deal. In the case of a lookback broken deal identified as an opportunity on a co-investment basis with LLCP VI, LMM II Fund, or LMM III Fund, our allocable portion of such third party broken deal expenses will be 5%, 12.5%, or 10%, respectively. Unless our Board approves otherwise, in no event will our portion of the aggregate lookback broken deal expenses exceed $75,000 on a calendar year basis.

The Manager and its respective affiliates may have an incentive to delay a liquidity event, which may result in actions that are not in the best interest of our shareholders.

We pay certain amounts to the Managing Dealer and participating broker-dealers in connection with the distribution of certain classes of shares for the ongoing marketing, sale and distribution of such shares, including an ongoing distribution and shareholder servicing fee. The ongoing distribution and shareholder servicing fee for these classes of shares will terminate for all shareholders upon a liquidity event. As such, the Manager may have an incentive to delay a liquidity event or making such recommendation to our board of directors if such amounts receivable by the Managing Dealer have not been fully paid. A delay in a liquidity event may not be in the best interests of our shareholders.

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Our access to confidential information may restrict our ability to take action with respect to our businesses, which, in turn, may negatively affect our results of operations.

We, directly or through the Manager or the Sub-Manager, may obtain confidential information about our businesses. If we possess confidential information about such businesses, there may be restrictions on our ability to make, dispose of, increase the amount of, or otherwise take action with respect to, those businesses. The impact of these restrictions on our ability to take action with respect to such businesses could have an adverse effect on our results of operations.

We may be obligated to pay the Manager and the Sub-Manager incentive fees even if there is a decline in the value of our assets for that calendar year and even if our earned interest income is not payable in cash.

The Management Agreement and the Sub-Management Agreement entitle the Manager and the Sub-Manager to receive an incentive fee based on the total return of each class of our shares regardless of any capital losses. In such case, we may be required to pay the Manager and the Sub-Manager an incentive fee for a calendar year even if there is a decline in the value of our assets for that calendar year or if our net asset value is less than the purchase price of an investor’s shares.

Any incentive fee payable by us that relates to the total return of each class of our shares may be computed and paid on income that may include interest that has been accrued but not yet received or interest in the form of securities received rather than cash (“payment-in-kind” or “PIK” income) or based on unrealized gains. If one of our businesses defaults on a loan that is structured to provide accrued interest income, it is possible that accrued interest income previously included in the calculation of the incentive fee will become uncollectible. The Manager and the Sub-Manager are not obligated to reimburse us for any part of the incentive fee they received that was based on accrued interest income that we never received as a result of a subsequent default or an unrealized gain. Although we do not expect our debt assets to include a PIK feature, to the extent we do so, PIK income will be included in the total return of each class of our shares used to calculate the incentive fee to the Manager and the Sub-Manager even though we do not receive the income in the form of cash.

The Manager’s and the Sub-Manager’s liability is limited under the Management Agreement, the Sub-Management Agreement, the Administrative Services Agreement and the Sub-Administration Agreement, as applicable, and we are required to indemnify the Manager and the Sub-Manager against certain liabilities, which may lead them to act in a riskier manner on our behalf than it would when acting for their own account.

The Manager and the Sub-Manager have not assumed any responsibility to us other than to render the services described in the Management Agreement, the Sub-Management Agreement, the Administrative Services Agreement and the Sub-Administration Agreement, as applicable. Pursuant to the Management Agreement, the Sub-Management Agreement, the Administrative Services Agreement and the Sub-Administration Agreement, as applicable, the Manager, the Sub-Manager and their respective officers, managers, partners, members, agents, employees, controlling persons, shareholders, and any other person or entity affiliated with the Manager and the Sub-Manager will not be liable to us or any of our subsidiaries’ members, stockholders or partners in connection with the performance of any duties or obligations under the Management Agreement, the Sub-Management Agreement, the Administrative Services Agreement and the Sub-Administration Agreement, absent negligence or misconduct in the performance of the Manager’s or the Sub-Manager’s duties, as applicable. We have also agreed to indemnify, defend and protect the Manager, the Sub-Manager and their respective officers, managers, partners, members, agents, employees, controlling persons and any other person or entity affiliated with the Manager and the Sub-Manager with respect to all damages, liabilities, costs and expenses incurred in or by reason of any pending, threatened or completed, action suit investigation or other proceeding resulting from acts of the Manager and the Sub-Manager not arising out of negligence or misconduct in the performance of the Manager’s or the Sub-Manager’s duties, as applicable, under such agreements. These protections may lead the Manager and the Sub-Manager to act in a riskier manner when acting on our behalf than it would when acting for its own account.

Each of the Manager and the Sub-Manager can resign on 120 days notice and, pursuant to the Sub-Management Agreement, the Manager and the Sub-Manager have agreed to resign if the other is terminated for anything other than cause and we may not be able to find suitable replacement(s) within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

The Manager has the right, under the Management Agreement, to resign at any time on 120 days written notice, whether we have found a replacement or not. If the Manager resigns, we may not be able to contract with a new manager or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 120 days, or at all, in which case our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected. In addition, the coordination of our internal management, business activities and supervision of our businesses is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Manager and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our businesses may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

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The Sub-Manager also has the right, under the Sub-Management Agreement, to resign at any time on 120 days written notice, whether the Manager or the company has found a replacement or not. If the Sub-Manager resigns, the Manager and the company may not be able to contract with a new sub-manager. The Sub-Management Agreement provides that, in the event the Manager or the Sub-Manager is terminated or not renewed as a manager or sub-manager, other than for cause, the other will also terminate its Management Agreement or Sub-Management Agreement, as applicable. In such case, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected.

Risks Related to Our Business

A business strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.

We intend to acquire controlling interests in privately held, middle-market U.S. businesses which by their nature pose certain incremental risks as compared to public companies including that they:

have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress;
may have limited financial resources and may be unable to meet their obligations under their debt securities that we may hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our acquisition;
may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;
are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our privately held company and, in turn, on us; and
generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and members of the Manager’s and the Sub-Manager’s management may, in the ordinary course of business, be named as defendants in litigation arising from our ownership of these companies.

In addition, interests in private companies tend to be less liquid. The securities of private companies are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. These over-the-counter secondary markets may be inactive during an economic downturn or a credit crisis. In addition, the securities in these companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. If there is no readily available market for these assets, we are required to carry these assets at fair value as determined by our board of directors. As a result, if we are required to liquidate all or a portion of our assets quickly, we may realize significantly less than the value at which we had previously recorded these assets. We may also face other restrictions on our ability to liquidate our ownership of a business to the extent that we, the Manager, the Sub-Manager or any of their respective affiliates have material nonpublic information regarding such business or where the sale would be an impermissible joint transaction. The reduced liquidity of these assets may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

Finally, little public information generally exists about private companies and these companies may not have third-party credit ratings or audited financial statements. We must therefore rely on the ability of the Manager and the Sub-Manager to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from these business opportunities. Additionally, these companies and their financial information will not generally be subject to the Sarbanes-Oxley Act and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed business decision, and we may lose money on our assets.

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We face risks with respect to the evaluation and management of future acquisitions.

A significant component of our business strategy is to acquire controlling equity interests in businesses. We intend to focus on middle-market U.S. businesses in various industries. Generally, because such businesses are held privately, we may experience difficulty in evaluating potential target businesses as the information concerning these businesses is not publicly available. Therefore, our estimates and assumptions used to evaluate the operations, management and market risks with respect to potential target businesses may be subject to various risks. Further, the time and costs associated with identifying and evaluating potential target businesses and their industries may cause a substantial drain on our resources and may divert our management team’s attention away from operations for significant periods of time. In addition, we may incur substantial broken deal costs in connection with acquisition opportunities that are not consummated.

In addition, we may have difficulty effectively managing the businesses we acquire. The management or improvement of businesses we acquire may be hindered by a number of factors including limitations in the standards, controls, procedures and policies of such acquisitions. Further, the management of an acquired business may involve a substantial reorganization resulting in the loss of employees and customers or the disruption of our ongoing businesses. Some of the businesses we acquire may have significant exposure to certain key customers, the loss of which could negatively impact our financial condition, business and results of operations. We may experience greater than expected costs or difficulties relating to such acquisition, in which case, we might not achieve the anticipated returns from any particular acquisition, which may have a material adverse effect on our financial condition, business and results of operations.

In addition, certain members of the management teams of our businesses have, and may have in the future, the opportunity to participate in equity incentive programs which are expected to be based on the satisfaction of certain performance criteria and metrics and may include receipt of options. Although we believe such awards are important incentives for the management teams of our businesses, such awards could decrease our percentage ownership in a business to the extent such award vests and is exercised in the future.

If we cannot obtain debt financing or equity capital on acceptable terms, our ability to finance future acquisitions of businesses and expand our operations will be adversely affected.

The net proceeds from the sale of our shares in this offering, the initial public offering, and private offerings will be used to finance the acquisition of businesses, and, if necessary, the payment of operating expenses and the payment of various fees and expenses such as management fees, incentive fees, other fees and distributions. Any working capital reserves we maintain may not be sufficient for business purposes, and we may require additional debt financing or equity capital to operate. These sources of funding may not be available to us due to unfavorable economic conditions, which could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. Consequently, if we cannot obtain further debt or equity financing on acceptable terms, our ability to fund the acquisition of businesses and to expand our operations will be adversely affected. As a result, we would be less able to execute our business strategy, which may negatively impact our results of operations and reduce our ability to make distributions to our shareholders.

We may face increasing competition for acquisition opportunities, which could delay deployment of our capital, reduce returns and result in losses.

We compete for acquisitions with strategic buyers, private equity funds and diversified holding companies. Additionally, we may compete for loans with traditional financial services companies such as commercial banks. Certain competitors are substantially larger and have greater financial, technical and marketing resources than we do. For example, some competitors may have access to funding sources that are not available to us, and others may have higher risk tolerances or different risk assessments. These characteristics could allow our competitors to consider a wider variety of acquisition opportunities, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose acquisition opportunities if we do not match our competitors’ pricing, terms or structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable risk-adjusted returns on our businesses or may bear risk of loss, which may have a material adverse effect on our business, financial condition and results of operations. In addition, if we lose an acquisition opportunity, we may still incur broken deal costs related to the review of an opportunity that is not consummated, which could be substantial.

We will rely on receipts from our businesses to make distributions to our shareholders.

We are dependent upon the ability of our businesses to generate earnings and cash flow and distribute them to us in the form of interest and principal payments of indebtedness and, from time to time, distributions on equity to enable us, first, to satisfy our financial obligations and, second to make distributions to our shareholders. This ability may be subject to limitations under laws of the jurisdictions in which they are incorporated or organized. As a consequence of these various restrictions, we may be unable to generate sufficient receipts from our businesses, and therefore, we may not be able to declare, or may have to delay or cancel payment of, distributions to our shareholders.

We do not intend to own 100% of our businesses. While we receive cash payments from our businesses which are in the form of interest payments, debt repayment and distributions, if any distributions were to be paid by our businesses, they would be shared pro rata with the minority shareholders of our businesses and the amounts of distributions made to minority shareholders would not be available to us for any purpose, including debt service or distributions to our shareholders. Any proceeds from the sale of a business will be allocated among us and the non-controlling shareholders of the business that is sold.

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We anticipate acquiring controlling interests in a limited number of businesses and these businesses may be subject to unplanned business interruptions.

We anticipate acquiring controlling interests in a limited number of companies. As a result, the performance of our business may be substantially adversely affected by the unfavorable performance of even a single business. Further, operational interruptions and unplanned events at one or more of our production facilities of these businesses, such as explosions, fires, inclement weather, natural disasters, pandemics, accidents, transportation interruptions and supply could cause substantial losses in our production capacity. Furthermore, because customers may be dependent on planned deliveries from us, customers that have to reschedule their own operations due to our delivery delays may be able to pursue financial claims against us, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Such interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position, results of operations and cash flows may be adversely affected by such events.

The outbreak of highly infectious or contagious diseases, including the ongoing novel coronavirus (“COVID-19”) pandemic or the emergence of variant strains of COVID-19, could materially and adversely impact our business, our operating businesses, our financial condition, results of operations and cash flows. Further, the spread of COVID-19 pandemic has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.

In December 2019, COVID-19 was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. Since March 13, 2020, there have been a number of federal, state and local government initiatives to manage the spread of the virus and its impact on the economy, financial markets and continuity of businesses of all sizes and industries. For example, in March 2020, Congress approved, and former President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provided approximately $2 trillion in financial assistance to individuals and businesses resulting from the COVID-19 pandemic. The CARES Act, among other things, provided certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing and loan forgiveness/forbearance. The Federal Reserve implemented asset purchase and lending programs, including purchases of residential and commercial-mortgage backed securities and the establishment of lending facilities to support loans to small- and mid-size businesses. To further address the continued economic impact of the COVID-19 pandemic, the U.S. Congress passed, and former President Trump signed into law, a second COVID-19 relief bill in December 2020, which provided approximately $900 billion in financial assistance to individuals and businesses, including funds for rental assistance to be distributed by state and local governments and a revival of the forgivable small business loan program (the “Paycheck Protection Program”) originally provided for under the CARES Act. Most recently, in March 2021, Congress passed, and President Biden signed into law, a $1.9 trillion COVID-19 relief bill which provides additional financial assistance to individuals and businesses (including new funds for rental assistance and Paycheck Protection Program loans), as well as aid to state and local governments. As of June 30, 2021, some of our portfolio companies have taken advantage of certain provisions under the CARES Act but we and our portfolio companies have not borrowed under the Paycheck Protection Program. We continue to analyze the relevant legislative and regulatory developments and the potential impact they may have on our business (including our portfolio companies), results of operations, financial condition and liquidity. The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. Although more normalized activities have resumed, at this time we cannot predict the full extent of the impacts of the COVID-19 pandemic on us and our portfolio companies and the COVID-19 pandemic could have a delayed adverse impact on our financial results. We will continue to monitor the pandemic's effects on a regular basis and will adjust our operations as necessary.

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Outbreaks of pandemic or contagious diseases, such as the COVID-19 pandemic or the emergence of variant strains of COVID-19, could materially and adversely affect our business, our operating businesses, our financial condition, results of operations and cash flows. The Manager and the Sub-Manager have not been prevented and do not expect to be prevented from conducting business activities as a result of the COVID-19 pandemic. However, our portfolio companies could be prevented from conducting business activities for an indefinite period of time. Since certain aspects of the services provided by our businesses involve face to face interaction, the related COVID-19 quarantines and work and travel restrictions may reduce participation or result in a loss of business. Additionally, since certain of the products offered by our businesses are manufactured in a facility or distributed through retail stores, a closure of such facility, loss in business for such retail store, or our businesses’ inability to obtain raw materials and to ship products in a timely and cost-effective manner due to COVID-19 would have an adverse impact on production schedules and product sales. As of June 30, 2021, all of the manufacturing facilities were open and safety procedures have been implemented across our portfolio companies; however, there is a continued risk of temporary business interruptions resulting from employees contracting COVID-19 or from the reinstitution of business closures or work and travel restrictions. Further, if the U.S. and global economy slow down or consumer behavior shifts due to the COVID-19 pandemic (including the continued threat or perceived threat of such pandemic), the demand for the products or services offered by our operating businesses may be reduced. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, our operating businesses, our financial condition, results of operations and cash flows.

In certain circumstances, certain business analyses and decisions by the Manager and the Sub-Manager may be required to be undertaken on an expedited basis.

While we generally will not seek to make an acquisition until the Sub-Manager has conducted sufficient due diligence to make a determination whether to pursue an acquisition opportunity, in such cases, the information available to the Manager and the Sub-Manager at the time of making an acquisition decision may be limited. In certain circumstances, the business analyses and decisions by the Manager and the Sub-Manager may be required to be undertaken on an expedited basis to take advantage of acquisition opportunities. Therefore, no assurance can be given that the Manager and the Sub-Manager will have knowledge of all circumstances that may adversely affect such decision. In addition, the Manager and the Sub-Manager expect often to rely upon independent consultants in connection with its evaluation of proposed acquisitions. No assurance can be given as to the accuracy or completeness of the information provided by such independent consultants and we may incur liability as a result of such consultants’ actions.

Economic recessions or downturns could impair our businesses and harm our operating results.

Some of our businesses may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets may increase, and the value of our assets is likely to decrease during these periods. Adverse or disruptive economic conditions, such as during a government shutdown, may also decrease the value of any collateral securing our senior or second lien loans. A severe recession may further decrease the value of such collateral and result in losses of value in our assets and a decrease in our revenues, net income, assets and net worth. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing. These events could prevent us from acquiring additional assets, limit our ability to grow and negatively impact our operating results and financial condition.

Financial results of certain of our businesses may be affected by the operating results of and actions taken by their franchisees.

Certain of our businesses may receive a substantial portion of their revenues in the form of royalties, which are generally based on a percentage of gross sales from franchisees. Accordingly, financial results of such businesses are to a large extent dependent upon the operational and financial success of their franchisees. If sales trends or economic conditions deteriorate for franchisees, their financial results may also deteriorate and the royalties paid to such businesses may decline and the accounts receivable and related allowance for doubtful accounts may increase. In addition, if the franchisees fail to renew their franchise agreements, royalty revenues of these businesses may decrease which in turn may materially and adversely affect business and operating results of these businesses. For example, Lawn Doctor, one of our initial businesses, relies primarily on broker referrals for new franchise development and has two main broker relationships that are key to driving new franchisee growth, in addition to its corporate employees generating opportunities. Any disputes with brokers could negatively affect Lawn Doctor’s ability to attract new franchisees and adversely affect its business and operating results.

Additionally, although franchisees are contractually obligated to operate their businesses in accordance with the operations, safety, and health standards set forth in agreements between our businesses and their franchisees, such franchisees are independent third parties whom we or our businesses do not control. The franchisees own, operate, and oversee the daily operations of their business and have sole control over all employee and other workforce decisions. As a result, the ultimate success and quality of any franchisee’s business rests with the franchisee. If franchisees do not successfully operate their business in a manner consistent with required standards, royalty income paid to our businesses may be adversely affected and brand image and reputation could be harmed, which in turn could materially and adversely affect business and operating results of our businesses.

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For certain of our businesses, a limited number of customers may account for a large portion of their net sales, so that if one or more of the major customers were to experience difficulties in fulfilling their obligations to such businesses, cease doing business with such businesses, significantly reduce the amount of their purchases from such businesses or return substantial amounts of such businesses’ products, it could have a material adverse effect on our business, financial condition and results of operations.

For certain of our businesses, a limited number of customers may account for a large portion of their gross sales, so that if one or more of the major customers of such businesses were to experience difficulties in fulfilling their obligations to such businesses, cease doing business with such businesses, significantly reduce the amount of their purchases from such businesses or return substantial amounts of such businesses’ products, it could have a material adverse effect on our business, financial condition and results of operations. Except for outstanding purchase orders for specific products, certain of our businesses may not have written contracts with or commitments from any of their customers and pursuant to the terms of certain of their vendor agreements, even some purchase orders may be cancelled without penalty until delivery. A substantial reduction in or termination of orders from any of their largest customers could adversely affect their business, financial condition and results of operations. In addition, pressure by large customers seeking price reductions, financial incentives, and changes in other terms of sale or for these businesses to bear the risks and the cost of carrying inventory could also adversely affect business, financial condition and results of operations of our businesses. In addition, the bankruptcy or other lack of success of one or more of the significant customers could negatively impact such businesses’ revenues and bad debt expense.

Some of our businesses are or may be dependent upon the financial and operating conditions of their customers and clients. If the demand for their customers’ and clients’ products and services declines, demand for their products and services will be similarly affected and could have a material adverse effect on their financial condition, business and results of operations.

The success of our businesses’ customers’ and clients’ products and services in the market and the strength of the markets in which these customers and clients operate affect our businesses. Our businesses’ customers and clients are subject to their own business cycles, thus posing risks to these businesses that are beyond our control. These cycles are unpredictable in commencement, severity and duration. Due to the uncertainty in the markets served by most of our businesses’ customers and clients, our businesses cannot accurately predict the continued demand for their customers’ and clients’ products and services and the demands of their customers and clients for their products and services. As a result of this uncertainty, past operating results, earnings and cash flows may not be indicative of our future operating results, earnings and cash flows. If the demand for their customers’ and clients’ products and services declines, demand for their products and services will be similarly affected and could have a material adverse effect on their financial condition, business and results of operations.

 

Certain of our businesses compete in highly competitive markets which are subject to the risk of market disruption including from the development and advancement of new technologies and there can be no assurance that our businesses will be able to compete successfully. For example, our Healthcare Safety Holdings LLC (“HSH”) business competes in the highly competitive medical supply market. HSH’s daily use insulin pen needles, syringes and complementary offerings for the diabetes care markets compete with other needle-syringes manufacturers and other alternative drug delivery systems. The lack of product differentiation among manufacturers of traditional needles and syringes may subject HSH to downward product pricing pressures in the market. Other companies may develop new products that compete directly or indirectly with HSH’s products. A variety of new technologies, including other delivery methods such as microneedles on dissolvable patches and transdermal patches are being marketed as alternatives to injection for drug delivery. HSH’s narrow focus as a manufacturer of traditional needles and syringes products increases the risk that HSH loses market share to competing products and alternative drug delivery systems. While we currently do not believe such technologies have significantly affected the use of injection for drug delivery to date, there can be no assurance that they will not do so in the future or have an adverse impact on the value of HSH.

Some of our businesses are and may be subject to a variety of federal, state and foreign laws and regulations concerning employment, health, safety and products liability. Failure to comply with governmental laws and regulations could subject them to, among other things, potential financial liability, penalties and legal expenses which could have a material adverse effect on our financial condition, business and results of operations.

Some of our businesses are and may be subject to various federal, state and foreign government employment, health, safety and products liability regulations. Compliance with these laws and regulations, which may be more stringent in some jurisdictions, is a major consideration for our businesses. Government regulators generally have considerable discretion to change or increase regulation of our operations, or implement additional laws or regulations that could materially adversely affect our businesses. For example, as manufacturer and seller of pen needle and syringes, one of our businesses, HSH, is subject to significant regulatory oversight from governmental authorities such as the Food and Drug Administration as well as inherent products liability risk in the event of a product failure or a personal injury caused by HSH’s products. Noncompliance with applicable regulations and requirements could subject our businesses to investigations, sanctions, product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. Suffering any of these consequences could materially adversely affect our financial condition, business and results of operations. In addition, responding to any action may result in a diversion of the Manager’s, the Sub-Manager’s and our executive officers’ attention and resources from our operations.

 

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Some of our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose them to potential financial liability. Complying with applicable environmental laws requires significant resources, and if our businesses fail to comply, they could be subject to substantial liability.

Some of the facilities and operations of our businesses are and may be subject to a variety of federal, state and foreign environmental laws and regulations including laws and regulations pertaining to the handling, storage and transportation of raw materials, products and wastes, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently in place and in the future. Compliance with current and future environmental laws is a major consideration for certain of our businesses as any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties. Because some of our businesses may use hazardous materials in their operations, they may be subject to potential financial liability for costs associated with the investigation and remediation of their own sites if such sites become contaminated. Even if they fully comply with applicable environmental laws and are not directly at fault for the contamination, such businesses may still be liable.

The identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations, or other unanticipated events may arise in the future and give rise to material environmental liabilities, higher than anticipated levels of operating expenses and capital investment or, depending on the severity of the impact of the foregoing factors, costly plant relocation, all of which could have a material adverse effect on our financial condition, business and results of operations.

Some of our businesses are subject to certain risks associated with business they conduct in foreign jurisdictions.

Some of our businesses conduct business in foreign jurisdictions. Certain risks are inherent in conducting business in foreign jurisdictions, including:

exposure to local economic conditions;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
longer payment cycles for foreign customers;
adverse currency exchange controls;
exposure to risks associated with changes in foreign exchange rates;
potential adverse changes in the political environment of the foreign jurisdictions or diplomatic relations of foreign countries with the United States;
withholding taxes and restrictions on the withdrawal of foreign investments and earnings;
export and import restrictions;
labor relations in the foreign jurisdictions;
difficulties in enforcing intellectual property rights; and
required compliance with a variety of foreign laws and regulations.

Some of the businesses we acquire may rely on their intellectual property and licenses to use others’ intellectual property, for competitive advantage. If they are unable to protect their intellectual property, are unable to obtain or retain licenses to use others’ intellectual property, or if they infringe upon or are alleged to have infringed upon others’ intellectual property, it could have a material adverse effect on their financial condition, business and results of operations.

Each business’ success depends in part on their, or licenses to use others’ brand names, proprietary technology and manufacturing techniques. Such businesses may rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual property and other proprietary information without their authorization or independently developing intellectual property and other proprietary information that is similar. In addition, the laws of foreign countries may not protect the intellectual property rights of these companies effectively or to the same extent as the laws of the United States.

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Stopping unauthorized use of their proprietary information and intellectual property, and defending against claims that they have made unauthorized use of others’ proprietary information or intellectual property, may be difficult, time-consuming and costly. The use of their intellectual property and other proprietary information by others, and the use by others of their intellectual property and proprietary information, could reduce or eliminate any competitive advantage they have developed, cause them to lose sales or otherwise harm their business.

Some of the businesses we acquire may become involved in legal proceedings and claims in the future either to protect their intellectual property or to defend allegations that they have infringed upon others’ intellectual property rights. These claims and any resulting litigation could subject them to significant liability for damages and invalidate their property rights. In addition, these lawsuits, regardless of their merits, could be time consuming and expensive to resolve and could divert management’s time and attention. The costs associated with any of these actions could be substantial and could have a material adverse effect on their financial condition, business and results of operations.

Some of the businesses we acquire may be subject to certain risks associated with the movement of businesses offshore.

Some of the businesses we acquire may be potentially at risk of losing business to competitors operating in lower cost countries. An additional risk is the movement offshore of some customers of these businesses we control, leading them to procure products or services from more closely located companies. Either of these factors could negatively impact our financial condition, business and results of operations.

Defaults by our businesses will harm our operating results.

A business’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its debt financing and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize such business’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting business. Further, there may not be any prepayment penalty for our borrowers who prepay their loans. If borrowers choose to prepay their loans, we may not receive the full amount of interest payments otherwise to be received by us.

Our businesses may incur debt that ranks equally with, or senior to, our debt in such businesses.

Our businesses may have, or may be permitted to incur, other debt that ranks equally with, or senior to, our debt in such businesses. By their terms, such debt may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to our debt in such business. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of our business, holders of debt instruments ranking senior to our debt in that business would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such business may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with our debt in the business, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant business.

We may not have the funds or ability to make additional capital contributions or loans to our businesses.

After our initial acquisition of an equity stake in a business or loans to such business, we may be called upon from time to time to provide additional funds to such business or have the opportunity to increase our capital contributions. There is no assurance that we will make, or will have sufficient funds to make, follow-on contributions. Even if we do have sufficient capital to make a desired follow-on contribution, we may elect not to make a follow-on contribution because we may not want to increase our level of risk or we prefer other opportunities. Our ability to make follow-on contributions may also be limited by the Manager’s and the Sub-Manager’s allocation policies. Any decisions not to make a follow-on contribution or any inability on our part to make such a contribution may have a negative impact on such business, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce our expected return with respect to the business.

The debt positions we will typically acquire in connection with our acquisition of controlling equity interests in businesses may be risky, and we could lose all or part of our assets.

When we acquire a controlling equity interest in a business, we also will typically acquire a debt position in such business, which may be in the form of senior or subordinated securities. When we acquire senior debt, we will generally seek to take a security interest in the available assets of a business, including equity interests in any of its subsidiaries. There is a risk that the collateral securing our loans may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the business to raise additional capital. Also, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in such business’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.

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Our acquisitions of subordinated debt will generally be subordinated to senior debt and will generally be unsecured, which may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These acquisitions may involve additional risks that could adversely affect our returns as compared to our acquisition of senior debt. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our shareholders to non-cash income. We will not receive any principal repayments prior to the maturity of most of our subordinated debt, which may be of greater risk than amortizing loans.

We may acquire debt and minority interests in businesses and, if we do so, we may not be in a position to control such businesses, and their respective management team may make decisions that could decrease the value of our assets.

We anticipate that most of our net assets will be used for acquisitions which will involve controlling equity interests in businesses, but we may acquire only debt and/or minority interests in certain businesses. If we do so, we will be subject to risk that such businesses may make business decisions with which we disagree, and the management of such businesses may take risks or otherwise act in ways that do not serve our best interests. As a result, such businesses may make decisions that could decrease the value of our assets. In addition, we will generally not be in a position to control any business by acquiring its debt securities.

We may also participate in co-investment opportunities with affiliates of the Sub-Manager or with other third parties through partnerships, joint ventures or other entities, thereby acquiring jointly-controlled or non-controlling interests in businesses in conjunction with participation by one or more parties in such opportunity. As participants in such co-investment opportunities, we may have economic or other business interests or objectives that are inconsistent with those of our third-party partners or co-venturers. We may not have a right to participate in the operation, management, direction or control of such businesses, and our ability to redeem or sell all or a portion of our investment may be subject to significant restrictions. Furthermore, such co-investment opportunities may involve risks not present in acquisitions where a third party is not involved, including the possibility that we may incur liabilities as the result of actions taken by the controlling party and that a third-party partner or co-venturer may have financial difficulties and may have different liquidity objectives.

The credit ratings of certain of our assets may not be indicative of the actual credit risk of such rated instruments.

Rating agencies rate certain debt securities based upon their assessment of the likelihood of the receipt of principal and interest payments. Rating agencies do not consider the risks of fluctuations in market value or other factors that may influence the value of debt securities. Therefore, the credit rating assigned to a particular instrument may not fully reflect the true risks of an investment in such instrument. Credit rating agencies may change their methods of evaluating credit risk and determining ratings. These changes may occur quickly and often. While we may give some consideration to ratings, ratings may not be indicative of the actual credit risk of our assets that are in rated instruments. In fact, most debt securities that we intend to acquire will not be rated by any rating agency and, if they were rated, they would most likely be rated as below investment grade quality. Debt securities rated below investment grade quality are generally regarded as having predominantly speculative characteristics and may carry a greater risk with respect to a borrower’s capacity to pay interest and repay principal.

Subordinated liens on collateral securing debt that we may acquire in businesses may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

Certain debt that we will acquire in businesses may be secured on a second priority basis by the same collateral securing senior debt of such businesses. The first priority liens on the collateral will secure the business’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by such business under the agreements governing the debt. In the event of a default, the holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the business’s remaining assets, if any.

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We may also acquire unsecured debt in businesses, meaning that such acquisitions will not benefit from any interest in collateral of such businesses. Liens on any such business’s collateral, if any, will secure such business’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by such business under its secured debt agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured debt obligations after payment in full of all secured debt obligations. If such proceeds were not sufficient to repay the outstanding secured debt obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the business’s remaining assets, if any.

The rights we may have with respect to the collateral securing the debt we acquire in businesses with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

There may be circumstances where the loans we make to businesses could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Although we intend to generally structure certain of our acquisitions as secured debt, if one of our businesses were to go bankrupt, depending on the facts and circumstances, including the extent to which we provided managerial assistance to such company or a representative of us or the Manager and the Sub-Manager sat on the board of directors of such company, a bankruptcy court might re-characterize our debt in a business and subordinate all or a portion of our claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, our legal rights may be subordinated to other creditors.

In addition, a number of U.S. judicial decisions have upheld judgments obtained by borrowers against lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or contractual) of good faith, commercial reasonableness and fair dealing, or a similar duty owed to the borrower or has assumed an excessive degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or members. Because of the nature of our assets in businesses, we may be subject to allegations of lender liability.

Certain of our assets may be adversely affected by laws relating to fraudulent conveyance or voidable preferences.

Certain of our assets could be subject to federal bankruptcy law and state fraudulent transfer laws, which vary from state to state, if the debt obligations relating to such assets were issued with the intent of hindering, delaying or defrauding creditors or, in certain circumstances, if the issuer receives less than reasonably equivalent value or fair consideration in return for issuing such debt obligations. If the debt is used for a buyout of shareholders, this risk is greater than if the debt proceeds are used for day-to-day operations or organic growth. If a court were to find that the issuance of the debt obligations was a fraudulent transfer or conveyance, the court could void or otherwise refuse to recognize the payment obligations under the debt obligations or the collateral supporting such obligations, further subordinate the debt obligations or the liens supporting such obligations to other existing and future indebtedness of the issuer or require us to repay any amounts received by us with respect to the debt obligations or collateral. In the event of a finding that a fraudulent transfer or conveyance occurred, we may not receive any repayment on the debt obligations.

Under certain circumstances, payments to us and distributions by us to our shareholders may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, assets involving restructurings may be adversely affected by statutes relating to, among other things, fraudulent conveyances, voidable preferences, lender liability and the court’s discretionary power to disallow, subordinate or disenfranchise particular claims or re-characterize investments made in the form of debt as equity contributions.

We may acquire various structured financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could reduce the cash available to service our debt or for distribution to our shareholders.

We may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to service our debt or pay distributions to our shareholders.

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The downgrade of the U.S. credit rating could negatively impact our business, financial condition and results of operations.

U.S. debt ceiling and budget deficit concerns continue to present the possibility of a credit-rating downgrade, economic slowdowns, or a recession for the United States. The impact of any downgrades to the U.S. government’s sovereign credit rating could adversely affect the U.S. and global financial markets and economic conditions. These developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations. Further, if key economic indicators, such as the unemployment rate or inflation, progress at a rate consistent with the Federal Reserve’s objectives, the target range for the federal funds rate may increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms.

To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders, and result in losses.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. If we use leverage to partially finance our acquisitions, through borrowing from banks and other lenders an investor will experience increased risks of investing in our securities. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would if we had not borrowed and employed leverage. Similarly, any decrease in our income would cause net income to decline more sharply than it would have if we had not borrowed and employed leverage. Such a decline could negatively affect our ability to service our debt or make distributions to our shareholders. In addition, our shareholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management or incentive fees payable to the Manager and the Sub-Manager. Additionally, to the extent we use borrowings to finance a portion of the acquisition price of assets, we would make such acquisitions through corporate subsidiaries taxed at U.S. federal corporate tax rates, which may increase tax expenses.

The amount of leverage that we employ will depend on the Manager’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that leveraged financing will be available to us on favorable terms or at all. However, to the extent that we use leverage to finance our assets, our financing costs will be borne solely by our shareholders and will reduce cash available for distributions to our shareholders. Moreover, we may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.

Uncertainty regarding LIBOR may adversely impact our borrowings.

In July 2017, the U.K. Financial Conduct Authority (“FCA”), which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting the LIBOR as a benchmark by the end of 2021. On March 5, 2021, the FCA and the IBA announced that the IBA will cease publication in the current form for (i) 1-week and 2-month U.S. dollar LIBOR rates immediately following the publication on December 31, 2021 and (ii) overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR rates immediately following the publication on June 30, 2023. The FCA and U.S. bank regulators have welcomed the IBA’s proposal to continue publishing certain tenors for U.S. dollar LIBOR through June 30, 2023 because it will allow many legacy U.S. dollar LIBOR contracts that lack effective fallback provisions and are difficult to amend to mature before such LIBOR rates experience disruptions. U.S. bank regulators are, however, encouraging banks to cease entering into new financial contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. Given consumer protection, litigation, and reputation risks, U.S. bank regulators believe entering into new financial contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks. In addition, they expect new financial contracts to either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. Although the foregoing may provide some sense of timing, there is no assurance that LIBOR, of any particular currency and tenor, will continue to be published or be representative of the underlying market until any particular date, and it appears highly likely that LIBOR will be discontinued or no longer be representative after December 31, 2021 or June 30, 2023, depending on the currency and tenor.

The Alternative Reference Rates Committee (“AARC”), a steering committee comprised of large U.S. financial institutions convened by the U.S. Federal Reserve, has recommended the Secured Overnight Financing Rate (“SOFR”) as a more robust reference rate alternative to U.S. dollar LIBOR. SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. To approximate economic equivalence to LIBOR, SOFR can be compounded over a relevant term and a spread adjustment may be added. The use of SOFR as a substitute for LIBOR is voluntary and may not be suitable for all market participants. Market acceptance of SOFR remains uncertain as market conventions related to calculating SOFR-based interest continue to develop and several services are offering or developing credit sensitive alternative rates. Inconsistent use of replacement rates or calculation conventions among financial products could expose us to additional financial risks and increase the cost of any related hedging transactions.

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Our current line of credit (the "2021 Line of Credit") with United Community Bank (d/b/a Seaside Bank & Trust and referred to as “Seaside”) is linked to 1-month U.S. dollar LIBOR but allows for a substitute index in the event LIBOR is unavailable during the term of the 2021 Line of Credit. Our other future financings may be linked to 1-month U.S. dollar LIBOR. We anticipate that the 2021 Line of Credit will be refinanced or amended on or before June 30, 2023 to allow for interest to be calculated using an alternative reference rate. Before December 31, 2021 or June 30, 2023, depending on the currency and tenor, we may need to amend other future financings that utilize LIBOR as a factor in determining the interest rate based on an alternative benchmark rate. However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our legacy agreements. In addition, any resulting differences in interest rate standards among our assets and our financing arrangements may result in interest rate mismatches between our assets and the borrowings used to fund such assets. There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect on our business, results of operations, financial condition, and the market price of our common shares.

Future litigation or administrative proceedings could have a material adverse effect on our business, financial condition and results of operations.

We may become involved in legal proceedings, administrative proceedings, claims and other litigation that arise in the ordinary course of business. In defending ourselves in these proceedings, we may incur significant expenses in legal fees and other related expenses, regardless of the outcome of such proceedings. Unfavorable outcomes or developments relating to these proceedings, such as judgments for monetary damages, injunctions or denial or revocation of permits, could have a material adverse effect on our business, financial condition and results of operations. In addition, settlement of claims could adversely affect our financial condition and results of operations. See “Business—Legal Proceedings.”

We could be negatively impacted by cybersecurity attacks.

We, and our businesses, as well as the Manager and the Sub-Manager, may use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cyber attacks, including cyber attacks to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The risk of such a security breach or disruption has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cyber security incidents. The results of these incidents could include disrupted operations, misstated or unreliable financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, regulatory enforcement litigation and reputational damage, which could materially adversely affect our financial condition, business and results of operations. These risks require continuous and likely increasing attention and other resources from us to, among other actions, identify and quantify these risks, upgrade and expand our technologies, systems and processes to adequately address them and provide periodic training for the Manager’s employees to assist them in detecting phishing, malware and other schemes. Such attention diverts time and other resources from other activities and there is no assurance that our efforts will be effective. Potential sources for disruption, damage or failure of our information technology systems include, without limitation, computer viruses, security breaches, human error, cyber attacks, natural disasters and defects in design. Additionally, due to the size and nature of our company, we rely on third-party service providers for many aspects of our business. We can provide no assurance that the networks and systems that our third-party vendors have established or use will be effective.

We, and our businesses, are subject to a variety of federal, state and international laws and other obligations regarding data protection.

We, and our businesses, are subject to a variety of federal, state and international laws and other obligations regarding data protection. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing domestic and international requirements may cause us or our businesses to incur substantial costs or require us or one of our businesses to change its business practices. Any failure by us or one of our businesses to comply with its own privacy policy, applicable association rules, or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us or one of our businesses by governmental entities or others. Additionally, given the data collection and distribution focus of our Roundtables’ business, any failure could have a material impact on the use of its services by its customers.

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We may acquire interests in joint ventures, which creates additional risk because, among other things, we cannot exercise sole decision making power and our partners may have different economic interests than we have.

We may acquire interests in joint ventures with third parties. There are additional risks involved in joint venture transactions. As a co-investor in a joint venture, we may not be in a position to exercise sole decision-making authority relating to the joint venture or other entity. As a result, the operations of the joint venture may be subject to the risk that third parties may make business, financial or management decisions with which we do not agree or the management of the joint venture may take risks or otherwise act in a manner that does not serve our interests. Further, there may be a potential risk of impasse in some business decisions because we may not be in a position to exercise sole decision-making authority. In such situations, it is possible that we may not be able to exit the relationship because we may not have the funds necessary to complete a buy-out of the other partner or it may be difficult to locate a third-party purchaser for our interest. Because we may not have the ability to exercise control over such operations, we may not be able to realize some or all of the benefits that we believe will be created from our involvement. In addition, there is the potential of our joint venture partner becoming bankrupt and the possibility of diverging or inconsistent economic or business interests of us and our partner. These diverging interests could result in, among other things, exposing us to liabilities of the joint venture in excess of our proportionate share of these liabilities. If any of the foregoing were to occur, our business, financial condition and results of operations could suffer as a result.

A significant portion of our assets are recorded at fair value as determined in good faith by our board of directors, with assistance from the Manager and the Sub-Manager and, as a result, there will be uncertainty as to the value of our assets.

Our financial statements are prepared using the specialized accounting principles of Accounting Standards Codification Topic 946, Financial Services-Investment Companies, or ASC Topic 946, which requires us to carry our assets at fair value or, if fair value is not determinable based on transactions observable in the market, at fair value as determined by our board of directors. For most of our assets, market prices are not readily available. As a result, we value these assets monthly at fair value as determined in good faith by our board of directors based on input from the Manager, the Sub-Manager and the independent valuation firm. See “Determination of Net Asset Value.”

Our board of directors is ultimately responsible for the determination, in good faith, of the fair value of our assets. The determination of fair value is subjective, and the Manager and the Sub-Manager have a conflict of interest in assisting our board of directors in making this determination. Our board of directors, including a majority of our independent directors and our audit committee, has adopted a valuation policy that provides for the methodologies to be used to estimate the fair value of our assets for purposes of our net asset value calculation. Our board of directors makes this determination on a monthly basis and any other time when a decision is required regarding the fair value of our assets. Our board of directors has retained an independent valuation firm, Alvarez & Marsal Valuation Services, LLC, to assist the Manager and the Sub-Manager in preparing their recommendations with respect to our board of directors’ determination of the fair values of assets for which market prices are not readily available. The types of factors that may be considered in determining the fair values of our assets include available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the business’s ability to make payments, its earnings and discounted cash flows, the markets in which the company does business, comparisons of financial ratios of peer business entities that are public, mergers and acquisitions comparables, the principal market and enterprise values, among other factors. Because such valuations, and particularly valuations of private companies, are inherently uncertain, the valuations may fluctuate significantly over short periods of time due to changes in current market conditions. The determinations of fair value by our board of directors may differ materially from the values that would have been used if an active market and market prices existed for these assets. Our net asset value could be adversely affected if the determinations regarding the fair value of our assets were materially higher than the values that we ultimately realize upon the disposal of such assets. See “Determination of Net Asset Value.”

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including, but not limited to, our ability to consummate transactions, the terms of any transactions that we complete, variations in the earnings and/or distributions paid by the businesses we make capital contributions and loans to, variations in the interest rates on loans we make, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

We may experience fluctuations in our operating expenses.

We could experience fluctuations in our operating expenses due to a number of factors, including, but not limited to, changes in inflation and the flow on effects on prices generally, the terms of any transactions that we complete, changes in operating conditions, changes to our operating environment, changes in the perception of risk associated with operating these assets. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

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We will be exposed to risks associated with changes in interest rates.

To the extent we borrow to finance our assets, we will be subject to financial market risks, including changes in interest rates. As of the date of this prospectus, interest rates in the U.S. are near historic lows, which may increase our exposure to risks associated with rising interest rates. An increase in interest rates would make it more expensive to use debt for our financing needs. When we borrow, our net income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we employ those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates when we have floating-rate debt outstanding, our cost of funds may increase, which could reduce our net income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include borrowing at fixed rates or various interest rate hedging activities. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Tax

Shareholders may realize taxable income without cash distributions, and may have to use funds from other sources to fund tax liabilities.

Because we intend to be taxed as a partnership for U.S. federal income tax purposes, shareholders may realize taxable income in excess of cash distributions by us. There can be no assurance that we will pay distributions at a specific rate or at all. As a result, shareholders may have to use funds from other sources to pay their tax liability.

In addition, the payment of the distribution and shareholder servicing fees over time with respect to the Class T and Class D shares will be paid from cash distributions that would otherwise be distributable to the shareholders of Class T and Class D shares. Accordingly, the Class T and Class D shareholders may receive a lower cash distribution than the Class FA, Class A, Class I and Class S shareholders as a result of economically bearing our obligation to pay such fees. Additionally, since the management and incentive fees for the non-founder shares are higher than the management and incentive fees for the founder shares, the non-founder shareholders may receive a lower cash distribution than the founder shareholders as a result of economically bearing a greater proportionate share of our obligation to pay such fees. See “Certain U.S. Federal Income Tax Consequences—Partnership Allocations and Adjustments.” The payment of such fees will be specially allocated to the class of shares that are bearing these fees. Some shareholders will not be able to deduct these fees for tax purposes, which may result in shareholders’ taxable income from the company exceeding the amount of cash distributions made to such shareholders. See “Certain U.S. Federal Income Tax Considerations—Limitations on Deductibility of Certain Losses and Expenses.”

If we were to become taxable as a corporation for U.S. federal income tax purposes, we would be required to pay income tax at corporate rates on our net income and would reduce the amount of cash available for distribution to our shareholders. Such distributions, if any, by us to shareholders would constitute dividend income taxable to such shareholders, to the extent of our earnings and profits.

Under Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a corporation, and not as a partnership, for U.S. federal income tax purposes. A partnership is a publicly traded partnership if (i) interests in the partnership are traded on an established securities market or (ii) interests in the partnership are readily tradable on a secondary market or the substantial equivalent thereof. Applicable Treasury regulations (the “Section 7704 Regulations”) provide guidance with respect to such classification standards, and create certain safe harbor standards which, if satisfied, generally preclude classification as a publicly traded partnership. Failure to satisfy a safe harbor provision under the Section 7704 Regulations will not cause an entity to be treated as a publicly traded partnership if, taking into account all facts and circumstances, the partners are not readily able to buy, sell or exchange their interests in a manner that is comparable, economically, to trading on an established securities market.

While it is expected that we will operate so that we will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, the lack of direct guidance with respect to the application of tax laws to the activities we are undertaking and the possibility of future changes in our circumstances, it is possible that we will not qualify to be taxable as a partnership for any particular year. Our shares will not be listed on an exchange or quoted through a national quotation system for the foreseeable future, if ever. Our LLC Agreement provides for certain restrictions on transferability and on our ability to repurchase shares intended to ensure that we qualify as a partnership for U.S. federal income tax purposes and that we are not taxable as a publicly traded partnership. Under our LLC Agreement, prior to a listing of our shares on a national securities exchange, no transfer (including any share repurchases) of an interest may be made if it would result in our being treated as a publicly traded partnership. In addition, we may, without the consent of any shareholder, amend our LLC Agreement in order to improve, upon advice of counsel, our position in avoiding such publicly traded partnership status (and we may impose time-delay and other restrictions on recognizing transfers (including any share repurchases) as necessary to do so).

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If we were treated as a publicly traded partnership for U.S. federal income tax purposes, we would nonetheless remain taxable as a partnership if 90% or more of our income for each taxable year in which we were a publicly traded partnership consisted of “qualifying income” and we were not required to register under the Investment Company Act (the “qualifying income exception”). Qualifying income generally includes interest (other than interest generated from a financial business), dividends, real property rents, gain from the sale of assets that produce qualifying income and certain other items. Although there is no direct authority regarding whether activities similar to those conducted by us could be treated as a financial business for this purpose, the Internal Revenue Service, or the IRS, has issued private letter rulings to the effect that interest income on loans not made to customers in connection with a banking or other financing business is qualifying income for purposes of the publicly traded partnership rules. These private letter rulings are binding on the IRS only with respect to the particular taxpayers who requested and received those rulings and address only the specific facts presented by the requesting taxpayer; however, such authority nonetheless provides valuable indications of the IRS’s views on specific issues. In addition, to the extent that we invest in levered loans through “controlled foreign corporations” (each, a “CFC”), as discussed in “Certain U.S. Federal Income Tax Consequences-Investments in Non-U.S. Corporations,” we intend to currently distribute any Subpart F inclusions and treat such Subpart F inclusions as qualifying income for purposes of the qualifying income exception. Since our gross income will largely consist of dividend and interest income from our subsidiaries and other portfolio companies, we expect to satisfy the qualifying income exception. However, no assurance can be given that the actual results of our operations for any taxable year will satisfy the qualifying income exception.

If, for any reason, we become taxable as a corporation for U.S. federal income tax purposes, our items of income and deduction would not pass through to our shareholders and our shareholders would be treated for U.S. federal income tax purposes as shareholders in a corporation. We would be required to pay income tax at corporate rates on our net income. Distributions by us to shareholders would constitute dividend income taxable to such shareholders, to the extent of our earnings and profits, and the payment of these distributions would not be deductible by us. Our failure to qualify as a partnership for U.S. federal income tax purposes could have a material adverse effect on us, our shareholders and the value of the shares.

The IRS could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the shares if the IRS does not accept the assumptions or conventions utilized by us.

Although we are not a publicly traded partnership, given the large number of investors we anticipate will invest in us, we expect to apply conventions relevant to publicly traded partnerships. U.S. federal income tax rules applicable to partnerships are complex and their application is not always clear. We apply certain assumptions and conventions intended to comply with the intent of the rules and report income, gain, deduction, loss and credit to shareholders in a manner that reflects each shareholder’s economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable rules. It is possible therefore that the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations promulgated thereunder and will require that items of income, gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to shareholders.

Changes in tax laws and regulations may have a materially adverse effect on our business, financial condition and result of operations and have a negative impact on our shareholders.

The present U.S. federal income tax treatment of an investment in our shares may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. No assurance can be given as to whether, when, or in what form, the U.S. federal and state income tax laws applicable to us and our shareholders may be enacted. For example, legislation recently has been proposed that, if enacted, would fundamentally change the manner in which partnerships are taxed, including eliminating the "qualifying income exception," discussed under "Certain U.S. Federal Income Tax Consequences—Classification as a Partnership" below, that applies to prevent certain "publicly traded partnerships" from being taxable as corporations for U.S. federal income tax purposes. While it is not possible to predict the likelihood of this proposed legislation being enacted in its current form, if at all, we and our shareholders could be materially adversely affected by any such change in, or any other new, tax law, regulation or interpretation. Prospective investors should consult their tax advisors regarding the potential changes in tax laws.

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Interest deductions on loans made to our subsidiaries and other portfolio companies may be limited, which could result in adverse tax consequences.

Our debt investments in our subsidiaries (including portfolio companies) are intended to be treated as indebtedness for U.S. federal income tax purposes. If the IRS successfully recharacterized any of such debt investments as equity for U.S. federal income tax purposes, payments of interest with respect to such debt investment may be recharacterized as a dividend and would not be deductible by our subsidiary in computing its taxable income, resulting in the subsidiary potentially being subject to additional U.S. federal income tax.  Even to the extent the debt investments are respected as indebtedness for U.S. federal income tax purposes, the deduction for interest payments by each of our subsidiaries with respect to such debt investments for any taxable year is generally limited to the sum of (i) such subsidiary’s business interest income and (ii) 30% of the subsidiary’s “adjusted taxable income”, unless the subsidiary is an electing real property trade or business. To the extent interest deductions by our subsidiaries are limited, it could increase the U.S. federal income tax liability of our subsidiaries, reducing the amount of cash available for distribution to us, and, as a result, to our shareholders.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this prospectus constitute “forward-looking statements.” Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of our business and its performance, the economy and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance, although not all forward-looking statements include these words. The forward-looking statements contained in this prospectus involve risks and uncertainties, including statements as to:

our future operating results;
our business prospects and the prospects of our businesses and other assets;
unanticipated costs, delays and other difficulties in executing our business strategy;
performance of our businesses and other assets relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these assets;
our contractual arrangements and relationships with third parties;
actual and potential conflicts of interest with the Manager, the Sub-Manager and their respective affiliates;
the dependence of our future success on the general economy and its effect on the industries in which we target;
events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, virus outbreaks or pandemics, such as COVID-19, terrorist attacks, natural or man-made disasters or threatened or actual armed conflicts;
the use, adequacy and availability of proceeds from this offering, financing sources, working capital or borrowed money to finance a portion of our business strategy and to service our outstanding indebtedness;
the timing of cash flows, if any, from our businesses and other assets;
the ability of the Manager and the Sub-Manager to locate suitable acquisition opportunities for us and to manage and operate our businesses and other assets;
the ability of the Manager, the Sub-Manager and their respective affiliates to attract and retain highly talented professionals;
the ability to operate our business efficiently, manage costs (including general and administrative expenses) effectively and generate cash flow;
the lack of a public trading market for our shares;
the ability to make and the amount and timing of anticipated future distributions;
estimated net asset value per share of our shares;
the loss of our exemption from the definition of an “investment company” under the Investment Company Act;
fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S. economy;
epidemics and pandemics;
the degree and nature of our competition; or
the effect of changes to government regulations, accounting rules or tax legislation.

 

Our forward-looking statements are not guarantees of our future performance and shareholders are cautioned not to place undue reliance on any forward-looking statements. While we believe our forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. Our forward-looking statements are based on our current expectations and a variety of risks, uncertainties and other factors, many of which are beyond our ability to control or accurately predict. Important factors that could cause our actual results to vary materially from those expressed or implied in our forward-looking statements include, but are not limited to, the factors listed and described under “Risk Factors” in this prospectus, our quarterly reports on Form 10-Q, annual report on Form 10-K, and current reports on Form 8-K, as filed with the SEC and other documents we file from time to time with the SEC. In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic, many of which are unknown, including the duration of the pandemic, the extent of the adverse health impact on the general population and our customers, and in particular our personnel, its impact on the employment rate and the economy, the extent and impact of governmental responses, and the impact of operational changes we or our businesses may implement in response to the pandemic. All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made; we undertake no obligation to, and expressly disclaim any obligation to, update or revise forward-looking statements to reflect new information, changed assumptions, the occurrence of subsequent events, or changes to future operating results over time unless otherwise required by law.

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ESTIMATED USE OF PROCEEDS

The following tables present information about how the proceeds raised in this offering will be used. Information is provided assuming (i) the sale of the maximum offering amount and (ii) that 30% of the gross offering proceeds from this offering is from sales of Class A shares, 30% is from sales of Class T shares, 10% is from sales of Class D shares and 30% is from sales of Class I shares. The 30%, 30%, 10% and 30% allocation assumption is based upon the Managing Dealer’s expectations taking into consideration, among other factors, the experience of our initial public offering, anticipated participating broker-dealers and distribution intermediaries which may participate in this offering, the experiences of other multi-class blind pool initial public offerings, current market demand and anticipated regulatory changes.

There can be no assurance that this assumption will prove to be accurate. Many of the numbers in the table are estimates because all fees and expenses cannot be determined precisely at this time. The actual amount of expenses cannot be determined at the present time and will depend on numerous factors, including the aggregate amount borrowed by us. The actual use of proceeds is likely to be different than the figures presented in the table because we may not raise the maximum offering amount. Raising less than the maximum offering amount or selling a different percentage of Class A, Class T, Class D and Class I shares will alter the amounts of commissions, fees and expenses set forth below.

Under the terms of the Management and Sub-Management Agreements between us and the Manager and the Sub-Manager, respectively, the Manager (and indirectly the Sub-Manager) is entitled to receive up to 1.50% of gross proceeds raised in this particular offering to recover cumulative organization and offering costs which have been funded by the Manager, the Sub-Manager or their respective affiliates.

The Manager (and indirectly the Sub-Manager) is responsible for the payment of the company’s cumulative organization and offering expenses to the extent they exceed (A) 1.0% of the cumulative gross proceeds from any of our private offerings and (B) 1.5% of the cumulative gross proceeds from this offering or our other public offerings, in each case, without recourse against or reimbursement by the company. Notwithstanding the foregoing, the company shall reimburse the Manager for cumulative organization and offering expenses it may incur on the company’s behalf but only to the extent that (1) the total amount of all cumulative organization and offering expenses is reasonable and (2) solely in connection with this offering, the reimbursement would not cause the selling commissions, any dealer manager fees, the distribution and shareholder servicing fees and the organization and offering expenses borne by the company to exceed 15.0% of gross proceeds from this offering pursuant to the relevant registration statement as of the date of the reimbursement. The Manager’s (and indirectly the Sub-Manager’s) obligation to pay the company’s organization and offering expenses shall be calculated on a cumulative basis at the time such organization and offering expenses are due and payable under the Management Agreement, as compared to the cumulative gross proceeds from this offering or such other offerings at such time.

We estimate that we will incur cumulative organization and offering costs, which includes actual legal, accounting, printing, filing fees, and other expenses attributable to conducting this offering or our other offerings, of approximately 1.5% of the gross offering proceeds from all of our private and public offerings, assuming maximum gross proceeds in this offering are raised.

Until the proceeds from this offering are fully invested, and from time to time thereafter, we may not generate sufficient cash flow from operations to fully fund distributions. Therefore, some or all of our distributions may be paid from other sources, such as cash advances by the Manager, cash resulting from a waiver or deferral of fees by the Manager and the Sub-Manager, borrowings, proceeds from this offering and/or pursuant to the Expense Support and Conditional Reimbursement Agreement. There is no limit on distributions that may be made from these sources. The estimated amount to be invested, presented in the table below, will be impacted to the extent we use proceeds from this offering to pay distributions. The following table is presented solely for informational purposes.

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The following table presents information regarding the use of proceeds raised in this offering with respect to Class A shares.

   Maximum Sale of
$300,000,000
of Class A Shares
in this Offering
   Sale of $150,000,000
of Class A Shares
in this Offering
(Half Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public Offering
Proceeds
 
Gross Proceeds (1)   300,000,000    100.00%   150,000,000    100.00%
Less Offering Expenses(2)                    
Selling Commissions (1)   18,000,000    6.00%   9,000,000    6.00%
Dealer Manager Fee   7,500,000    2.50%   3,750,000    2.50%
Other Organization and Offering Expenses (3)   2,858,663    0.95%   2,858,663    1.90%
                     
Amount Available for Investment/ Net Proceeds to be Invested (4)   271,614,337    90.55%   134,364,337    89.60%

 

The following table presents information regarding the use of proceeds raised in this offering with respect to Class T shares.

 

   Maximum Sale of
$300,000,000
of Class T Shares
in this Offering
   Sale of $150,000,000
of Class T Shares
in this Offering
(Half Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public Offering
Proceeds
 
Gross Proceeds (1)   300,000,000    100.00%   150,000,000    100.00%
Less Offering Expenses(2)                    
Selling Commissions (1)   9,000,000    3.00%   4,500,000    3.00%
Dealer Manager Fee   5,250,000    1.75%   2,625,000    1.75%
Other Organization and Offering Expenses (3)   2,992,454    1.00%   2,992,454    2.00%
                     
Amount Available for Investment/ Net Proceeds to be Invested (4)   282,757,546    94.25%   139,882,546    93.25%

 

The following table presents information regarding the use of proceeds raised in this offering with respect to Class D shares.

 

   Maximum Sale of
$100,000,000
of Class D Shares
in this Offering
   Sale of $50,000,000
of Class D Shares
in this Offering
(Half Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public Offering
Proceeds
 
Gross Proceeds (1)   100,000,000    100.00%   50,000,000    100.00%
Less Offering Expenses(2)                    
Selling Commissions (1)       0.00%       0.00%
Dealer Manager Fee       0.00%       0.00%
Other Organization and Offering Expenses (3)   1,061,048    1.06%   1,061,048    2.12%
                     
Amount Available for Investment/ Net Proceeds to be Invested(4)   98,938,952    98.94%   48,938,952    97.88%

 

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The following table presents information regarding the use of proceeds raised in this offering with respect to Class I shares.

 

   Maximum Sale of
$300,000,000
of Class I Shares
in this Offering
   Sale of $150,000,000
of Class I Shares
in this Offering
(Half Offering)
 
   Amount ($)   Percent of
Public Offering
Proceeds
   Amount ($)   Percent of
Public Offering
Proceeds
 
Gross Proceeds (1)   300,000,000    100.00%   150,000,000    100.00%
Less Offering Expenses(2)                    
Selling Commissions (1)       0.00%       0.00%
Dealer Manager Fee       0.00%       0.00%
Other Organization and Offering Expenses(3)   3,087,835    1.03%   3,087,835    2.06%
                     
Amount Available for Investment/ Net Proceeds to be Invested (4)   296,912,165    98.97%   146,912,165    97.94%

 

 

(1)The tables assume that no shares are sold under our distribution reinvestment plan. The actual selling commissions that will be paid on Class A shares and Class T shares may be higher or lower due to rounding. See the section of this prospectus entitled “Plan of Distribution” for a description of the circumstances under which selling commissions and dealer manager fees may be reduced in connection with certain purchases including, but not limited to, purchases by investors that are clients of a registered investment adviser, registered representatives or principals of the Managing Dealer or participating brokers, and the Manager, the Sub-Manager, their respective affiliates, officers and employees. A portion of the selling commissions will be reduced in connection with volume purchases, and will be reflected by a corresponding reduction in the per share purchase price. In no event, however, will commission discounts reduce the proceeds of this offering that are available to us. No sales load is paid in connection with the purchase of shares pursuant to our distribution reinvestment plan.
(2)We also pay to the Managing Dealer ongoing distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in this primary offering (excluding Class T Shares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of our current net asset value per share, as disclosed in our periodic or current reports, payable on a monthly basis. The distribution and shareholder servicing fees accrue daily and are paid monthly in arrears. We pay the distribution and shareholder servicing fees to the Managing Dealer, which may reallow all or a portion of the distribution and shareholder servicing fee to the broker-dealer who sold the Class T or Class D shares or, if applicable, to a servicing broker-dealer of the Class T or Class D shares, a broker-dealer with a fee-based platform, or a fund “supermarket” platforms featuring Class D shares, so long as the broker-dealer or financial intermediary has entered into a contractual agreement with the Managing Dealer that provides for such reallowance. The distribution and shareholder servicing fees are ongoing fees that are not paid at the time of purchase, are not intended to be a principal use of offering proceeds and are not included in the above tables. The distribution and shareholder servicing fees are considered underwriting compensation in connection with this offering, subject to the 10% limit on underwriting compensation pursuant to FINRA rules. The distribution and shareholder servicing fees are similar to selling commissions. The distribution and shareholder servicing expenses borne by the participating broker-dealers may be different from and substantially less than the amount of the distribution and shareholder servicing fees charged. In addition, the Managing Dealer and/or participating broker-dealers may incur certain other costs and expenses associated with this offering or the facilitation of the marketing of our shares, including technology fees related to the marketing of shares, certain wholesaling activities, certain legal expenses, the costs and expenses of sales training and educational meetings held by us or the Managing Dealer or for participating broker-dealer sponsored conferences, or selling commissions and non-transaction based compensation paid to registered persons associated with the Managing Dealer in connection with wholesaling activities. Such costs and expenses will be paid out of selling commissions, dealer manager or distribution and shareholder servicing fees retained by the Managing Dealer (all or portion of which may be reallowed to participating broker-dealers); provided, however, that to the extent any such costs and expenses exceed the commissions, dealer manager or distribution and shareholder servicing fees retained by the Managing Dealer such costs and expenses will be borne by the Managing Dealer and/or participating broker-dealers without reimbursement by us.  In either case, such costs and expenses will be deemed to be underwriting compensation and will be subject to the FINRA’s 10% limit on total underwriting compensation.

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(3)Other organization and offering expenses include any and all cumulative costs and expenses, excluding selling commissions, dealer manager fees and distribution and shareholder servicing fees, incurred by us in connection with our formation, qualification and registration, and the marketing and distribution of our shares in this offering or our other offerings, including, without limitation, the following: amounts for SEC registration fees, FINRA filing fees, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, due diligence expenses, escrow fees and other administrative expenses of this offering. The amounts reflected are estimates. The total of these other organization and offering expenses are estimated to be approximately $10,000,000 if the maximum offering amount is sold. For purposes of these tables, estimated other organization and offering expenses are allocated among the Class A, Class T, Class D and Class I shares pro rata on a per share basis, assuming 30% of the gross offering proceeds from this offering is from sales of Class A shares, 30% is from sales of Class T shares, 10% is from sales of Class D shares and 30% is from sales of Class I shares, based on our current public offering prices.
(4)Although a substantial majority of the amount available for investment presented in this table is expected to be used to acquire assets, including used to finance acquisitions of other businesses, we may use a portion of such amount (i) to repay debt incurred in connection with operating our business; (ii) to establish reserves; or (iii) for other corporate purposes, including, but not limited to, payment of distributions to shareholders or payments of offering expenses in connection with future offerings pending the receipt of offering proceeds from such offerings, provided that these organization and offering expenses may not exceed the limitation of organization and offering expenses pursuant to our LLC Agreement and FINRA rules. We will incur capital expenses and acquisition expenses relating to our investments. In addition, we may use proceeds from our distribution reinvestment plan for repurchases of shares. Until proceeds are required to be invested or used for other purposes, we invest such amounts in short-term, highly liquid investments with appropriate safety of principal, including, but not limited to, government obligations, short-term debt obligations, interest bearing bank accounts and leveraged loans. We have also not established any limit on the extent to which we may use proceeds of this offering to pay distributions, and there will be no assurance that we will be able to sustain distributions at any level.

 

49

 

DISTRIBUTION POLICY

General

Subject to our board of director’s discretion and applicable legal restrictions, our board of directors has declared, and intends to continue to declare, cash distributions to shareholders based on monthly record dates and we have paid, and intend to continue to pay, such distributions on a monthly basis. Our board of directors may also authorize distributions in the form of shares or effect share splits. However, there can be no assurance that we will pay distributions at a specific rate or at all. Distributions will be paid out of funds legally available for distribution to our shareholders. Our distributions may exceed our earnings and adjusted cash flow from operating activities and we may fund our distributions to shareholders from any sources of funds available to us, including from expense support from the Manager and the Sub-Manager, as well as from offering proceeds and borrowings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Distributions” for additional information on the sources of funding for our distributions. Distributions will be made on all classes of our shares at the same time. Amounts distributed will be allocated among each class in proportion to the number of shares of each class outstanding. Amounts distributed to each class will be allocated among our shareholders in such class in proportion to their shares. We have not established limits on the amount of funds we may use from any available sources to make distributions. The per share amount of distributions on Class A, Class S, Class FA, Class T, Class D and Class I shares may differ because of different allocations of certain class-specific expenses. Specifically, distributions on the non-founder shares may be lower than distributions on founder shares because we are required to pay higher management and incentive fees to the Manager and the Sub-Manager with respect to the non-founder shares. Additionally, distributions on Class T shares and Class D shares may be lower than distributions on Class A, Class FA and Class I shares because we are required to pay ongoing distribution and shareholder servicing fees with respect to the Class T shares and Class D shares sold in this offering.

Distributions Declared

Cash distributions declared during the periods presented were funded from the following sources noted below:

   Year Ended
December 31, 2020
   Year Ended
December 31, 2019
   Period from February 7, 2018 (Commencement of Operations) to December 31, 2018 
   Amount   % of Distributions Declared   Amount   % of Distributions Declared   Amount   % of Distributions Declared 
Net investment income(1)  $7,493,472    75.5%  $4,981,264    85.2%  $3,389,372    96.3%
Distributions in excess of net investment income(2)   2,435,881    24.5%   864,320    14.8%   128,930    3.7%
Total distributions declared(3)  $9,929,353    100.0%  $5,845,584    100.0%  $3,518,302    100.0%

 

FOOTNOTES:

(1)Net investment income includes expense support from the Manager and Sub-Manager of $3,301,473, $1,372,020 and $389,774 for the years ended December 31, 2020 and 2019 and for the period from February 7, 2018 to December 31, 2018, respectively.
(2)Consists of offering proceeds for the periods presented.
(3)For the year ended December 31, 2020, includes $2,240,547 of distributions reinvested pursuant to our distribution reinvestment plan, of which $244,845 was reinvested in January 2021 with the payment of distributions declared in December 31, 2020. For the year ended December 31, 2019, includes $886,408 of distributions reinvested pursuant to our distribution reinvestment plan, of which $114,090 was reinvested in January 2020. For the period from February 7, 2018 to December 31, 2018, includes $126,625 of distributions reinvested pursuant to our distribution reinvestment plan, of which $26,789 was reinvested in January 2019.

 

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Cash distributions declared during the periods presented were funded from the following sources noted below:

 

   Six Months Ended June 30, 
   2021   2020 
   Amount   % of Cash
Distributions
Declared
   Amount   % of Cash
Distributions
Declared
 
Net investment income(1)  $4,832,909    70.0%  $3,421,603    77.4%
Distributions in excess of net investment income(2)   2,075,537    30.0%   1,001,586    22.6%
Total distributions declared(3)  $6,908,446    100.0%  $4,423,189    100.0%

 

FOOTNOTES:

(1)Net investment income includes expense support from the Manager and Sub-Manager of $4,495,242 and $1,597,728 for the six months ended June 30, 2021 and 2020, respectively.
(2)Consists of distributions made from offering proceeds for the periods presented.
(3)For the six months ended June 30, 2021, includes $1,760,794 of distributions reinvested pursuant to our distribution reinvestment plan, of which $360,174 was reinvested in July 2021 with the payment of distributions declared in June 30, 2021. For the six months ended June 30, 2020, includes $944,968 of distributions reinvested pursuant to our distribution reinvestment plan, of which $184,080 was reinvested in July 2020.

 

 Our LLC Agreement provides that distributions in-kind shall not be permitted, except for distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for our dissolution and or distributions of in-kind property which (i) we advise each shareholder of the risks associated with direct ownership of the property, (ii) we offer each shareholder the election of receiving such in-kind distributions, and (iii) we distribute in-kind only to those shareholders that accept such offer. We have adopted a distribution reinvestment plan pursuant to which you may have the full amount of your cash distributions from us reinvested in additional shares.

See “Distribution Reinvestment Plan” for additional details regarding the distribution reinvestment plan.

 

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DETERMINATION OF NET ASSET VALUE

Relevance of Our Net Asset Value

Our net asset value per share for each class of shares is calculated and published on a monthly basis.

Our net asset value will:

be disclosed in our quarterly and annual financial statements and on a monthly basis in a current report on Form 8-K;
determine the price per share that is paid to shareholder participants in our quarterly share repurchase program and the price per share paid by participants in our distribution reinvestment plan;
be an input in the computation of fees earned by the Manager and the Sub-Manager whose fees are linked, directly or indirectly, in whole or part to the value of our gross assets; and
be evaluated alongside the net proceeds per share to us from this offering in determining the offering price per share for each class of shares.

Determination of Our Net Asset Value

The calculation of our net asset value is a calculation of fair value of our assets less our outstanding liabilities. Our board of directors, including a majority of our independent directors and our audit committee, has adopted a valuation policy that provides for the methodologies to be used to estimate the fair value of our assets for purposes of our net asset value calculation. Any changes to the valuation policy are required to be approved by our board of directors, including a majority of our independent directors, and our audit committee.

We have adopted, and our valuation policy will be performed in accordance with, Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC Topic 820 clarifies that the fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is defined as a market in which transactions for the asset or liability occur with sufficient pricing information on an ongoing basis. Publicly listed equity and debt securities and listed derivatives that are traded on major securities exchanges and publicly traded equity options are generally valued using Level 1 inputs. If a price for a Level 1 asset cannot be determined based upon this established process, it shall then be valued as a Level 2 asset.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following: (i) quoted prices for similar assets in active markets; (ii) quoted prices for identical or similar assets in markets that are not active; (iii) inputs that are derived principally from or corroborated by observable market data by correlation or other means; and (iv) inputs other than quoted prices that are observable for the assets. Fixed income and derivative assets where there is an observable secondary trading market and through which pricing inputs are available through pricing services or broker quotes are generally valued using Level 2 inputs. If a price for a Level 2 asset cannot be determined based upon this established process, it shall then be valued as a Level 3 asset.

Level 3: Unobservable inputs for the asset or liability being valued. Unobservable inputs will be used to measure fair value to the extent that observable inputs are not available and such inputs will be based on the best information available in the circumstances, which under certain circumstances might include the Manager’s or the Sub-Manager’s own data. Level 3 inputs may include, but are not limited to, capitalization and discount rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. Certain assets may be valued based upon estimated value of underlying collateral and include adjustments deemed necessary for estimates of costs to obtain control and liquidate available collateral. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. Debt and equity investments in private companies or assets valued using the market or income approach are generally valued using Level 3 inputs.

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Unless an exception exists as identified in accordance with our valuation policy (for example, a broker quote or pricing service quote is deemed unreliable), our Level 1 and Level 2 assets will be reviewed and approved by the Manager, but will not require the approval of our board of directors. Pricing services serve as the preferred source of prices for assets, unless a price is not available or is determined to be unreliable or inadequately represents the fair value of the particular asset. In that case, valuations will be based on broker quotes or other similar external valuation sources if available to value the asset.

Our board of directors, with assistance from the Manager and Sub-Manager, is ultimately responsible for determining in good faith the fair value of our Level 3 assets. For an asset which is classified as a Level 3 asset, our board of directors has retained an independent valuation firm, Alvarez & Marsal Valuation Services, LLC, to assist the Manager and the Sub-Manager in preparing their recommendations with respect to our board of directors’ determination of the fair values of such assets and has approved the following valuation process when a valuation is sought:

values or valuation ranges for such assets is provided by the independent valuation firm. As part of this process, the Sub-Manager provides the independent valuation firm with access to all of the information relating to such assets relevant to the discharge of the independent valuation firm’s responsibilities and the Sub-Manager consults with, and seeks support from, the Manager as necessary throughout this process;
the Sub-Manager reviews the values or valuation ranges prepared by the independent valuation firm and provides its valuation recommendation for such assets to the Manager;
the Manager provides a valuation recommendation for such assets to our audit committee of our board of directors. Our audit committee reviews the recommendations of the Manager and the Sub-Manager, and makes its own recommendation of the fair value of such assets to our board of directors; and
our board of directors reviews and adopts the fair value of such assets.

On no less than a quarterly basis, values or valuation ranges for all Level 3 assets will be provided by the independent valuation firm. The Manager and the Sub-Manager will monitor our Level 3 assets for unobservable inputs. If it is determined that the impact of any such unobservable inputs would reasonably be expected to materially impact the fair value of an asset any time a valuation is sought, then the Sub-Manager will notify the Manager and the Manager will notify the independent valuation firm and request that the independent valuation firm provide an updated valuation for such asset.

The determination of the fair value of our assets requires judgment, especially with respect to assets for which market prices are not available. For most of our assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of our net asset value is based, in part, on the estimated fair value of our assets, our calculation of net asset value is subjective and could be adversely affected if the determinations regarding the estimated fair value of our assets were materially higher than the values that we ultimately realize upon the disposal of such assets. Furthermore, through the valuation process, our board of directors may determine that the fair value of our assets differs materially from the values that were provided by the independent valuation firm.

Our board of directors, with assistance from the Manager, determines the net asset value per share on a monthly basis for each class of shares outstanding by dividing the value of total assets pertaining to a class of shares minus liabilities pertaining to a class of shares by the total number of shares of a class outstanding at the time of determination.

Our audit committee reviews, and recommends to our board of directors for adoption, our quarterly and annual financial statements for inclusion in our quarterly reports on Form 10-Q and annual report on Form 10-K, and such financial statements include a determination of our net asset value and net asset value per share for each class of shares as of the last day of each calendar quarter. These financial statements, in turn, are reviewed and approved by our board of directors. In addition, on a monthly basis, our audit committee reviews, and recommend to our board of directors for adoption, a determination of our net asset value per share for each class of shares as of the last day of each month for inclusion in a current report on Form 8-K. This determination of our net asset value per share for each class of shares, in turn, is reviewed and approved by our board of directors.

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Independent Valuation Firm

Alvarez & Marsal Valuation Services, LLC was selected as the company’s independent valuation firm due to its experience and nationally recognized valuation expertise. Alvarez & Marsal Valuation Services, LLC has no prior affiliation with the company, the Manager, the Sub-Manager or any of their respective affiliates.

Alvarez & Marsal Valuation Services, LLC and its affiliates employs more than 70 valuation consultants, located in New York, London, Frankfurt, Amsterdam, Chicago, Seattle, San Francisco, Houston and Atlanta. Alvarez & Marsal Valuation Services, LLC is an affiliate of Alvarez & Marsal Holdings, a privately owned independent global professional services firm established in 1983.

Use of Pricing Services

The Manager and the Sub-Manager will obtain prices from approved unaffiliated third-party pricing services for assets held by the company. The Manager, the Sub-Manager or our board of directors may take action if they believe that the prices obtained from the pricing services are unreliable or unavailable.

Equity securities are priced based on the last reported market price as of the relevant measurement date, or if such date was not a trading day, the price from the immediately preceding trading day is used.

If the price obtained from a primary pricing source is determined by the Manager or the Sub-Manager to be unreliable, the Manager can use a price from a secondary approved pricing source. The determination by the Manager that a secondary pricing source is preferable to a primary pricing source requires contemporaneous documentation.

If no reliable price is available from an approved pricing service, the Manager or the Sub-Manager shall attempt to utilize broker quotes or similar external observable pricing inputs. These actions require contemporaneous documentation of the rationale for determining a price is not reliable and support for the use of a price from a different source. Any time a valuation is sought but on no less than a quarterly basis, the Manager will review all pricing provided from pricing services.

If a price from a pricing service for an asset is determined to be unreliable for that asset and no other external pricing sources (i.e., pricing services or broker quotes) are determined to be available, then the asset will be deemed a Level 3 asset and the valuation will follow procedures for Level 3 assets as outlined herein.

Use of Broker Quotes

Broker quotes are generally obtained by the Manager and the Sub-Manager and are utilized as described above. The use of broker quotes is only permissible if no reliable price from an approved pricing service is available.

If only one available broker quote is deemed to be reliable on a month end date, then a corroborating internal analysis must be prepared and approved by the Manager. If more than two broker quotes are obtained, the mean of the prices from the quotes is used if the quotes are deemed reliable and the quotes are in a reasonable range to one another.

If two broker quotes are obtained and they provide materially different prices, then the Manager will attempt to reconcile the sources of the quotes and determine whether the quotes are reliable.

Broker quotes will be evaluated by the Manager anytime a valuation is sought and using the following considerations when determining whether broker quotes are reliable:

Type and complexity of the investment for which a quote is being received;
Unique features or characteristics with regard to the security, including size of the transaction as compared to other market transactions, privy of information as a result of due diligence efforts;
Whether the quote is based on an active market for the financial instrument or through modeled assumptions;
Prices that are inconsistent with other actual trades by the Manager or the Sub-Manager or the company or through broker quotes;
Existence of trading halts, closed markets or singular market event, including material market fluctuation;
Significant event which may relate to a specific issuer, market sector, political or geographical action or natural disaster;

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The reliability of the broker providing the quote for the financial instrument; and
Whether the quote is an indicative price or a binding offer.

Net Asset Value Determinations in Connection with this Continuous Offering

Our board of directors determines our net asset value for each class of our shares on a monthly basis. We expect that such determination will ordinarily be made within 15 business days after each such completed month. Following the commencement of valuations, to the extent that our net asset value per share on the most recent determination increases above or decreases below our net proceeds per share as stated in this prospectus, our board of directors will adjust the offering prices of any of the classes of our shares to ensure that no share is sold at a price, after deduction of upfront selling commissions and dealer manager fees, that is above or below our net asset value per share as of the most recent valuation date. The adjusted offering prices will become effective five business days after our board of directors determines to set the new prices and we publicly disclose such prices. Our board of directors will continue to adjust the offering prices of all classes of our shares as necessary in this manner.

Promptly following any such adjustment to the offering prices per share, we will file a prospectus supplement or post-effective amendment to the registration statement with the SEC disclosing the adjusted offering prices and the effective date of such adjusted offering prices, and we will also post the updated pricing information on our website at www.cnlstrategiccapital.com. A subscriber may also obtain our current offering price by calling us by telephone at (866) 650-0650. If the new offering price per share for any of the classes of our shares being offered by this prospectus represents more than a 20% change in the per share offering price of our shares from the most recent offering price per share, we will file an amendment to the registration statement with the SEC. We will attempt to file the amendment on or before such time in order to avoid interruptions in this offering; however, there can be no assurance that this offering will not be suspended while the SEC reviews any such amendment and until it is declared effective.

Subscribers are not committed to purchase shares at the time their subscription orders are submitted and any subscription may be withdrawn at any time before the time it has been accepted by us. The monthly closing date on which we will accept subscriptions is expected to be the last business day of each month. The purchase price per share to be paid by each investor will be equal to the price that is in effect on the date we accept such investor’s subscription agreement in connection with our monthly closings. Generally, an investor will know the monthly closing date that applies to their subscription. In the event we adjust the offering price after an investor submits their subscription agreement and before the date we accept such subscription, such investor will not be provided with direct notice by us of the adjusted offering price but will need to check our website or our filings with the SEC prior to the closing date of their subscription. In this case, an investor will have at least five business days after we publish the adjusted offering price to consider whether to withdraw their subscription request before they are committed to purchase shares upon our acceptance.

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Historical Net Asset Value Determinations

Our board of directors had also previously determined the net asset value per share for each company share class as of the following months ended:

 

Month Ended Class FA Class A Class T Class D Class I Class S

9/30/2021

$32.44 $30.80 $30.65 $30.27 $31.18 $32.64

8/31/2021

$32.26 $30.70 $30.46 $30.11 $31.07 $32.44
7/31/2021

$32.58

$31.07 $30.85

$30.49

$31.44 $32.76
6/30/2021 $32.40 $30.92

$30.73

$30.35 $31.28 $32.56
5/31/2021 $32.13 $30.70 $30.53 $30.13 $31.06 $32.28
4/30/2021 $31.75 $30.36 $30.21 $29.80 $30.70 $31.89
3/31/2021 $31.22 $29.88 $29.74 $29.33 $30.21 $31.35
2/28/2021 $30.95 $29.65 $29.53 $29.11 $29.97 $31.07
1/31/2021 $30.54 $29.29 $29.18 $28.75 $29.60 $30.66
12/31/2020 $29.97 $28.76 $28.67 $28.24 $29.06 $30.08
11/30/2020 $29.53 $28.36 $28.29 $27.85 $28.65 $29.62
10/31/2020 $29.26 $28.13 $28.08 $27.64 $28.42 $29.35
9/30/2020 $29.00 $27.91 $27.88 $27.44 $28.19 $29.07
8/31/2020 $28.85 $27.80 $27.79 $27.34 $28.08 $28.92
7/31/2020 $28.61 $27.59 $27.60 $27.15 $27.87 $28.66
6/30/2020 $27.96 $26.98 $27.01 $26.58 $27.25 $28.00
5/31/2020 $27.54 $26.61 $26.65 $26.21 $26.88 $27.58
4/30/2020 $27.13 $26.24 $26.30 $25.86 $26.50 $27.16
3/31/2020 $27.15 $26.30 $26.36 $25.94 $26.55 $27.16
2/29/2020 $27.56 $26.75 $26.82 $26.40 $26.99 --
1/31/2020 $27.53 $26.76 $26.85 $26.44 $27.00 --
12/31/2019 $27.64 $26.91 $27.01 $26.61 $27.15 --
11/30/2019 $27.48 $26.79 $26.89 $26.43 $27.02 --
10/31/2019 $27.38 $26.74 $26.85 $26.40 $26.96 --
9/30/2019 $27.34 $26.74 $26.84 $26.43 $26.95 --
8/31/2019 $27.19 $26.64 $26.74 $26.27 $26.83 --
7/31/2019 $27.19 $26.69 $26.79 $26.35 $26.87 --
6/30/2019 $27.19 $26.74 $26.84 $26.46 $26.91 --
5/31/2019 $27.16 $26.75 $26.86 $26.45 $26.91 --
4/30/2019 $26.88 $26.51 $26.62 $26.24 $26.67 --
3/31/2019 $26.72 $26.39 $26.50 $26.17 $26.54 --
2/28/2019 $26.72 $26.43 $26.54 $26.15 $26.57 --
1/31/2019 $26.57 $26.33 $26.43 $26.07 $26.44 --
12/31/2018 $26.65 $26.44 $26.54 $26.23 $26.55 --
11/30/2018 $26.61 $26.42 $26.52 $26.23 $26.52 --
10/31/2018 $26.40 $26.25 $26.33 $26.11 $26.33 --
9/30/2018 $26.41 $26.28 $26.36 $26.20 $26.34 --
8/31/2018 $26.41 $26.30 $26.38 $26.28 $26.35 --
7/31/2018 $26.18 $26.09 $26.16 $26.12 $26.13 --
6/30/2018 $25.43 $25.37 $25.42 $25.41 $25.40 --
5/31/2018 $25.26 $25.08 $25.17 -- $25.23 --
4/30/2018 $25.16 $25.16 -- -- $25.23 --
3/31/2018 $25.16 -- -- -- -- --

 

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PRIOR PERFORMANCE OF THE MANAGER, THE SUB-MANAGER AND THEIR RESPECTIVE AFFILIATES

General

The information presented in this section represents the historical experience of certain programs sponsored or managed in the last ten years by CNL affiliates and LLCP and its affiliates, through December 31, 2020, except as otherwise indicated. The purpose of this prior performance information is to enable investors to evaluate accurately the experience of CNL affiliates and LLCP and its affiliates in sponsoring programs. Investors should not assume that they will experience returns, if any, comparable to those experienced by investors in the prior programs summarized in this section. Investors who purchase our shares will not thereby acquire an ownership interest in any of the entities to which the following information relates. Further, the private funds discussed in this section were conducted through privately held entities that were subject neither to the up-front commissions, fees and other expenses associated with this offering nor all of the laws and regulations that will apply to us as a publicly offered company.

Our structure and business strategy are different from certain of these prior programs and our performance will depend on factors that may not be applicable to or affect the performance of these programs. We consider a prior program to have a business objective similar to us if the program acquires, or has acquired, controlling and minority equity interests in growing middle-market businesses located primarily in the United States. Although a business objective is similar, the specific acquisition criteria of a prior program may vary from program to program as compared to our acquisition criteria.

The prior performance tables included in this prospectus, beginning on page A-1, include further information regarding certain of the prior programs described herein.

Prior Programs Sponsored by CNL Affiliates

Since 1973, CNL affiliates have formed or acquired companies with more than $34 billion in assets. Prior to this offering, CNL affiliates have only sponsored real estate and credit investment programs. The company is the first program sponsored by CNL and its affiliates that targets the acquisition of controlling equity interests in middle-market businesses.

During the ten year period ended December 31, 2020, CNL affiliates have sponsored and managed seven public programs (the “CNL Public Programs”), which can be divided into two basic categories: the CNL Public REITs and the CNL BDCs. During the ten year period ended December 31, 2020, the CNL Public REITs have focused on investing in real properties, including healthcare, hotel, leisure, recreation and multifamily located primarily in the United States. The CNL Public REITs have raised a total of approximately $5.6 billion from retail investors and distributed approximately $2.6 billion in distributions to its investors through the end of year 2020. During this time, more than 250 properties have been disposed by the CNL Public REITs, representing approximately $5.0 billion in value. During the ten year period ended December 31, 2020, the CNL BDCs, which have focused on making debt investments in medium- and large-sized private companies located primarily in the United States and Western Europe, raised a total of approximately $3.6 billion from retail investors, invested approximately $10.9 billion, and distributed approximately $907.4 million in dividends to its investors through the end of year 2017. On November 14, 2017, shares of common stock of Corporate Capital Trust, Inc. (“CCT I”), one of the CNL BDCs, commenced trading on the New York Stock Exchange (the “Listing”) with the ticker symbol “CCT”. As part of the Listing, CNL terminated its advisory agreement with CCT I. Previously, as of December 31, 2017, Corporate Capital Trust II (“CCT II”), the other CNL BDC, had approximately 2,605 investors and $163.9 million invested across 98 positions in 82 issuers. Approximately $93.6 million of these investments were first lien senior secured loans. In connection with a transaction to transition CCT II’s investment advisory services, as of April 9, 2018, CCT II is no longer sponsored or managed by CNL affiliates.

Below is a description of the CNL Public Programs. All CNL Public Programs information is as of December 31, 2020, unless otherwise indicated. We believe that we do not share a comparable business strategy or business objective with any of the CNL Public Programs.

CNL Public REITs

The CNL Public REITs primarily focus on investing in real properties located in the United States. The five CNL Public REITs are described below:

CNL Lifestyle Properties, Inc. (“CNL Lifestyle Properties”) launched in 2004, closed in 2011 with a total of approximately $3.42 billion of capital raised and acquired approximately 150 properties. CNL Lifestyle Properties primarily focused on properties such as ski and mountain lifestyle properties, golf courses, attractions, marinas, senior living properties and additional lifestyle retail properties, and is in the process of selling its assets. As part of executing under its strategic alternative to provide liquidity to its stockholders, CNL Lifestyle Properties sold its remaining assets in April 2017, paid an interim liquidating distribution to its stockholders and made a final liquidating distribution and dissolved the company in December 2017.

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CNL Growth Properties, Inc. (“CNL Growth Properties”) launched in 2009, closed in 2014 with a total of approximately $209 million of capital raised and acquired more than ten properties. CNL Growth Properties primarily focused on investing in multifamily development properties that offered the potential for capital appreciation. As part of executing under its strategic alternative to provide liquidity to its stockholders, CNL Growth Properties sold its last property in September 2017, paid liquidating distributions to its stockholders and dissolved the company in October 2017.
Global Income Trust, Inc. (“Global Income Trust”) launched in 2010, closed in 2013 with a total of approximately $83 million of capital raised and acquired nine properties. Global Income Trust primarily focused on investing in a portfolio of income-oriented commercial real estate and real estate-related assets. Global Income’s investments were made in both the United States and Germany. As part of executing under its strategic alternative to provide liquidity to its stockholders, Global Income Trust sold its remaining assets, paid a liquidating distribution to its stockholders and dissolved the company in December 2015.
CNL Healthcare Properties, Inc. (“CNL Healthcare Properties”) launched in 2011, closed in 2015 with a total of approximately $1.77 billion of capital raised and acquired 152 properties. CNL Healthcare Properties primarily focuses on investing in senior housing, medical office building, acute care and post-acute care facility sectors, including stabilized, value add and development properties. In 2018, CNL Healthcare Properties appointed a special committee comprised of its independent directors to evaluate strategic alternatives to provide liquidity for its stockholders. In 2019, CNL Healthcare Properties sold its medical office building portfolio. As of December 31, 2020, CNL Healthcare Properties owned 74 properties, including 71 senior housing communities, two acute-care facilities and one vacant land parcel adjacent to one of its senior housing communities.
CNL Healthcare Properties II, Inc. (“CNL Healthcare Properties II”) launched in 2016, closed in 2018 with a total of approximately $50.8 million of capital raised and acquired three properties. CNL Healthcare Properties II primarily focused on investing in seniors housing, medical office building, acute care and post-acute care facility sectors, including stabilized, value add and development properties. As part of executing under its strategic alternative to provide liquidity to its stockholders, CNL Healthcare Properties II sold its remaining assets, paid a liquidating distribution to its stockholders and dissolved the company in March 2020.

CNL BDCs

The CNL BDCs primarily focus on making debt investments in medium- and large-sized private companies located primarily in the United States. The two CNL BDCs are described below:

CCT I launched in 2011, closed in 2016 with a total of approximately $3.47 billion of capital raised. CCT I primarily focused on investing in medium- and large-sized private companies. Most of CCT I’s investments were made in both the United States and Western Europe. On November 14, 2017, as part of the Listing, CNL terminated its advisory agreement with CCT I. As of December 31, 2017, CCT I had 69,445 investors and $4.0 billion invested across 154 positions in 105 issuers. Approximately 61 of these investments were first lien senior secured loans.
CCT II launched in 2016 and suspended its continuous public offering of its common shares of beneficial interest effective as of January 10, 2018. As of December 31, 2017, approximately $119.1 million in capital had been raised for CCT II. CCT II primarily focused on investing in medium- and large-sized private companies. Most of CCT II’s investments were made in the United States. As of December 31, 2017, CCT II had 2,605 investors and $163.9 million invested across 98 positions in 82 issuers. Approximately 49 of these investments were first lien senior secured loans. In connection with a transaction to transition CCT II’s investment advisory services, as of April 9, 2018, CCT II is no longer sponsored or managed by CNL affiliates.

As described above, we consider a program that acquires, or has acquired, controlling and minority equity interests in growing middle-market businesses located primarily in the United States to have a business objective similar to ours. We believe the CNL Public REITs do not have business objectives similar to ours because they primarily invest in real properties. We also believe the CNL BDCs do not have business objectives similar to ours because they primarily make debt investments in medium- and large-sized private companies. Thus, we believe none of the CNL Public Programs has comparable business strategies or business objectives to that of the company and we have determined that no further historical performance information is necessary to be included in the prospectus in the form of prior performance tables.

Upon written request, you may obtain, without charge, a copy of the most recent annual report on Form 10-K filed with the SEC by any public program described above. We will provide exhibits to each such Form 10-K upon payment of a reasonable fee for copying and mailing expenses. These reports and exhibits, as well as other reports required to be filed with the SEC, are also available at the SEC’s website at www.sec.gov.

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Adverse Conditions and Other Developments Affecting CNL Public Programs

Certain of the prior programs sponsored by CNL affiliates have been affected by general economic conditions, capital market trends and other external factors during their respective operating periods.

CNL Lifestyle Properties

CNL Lifestyle Properties was a real estate investment trust that invested in income-producing properties with a focus on lifestyle-related industries. CNL Lifestyle Properties became effective on April 16, 2004 and invested in a total of 214 properties, with an aggregate initial purchase price of approximately $4.3 billion, across a variety of different lifestyle industries, including a majority within the ski & mountain lifestyle, golf, attractions, healthcare and marina industries. Commencing with the onset of the global financial crisis in 2008, certain properties owned by CNL Lifestyle Properties suffered declines in performance which had a negative impact on the fund’s net asset value. The public primary offering price for CNL Lifestyle Properties was $10.00 per share throughout three public primary offerings from April 2004 to April 2011.

Beginning in the second quarter of 2010, CNL Lifestyle Properties limited redemption requests to $1.75 million per quarter and in April 2012, increased this limitation to $3.0 million per quarter, prior to the suspension of its redemption plan effective September 26, 2014. Consistent with its articles of incorporation, in March 2014, CNL Lifestyle Properties appointed a special committee comprised of its independent directors of the board and announced the engagement of a financial advisor to assist management and its board of directors in evaluating various strategic alternatives to provide liquidity to stockholders. Beginning in March 2014 and continuing through April 2017, CNL Lifestyle Properties liquidated its assets through multiple transactions in order to provide liquidity to its stockholders.

In April 2017, CNL Lifestyle Properties sold its remaining 36 properties to EPR Properties (“EPR”) and Ski Resort Holdings, LLC in exchange for both cash and EPR stock. As a result of this transaction, CNL Lifestyle Properties paid an interim liquidating distribution to its stockholders in the form of cash and EPR stock. Inception to dissolution, CNL Lifestyle Properties has paid total distributions with a value from $10.37 to $6.50 for each outstanding share of the company’s common stock, depending on the timing of the stockholders’ initial investment, excluding shares sold under the distribution reinvestment plan. CNL Lifestyle Properties finalized the liquidation process of its remaining de minimis assets and outstanding liabilities, made a final distribution to stockholders and dissolved the company in December 2017.

Global Income Trust

Global Income Trust (formally known as Macquarie CNL Global Income Trust, Inc.) was formed in March 2009 with the intent to acquire and operate a diverse portfolio of commercial real estate assets and real estate-related assets on a global basis. The company began raising capital in a public offering in April 2010, and the offering closed in April 2013. Global Income Trust acquired two Class A office buildings and two industrial warehouses in the United States. Those properties were leased to third-party tenants and those tenants included subsidiaries of Samsonite, Mercedes-Benz Financial, and FedEx Ground. Additionally, Global Income Trust acquired a portfolio of five neighborhood retail centers in Germany. BlackRock Real Estate, as successor to Macquarie Capital Funds Inc., was a co-investor and sub-advisor to Global Income Trust on the German properties. The aggregate initial purchase price of the nine properties was approximately $121 million.

Global Income Trust did not achieve a critical mass of investments which negatively impacted the net asset value of the fund relative to the $10.00 per share public primary offering price in effect from April 2010 through April 2013. In April 2013, when its offering closed, Global Income Trust terminated its dividend reinvestment program and suspended its share redemption plan. In August 2013, Global Income Trust’s board of directors appointed a special committee comprised of the independent directors of the board and announced the engagement of a financial advisor to assist management and its board of directors in evaluating strategic alternatives to provide liquidity to stockholders. During 2015, Global Income Trust, through multiple transactions, sold all of its net assets and paid a liquidating distribution of $7.01 for each outstanding share of the company’s common stock. As part of the $7.01 liquidating distribution, CNL Global Income Advisors, LLC, Global Income Trust’s advisor, made a direct payment to Global Income Trust’s stockholders with respect to previously paid reimbursements of certain organizational, offering and operating expenses. Global Income Trust paid total cash distributions from $10.46 to $8.45 for each outstanding share of the company’s common stock, depending on the timing of the stockholders’ investment, excluding shares sold under the distribution reinvestment plan. Global Income Trust dissolved on December 31, 2015. 

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CNL Growth Properties

CNL Growth Properties (formally known as Global Growth Trust, Inc.) was launched in 2009 and acquired an interest in 18 properties with a capitalized cost of approximately $640 million.  CNL Growth Properties acquired, developed, and operated 17 Class A multifamily communities in nine states with eight different regional and national development joint venture partners.  CNL Growth Properties was the majority owner and managing member in each joint venture, with an ownership interest ranging from 54-95%.  Beginning in January 2015 and continuing through September 2017, CNL Growth Properties successfully liquidated these properties through individual sales of each of the seventeen communities. CNL Growth Properties also acquired a three building office complex in 2011 which was sold in 2014.

The public primary offering price for CNL Growth Properties was $10.00 per share during the initial offering from October 2009 to April 2013, $10.84 per share during the follow-on offering from August 2013 to January 15, 2014, and then $11.00 per share thereafter until the offering closed in April 2014. Stockholders of CNL Growth Properties received total distributions, depending on the timing of the stockholders’ initial investment from $18.21 to $13.71 for each outstanding share of the company’s common stock (excluding shares sold under the distribution reinvestment plan). CNL Growth Properties was dissolved on October 31, 2017. 

Prior Programs Sponsored by LLCP and its Affiliates

Since its inception in 1984 through December 31, 2020, LLCP and the LLCP Senior Executives have managed approximately $11.2 billion of capital. From 1984 through 1993, LLCP Founding Principals Arthur E. Levine and Lauren B. Leichtman made seven investments in their individual capacities prior to establishing LLCP. From 1994 through December 31, 2020, LLCP has sponsored and managed thirteen private funds (the “LLCP Private Funds”) in addition to our company, raised a total of approximately $8.9 billion of capital commitments from over 150 institutional and other investors, and invested approximately $6.3 billion in 94 middle-market companies across various industries, including franchisors, business services, and light manufacturing and engineered products. See “Appendix A: Prior Performance Tables—Table I” for more detailed information about LLCP and its affiliates’ experience in raising and investing funds in connection with certain of these private funds. As of December 31, 2020, 59 businesses had been sold by the LLCP Private Funds. The aggregate investment cost of these businesses was approximately $2.2 billion with a realized value of approximately $4.8 billion. See “Appendix A: Prior Performance Tables—Table V” for more detailed information about sales of individual middle-market companies by certain of the LLCP Private Funds.

The approximately $11.2 billion of capital managed by LLCP since inception includes the thirteen private funds described below, our company and $2.3 billion of co-investment and certain collateralized loan obligation vehicles. The thirteen private funds managed by LLCP includes the eight Private Acquisition Funds, two Value Funds, and three Regional Based Funds, which, after also including our company and co-investment vehicles managed by LLCP, represents the management of approximately $8.9 billion of capital commitments.

Below is a description of the LLCP Private Funds, which are divided into three basic categories: Private Acquisition Funds; Value Funds; and Regional Based Funds. LLCP Private Funds and Prior Performance Tables information is as of December 31, 2020, unless otherwise noted. We believe that we share a similar business objective with the Private Acquisition Funds, although the specific acquisition criteria for the businesses we acquire may vary from the Private Acquisition Funds’ acquisition criteria. We believe that we do not share a similar business objective with the Value Funds or the Regional Based Funds.

Private Acquisition Funds

The Private Acquisition Funds acquire, or have acquired, controlling and minority equity interests in growing middle-market businesses located primarily in the United States. Additional detail regarding the Private Acquisition Funds as of December 31, 2020 is set forth below. 

The eight Private Acquisition Funds are described below:

Levine Leichtman Capital Partners, L.P. (“LLCP I”) launched in 1994, closed in 1994 with a total of approximately $102.5 million of capital commitments and made six investments. LLCP I primarily focused on companies in the U.S. with annual revenues of $50 to $500 million. LLCP I dissolved on November 30, 2009.
Levine Leichtman Capital Partners II, L.P. (“LLCP II”) launched in December 1997, closed in August 1999 with a total of approximately $350 million of capital commitments and has made 12 investments. LLCP II primarily focused on companies in the U.S. with annual revenues ranging from $50 million to $500 million. LLCP II is currently in its wind-down period.
Levine Leichtman Capital Partners III, L.P. (“LLCP III”) launched in June 2002, closed in December 2004 with a total of approximately $500 million of capital commitments and has made 14 investments. LLCP III primarily focused on companies in the U.S. with annual revenues ranging from $50 million to $500 million. LLCP III is currently in its liquidation period.

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Levine Leichtman Capital Partners IV, L.P. (“LLCP IV”) launched in September 2007, closed in October 2009 with a total of approximately $1.1 billion of capital commitments and has made 11 investments. LLCP IV primarily focused on companies in the U.S. with annual revenues ranging from $50 million to $500 million. LLCP IV’s investment period has expired; however, it may be called upon to provide follow-on capital for existing investments.
Levine Leichtman Capital Partners V, L.P. (“LLCP V”) launched in September 2012, closed in March 2014 with a total of approximately $1.6 billion of capital commitments and has made 11 investments. LLCP V primarily focuses on companies in the U.S. with annual revenues ranging from $50 million to $500 million. LLCP V’s investment period has expired; however, it may be called upon to provide follow-on capital for existing investments.
Levine Leichtman Capital Partners VI, L.P. (“LLCP VI”) launched in May 2017, closed in December 2018 with a total of approximately $2.5 billion of capital commitments and has made seven investments. LLCP VI primarily focuses on companies in the U.S. with annual revenues ranging from $50 million to $500 million. LLCP VI is currently in its investment period.
Levine Leichtman Capital Partners Small Business Fund, L.P. (“LMM I Fund”) launched in May 2010, closed in February 2011 with a total of approximately $226 million of capital commitments and has made seven investments.  The LMM I Fund focuses on companies in the U.S. with annual revenues of less than $50 million at the time of investment.  The LMM I Fund’s investment period has expired; however, it may be called upon to provide follow-on capital for existing investments.
LLCP Lower Middle Market Fund, L.P. (“LMM II Fund”) launched in March 2016, closed in October 2016 with a total of $615 million of capital commitments and has made eight investments. The LMM II Fund focuses on U.S. companies with annual revenues of less than $50 million at the time of investment. The LMM II Fund is currently in its investment period.

The table below sets forth certain performance data relating to the Private Acquisition Funds. From 1994 through December 31, 2020, the Private Acquisition Funds invested approximately $5.0 billion in 76 investments generating a gross realized internal rate of return of 20.3% and a 2.2x cash-on-cash multiple. This performance and other data is not a guarantee or prediction of the returns that we may achieve in the future.

Private Acquisition Funds

Performance From Inception through December 31, 2020(1)

($ in thousands) As of December 31, 2020
  Total Number of
Investments
  Investment
Amount(2)(3)
  Realized
Value(4)(5)
  Unrealized
Value(4)
  Gross
Internal
Rate of
Return(6)
    Net
Internal
Rate of
Return(7)
    Management
& Incentive
Fees,
Expenses
 
LLCP I 6   $98,560   $159,945   $ -   44.2%     18.7%     $32,534  
LLCP II 12   $346,772   $505,857   $ -   10.5%     5.7%     $61,098  
LLCP III 14   $470,356   $920,237   $ -   16.3%     9.8%     $142,858  
LLCP IV 11   $834,654   $1,853,935   $148,431   27.4%     18.3%     $325,623  
LLCP V 11   $1,351,220   $1,082,897   $1,869,410   19.3%     13.5%     $330,135  
LLCP VI 7   $1,278,933   $105,368   $1,488,436   14.9%     6.7%     $159,721  
LMM I Fund 7   $149,705   $487,947   $14,150   44.5%(8)     35.8%(8)     $92,919  
LMM II Fund 8   $465,453   $319,863   $634,996   34.5%     23.8%     $96,634  

(1)The private funds shown in this table were conducted through privately held entities that were subject neither to the up-front commissions, fees and other expenses associated with this offering nor all of the laws and regulations that will apply to us.
(2)Excludes capital called for fund-level fees and expenses.
(3)Investment Amount is determined as of the closing of the investment and includes all equity called and all debt funded or contractually committed to be funded by the collective investments herein.
(4)Realized and Unrealized Value before fees, expenses, and general partner’s carried interest. Realized value represents the combination of cumulative interest and dividend payments as well as net proceeds derived from the ultimate sale transaction. Determinations of Unrealized Value are based upon the principal amount of the Fund’s investment in the underlying portfolio company’s debt securities (or possibly less if such debt security is impaired) at the time of determination plus the value of such Fund’s equity investment in the portfolio company, as valued by LLCP’s valuation committee. LLCP believes these values are reasonable and appropriate; however, there can be no assurance that proceeds will be realized on these investments, or that, if or when realized, the proceeds will be equal to the values estimated by LLCP. Unrealized Values are as of December 31, 2020.

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(5)Distributions in LLCP III, LLCP IV, LLCP V, LMM I Fund and LMM II Fund for fully realized investments may include notes receivables, escrows, holdbacks, residual interests and other reserves that each fund believes will be received at the expiration of any applicable time periods or otherwise.
(6)Internal rates of return (gross) before fees, expenses, and general partner’s carried interest, calculated using a “time-zero” methodology in which the cash flows of all investments (actual amounts of contributions and distributions) are based from the same hypothetical starting date.
(7)Internal rates of return (net) after fees, expenses, and general partner’s carried interest, calculated using a “time-zero” methodology in which the cash flows of all investments (actual amounts of contributions and distributions) are based from the same hypothetical starting date.
(8)Internal Rate of Return for LMM I Fund is based on limited partner cash flows, not fund level cash flows.

Regional Focused Funds

The three Regional Focused Funds are described below:

Levine Leichtman Capital Partners California Growth Fund, L.P. (“California Growth Fund”) launched in May 2007, closed in May 2007 with a total of approximately $40 million of capital commitments and has made two investments. The California Growth Fund primarily focused on investments in portfolio companies located in the State of California, with annual revenues of $50 million or less at the time of investment. The California Growth Fund also invested in one or more subsidiaries that directly hold or invest primarily in loan or debt obligations or participations therein of third parties. The California Growth Fund is currently in its wind-down period.
Levine Leichtman Capital Partners Europe, L.P. (“Europe Fund”) launched in November 2014, closed in November 2014 with a total of approximately €100 million of capital commitments and has made four investments. The Europe Fund primarily focuses on investments in companies located in Western Europe (excluding the United Kingdom). The Europe Fund is not actively seeking new investment opportunities; however, it may be called upon to provide follow-on capital for existing investments.
Levine Leichtman Capital Partners Europe II SCSP (“Europe II Fund”) launched in February 2019, closed in October 2020 with a total of approximately €463.2 million of capital commitments and has made three investments. The Europe II Fund primarily focuses on investments located in the United Kingdom and Ireland, as well as the Benelux and Nordic regions and is currently in its investment period.

Value Funds

The Value Funds primarily focus on making value-oriented investments. The two Value Funds are described below:

Levine Leichtman Capital Partners Deep Value Fund, L.P. (“Deep Value Fund”) launched in May 2005, closed in December 2006 with a total of approximately $508 million of capital commitments and had made 39 investments. The Deep Value Fund focused primarily on investments in debt, debt-related and other securities of small and middle capitalization U.S.-based companies in stressed, distressed or other special situations. No leverage was used by the Deep Value Fund to acquire investments. The Deep Value Fund was fully liquidated in March 2018. The Deep Value Fund returned all invested capital to its investors.
Levine Leichtman Capital Partners Private Capital Solutions, L.P. (“PCS Fund”) launched in May 2011, closed in December 2012 with a total of approximately $227 million of capital commitments and has made five investments. The PCS Fund focuses primarily on making debt and equity investments in value-oriented, slower growth middle-market companies. The PCS Fund’s investment period has expired; however, it may be called upon to provide follow-on capital for existing investments.

As described above, we consider a private fund that acquires, or has acquired, controlling and minority equity interests in growing middle-market businesses located primarily in the United States to have a business objective similar to ours. Thus, we believe the Private Acquisition Funds have business objectives similar to ours. With respect to the Value Funds, the Deep Value Fund did not have business objectives similar to ours because it primarily made debt investments in stressed, distressed or over-leveraged companies and the PCS Fund does not have business objectives similar to ours because it primarily makes investments in value-oriented, slower growth middle-market companies. With respect to the Regional Focused Funds, the California Growth Fund does not have business objectives similar to ours because it limits its investments to only companies in California and invests in loan and debt originations of third parties. The Europe Fund and Europe II Fund also do not have business objectives similar to ours because they limit their investments to only companies in Europe.

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Adverse Conditions and Other Developments Affecting LLCP Private Funds

Certain of the prior programs sponsored by LLCP affiliates have been affected from time to time by general economic conditions, capital market trends and other external factors during their respective operating periods. However, there have been no major adverse business developments or conditions experienced by any LLCP-affiliated programs that would be material to investors, including as a result of recent general economic conditions. You should not rely on the past performance of investments by other LLCP-affiliated entities to predict our future results. Our business strategy and key employees differ from the business strategies and key employees of certain other LLCP-affiliated programs in the past, present and future.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is based on the unaudited condensed consolidated financial statements as of June 30, 2021 and December 31, 2020, and for the quarter and six months ended June 30, 2021 and 2020. Amounts as of December 31, 2020 included in the unaudited condensed consolidated statements of assets and liabilities have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “Form 10-K”).

 

Overview

 

CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We are externally managed by the Manager, CNL Strategic Capital Management, LLC, an entity that is registered as an investment adviser under the Advisers Act. The Manager is controlled by CNL Financial Group, LLC, a private investment management firm specializing in alternative investment products. We have engaged the Manager under the Management Agreement pursuant to which the Manager is responsible for the overall management of our activities and sub-managed by the Sub-Manager, Levine Leichtman Strategic Capital, LLC, a registered investment adviser, under the Sub-Management Agreement pursuant to which the Sub-Manager is responsible for the day-to-day management of our assets. The Sub-Manager is an affiliate of Levine Leichtman Capital Partners, LLC.

 

The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisitions and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions. We intend to acquire and grow durable, middle market U.S. businesses with annual revenues primarily between $15 million and $250 million. We target businesses that have a track record of stable and predictable operating performance, are highly cash flow generative and have management teams who seek a meaningful ownership stake in the company. Our investments are typically structured as controlling equity interests in combination with debt positions. In doing so, we seek to provide long-term capital appreciation with current income, while protecting invested capital. We expect this to produce attractive risk-adjusted returns over a long time horizon. We seek to structure our investments with limited, if any, third-party senior leverage.

 

In addition, and to a lesser extent, we may acquire other debt and minority equity positions, which may include acquiring debt in the secondary market as well as minority equity interests and debt positions via co-investments with other funds managed by the Sub-Manager or their affiliates. We expect that these positions will comprise a minority of our total assets. We were formed as a Delaware limited liability company on August 9, 2016 and we operate and intend to continue to operate our business in a manner that will permit us to avoid registration under the Investment Company Act. We are not a “blank check” company within the meaning of Rule 419 of the Securities Act. We commenced operations on February 7, 2018.

 

Our Common Shares Offerings

 

Public Offering

 

On March 7, 2017, we commenced our Initial Public Offering of up to $1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, pursuant to the Initial Registration Statement. Through the Initial Public Offering, we are offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, “Non-founder shares”). There are differing selling fees and commissions for each class. We also pay distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Initial Public Offering (excluding sales pursuant to our distribution reinvestment plan).

 

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On February 19, 2021, we filed the Follow-On Registration Statement with the SEC in connection with the Follow-On Public Offering. As permitted under applicable securities laws, we continue to offer our common shares in the Initial Public Offering until the effective date of the Follow-On Registration Statement, upon which the Initial Registration Statement will be deemed terminated. Since the Initial Public Offering became effective in March 2018 through June 30, 2021, we have received net proceeds from the Initial Public Offering of approximately $184.3 million, including approximately $4.7 million received through our distribution reinvestment plan. As of June 30, 2021, the public offering price was $33.55 per Class A share, $32.05 per Class T share, $30.13 per Class D share and $31.06 per Class I share. See Note 7. “Capital Transactions” and Note 12. “Subsequent Events” under “Financial Statements” included in the company’s quarterly report on Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information. Since the Initial Public Offering became effective through June 30, 2021, we have incurred selling commissions and dealer manager fees of approximately $3.8 million from the sale of Class A shares and Class T shares. The Class D shares and Class I shares sold through June 30, 2021 were not subject to selling commissions and dealer manager fees. We also incurred obligations to reimburse the Manager and Sub-Manager for organization and offering costs of approximately $2.8 million based on actual amounts raised through the Initial Public Offering since the Initial Public Offering became effective through June 30, 2021. These organization and offering costs related to the Initial Public Offering had been previously advanced by the Manager and Sub-Manager, as described further in Note 5. “Related Party Transactions” in the “Financial Statements” included in the company’s quarterly report on Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information. In July 2021, our board of directors approved new per share public offering prices for each share class in the Initial Public Offering. The new public offering prices are effective as of July 27, 2021. The following table provides the new public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the Initial Public Offering:

    Class A   Class T   Class D   Class I 
Effective July 27, 2021:                     
Public Offering Price, Per Share   $33.79   $32.26   $30.35   $31.28 
Selling Commissions, Per Share    2.03    0.97         
Dealer Manager Fees, Per Share    0.84    0.56         

 

Portfolio and Investment Activity

 

As of June 30, 2021, we had invested in eight portfolio companies, consisting of equity investments and debt investments in each portfolio company. The table below presents our investments by portfolio company (in millions):

 

        As of June 30, 2021
        Equity Investments   Debt Investments(1)    
Portfolio Company   Investment Date   Ownership %   Cost Basis   Type   Interest Rate   Maturity Date   Cost Basis   Total
Cost Basis(2)
 
Lawn Doctor   2/7/2018   61 %   $ 30.5   Senior Secured - Second Lien   16.0 %   8/7/2023   $ 15.0   $ 45.5  
Polyform   2/7/2018   87     15.6   Senior Secured - First Lien   16.0     8/7/2023   15.7   31.3  
Roundtables   8/1/2019   81     32.4   Senior Secured - Second Lien   16.0     8/1/2025   12.1   44.5  
Roundtables   11/13/2019         Senior Secured - First Lien   8.0     11/13/2021   2.0   2.0  
Milton   11/21/2019   13     6.6   Senior Secured - Second Lien   15.0     12/19/2027   3.4   10.0  
Resolution Economics   1/2/2020   8     7.1   Senior Secured - Second Lien   15.0     1/2/2026   2.9   10.0  
Blue Ridge   3/24/2020   17     9.9   Senior Secured - Second Lien   15.0     3/24/2026   2.6   12.5  
HSH   7/16/2020   75     17.3   Senior Secured - First Lien   15.0     7/16/2027   24.4   41.7  
ATA   4/1/2021   75     36.0   Senior Secured - First Lien   15.0     4/1/2027   37.0   73.0  
            $ 155.4               $ 115.1   $ 270.5  

 

FOOTNOTES:

(1)The note purchase agreements contain customary covenants and events of default. As of June 30, 2021, all of our portfolio companies were in compliance with their respective debt covenants.
(2)See the Schedule of Investments and Note 3. “Investments” in the “Financial Statements” included in the company’s quarterly reports on Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information related to our investments, including fair values as of June 30, 2021.

 

See our Form 10-K for additional information regarding our portfolio companies and their related business activities.

 

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Concentrations of Risk

 

We had five portfolio companies (Lawn Doctor, Polyform, Roundtables, HSH and ATA) which met at least one of the significance tests under Rule 8-03(b) of Regulation S-X (the “Significance Tests”) for at least one of the periods presented in the condensed consolidated financial statements.

 

The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on our results of operations and cash flows from operations, which would impact our ability to make distributions to shareholders.

 

Non-GAAP Financial Measures

 

The company’s quarterly reports on Form 10-Q contain unaudited financial measures utilized by management to evaluate the operating performance and liquidity of our portfolio companies that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Each of these measures, Adjusted EBITDA and Adjusted Free Cash Flow (“FCF”), should not be considered in isolation from or as superior to or as a substitute for net income (loss), income (loss) from operations, net cash provided by (used in) operating activities, or other financial measures determined in accordance with GAAP. We use these non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our portfolio companies. We present these non-GAAP measures quarterly for our portfolio companies in which we own a controlling equity interest and annually for all of our portfolio companies.

 

You are encouraged to evaluate the adjustments to Adjusted EBITDA and Adjusted FCF, including the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted FCF, you should be aware that in the future our portfolio companies may incur expenses that are the same as or similar to some of the adjustments in this presentation. The presentations of Adjusted EBITDA and Adjusted FCF should not be construed as an inference that the future results of our portfolio companies will be unaffected by unusual or non-recurring items.

 

We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable to similar measures disclosures by other companies, because not all companies calculate these non-GAAP measures in the same manner. Because of these limitations and additional limitations described below, Adjusted EBITDA and Adjusted FCF should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA and Adjusted FCF only as supplemental measures.

 

Additionally, we provide our proportionate share of each non-GAAP measure because our ownership percentage of each portfolio company varies. We urge investors to consider our ownership percentage of each portfolio company when evaluating the results of each of our portfolio companies.

 

Adjusted EBITDA

 

When evaluating the performance of our portfolio, we monitor Adjusted EBITDA to measure the financial and operational performance of our portfolio companies and their ability to pay contractually obligated debt payments to us. In connection with this evaluation, the Manager and Sub-Manager review monthly portfolio company operating performance versus budgeted expectations and conduct regular operational review calls with the management teams of the portfolio companies.

 

We present Adjusted EBITDA as a supplemental measure of the performance of our portfolio companies because we believe it assists investors in comparing the performance of such businesses across reporting periods on a consistent basis by excluding items that we do not believe are indicative of their core operating performance.

 

We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain other non-recurring items that we do not consider indicative of the ongoing operating performance of our portfolio companies. These further adjustments are itemized below. Our proportionate share of Adjusted EBITDA is calculated based on our equity ownership percentage at period end.

 

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Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: (i) Adjusted EBITDA does not reflect cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; (iii) Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness; (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; (v) Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the on-going operations of our portfolio companies; and (vi) other companies in similar industries as our portfolio companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

 

The tables below reconcile our proportionate share of Adjusted EBITDA of our portfolio companies from net income (loss) of such portfolio companies for the quarter and six months ended June 30, 2021 and 2020:

 

   Quarter Ended June 30, 2021(1) 
   Lawn Doctor   Polyform   Roundtables   HSH   ATA 
Net income (GAAP)  $1,141,211   $236,707   $206,761   $425,066   $3,984,108 
Interest and debt related expenses   1,012,999    728,011    646,307    942,987    1,516,654 
Depreciation and amortization   623,485    432,783    486,408    937,033    1,106,585 
Income tax expense   388,500    95,000    56,943    120,000     
Adjusted EBITDA (non-GAAP)  $3,166,195   $1,492,501   $1,396,419   $2,425,086   $6,607,347 
                          
Our Ownership Percentage   61%   87%   81%   75%   75%
Our Proportionate Share of Adjusted EBITDA (non-GAAP)  $1,945,943   $1,300,416   $1,127,748   $1,806,932   $4,955,510 

 

   Quarter Ended June 30, 2020(1) 
   Lawn Doctor   Polyform   Roundtables 
Net income (loss) (GAAP)  $1,030,452   $111,432   $(52,527)
Interest and debt related expenses   1,051,108    736,362    651,532 
Depreciation and amortization   625,170    418,727    375,479 
Income tax expense (benefit)   350,815    45,000    (23,344)
Adjusted EBITDA (non-GAAP)  $3,057,545   $1,311,521   $951,140 
                
Our Ownership Percentage   62%   87%   81%
Our Proportionate Share of Adjusted EBITDA (non-GAAP)  $1,903,291   $1,142,335   $768,521 

 

   Six Months Ended June 30, 2021(1) 
   Lawn Doctor   Polyform   Roundtables   HSH   ATA(2) 
Net income (GAAP)  $1,808,632   $1,295,102   $114,040   $759,084   $3,984,108 
Interest and debt related expenses   2,015,926    1,448,156    1,287,714    1,877,860    1,516,654 
Depreciation and amortization   1,247,390    866,906    865,593    1,866,235    1,106,585 
Income tax expense   612,500    518,000    30,557    214,000     
Adjusted EBITDA (non-GAAP)  $5,684,448   $4,128,164   $2,297,904   $4,717,179   $6,607,347 
                          
Our Ownership Percentage   61%   87%   81%   75%   75%
Our Proportionate Share of Adjusted EBITDA (non-GAAP)  $3,493,662   $3,596,869   $1,855,787   $3,514,770   $4,955,510 

 

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   Six Months Ended June 30, 2020(1) 
   Lawn Doctor   Polyform   Roundtables 
Net income (loss) (GAAP)  $854,358   $16,336   $(570,533)
Interest and debt related expenses   2,108,144    1,466,307    1,299,554 
Depreciation and amortization   1,248,064    837,019    750,641 
Income tax expense (benefit)   239,315    8,000    (200,102)
Adjusted EBITDA (non-GAAP)  $4,449,881   $2,327,662   $1,279,560 
                
Our Ownership Percentage   62%   87%   81%
Our Proportionate Share of Adjusted EBITDA (non-GAAP)  $2,770,006   $2,027,394   $1,033,884 

 

FOOTNOTE:

 

(1)Excludes three portfolio companies in which we owned a minority equity interest as of June 30, 2021 and 2020.

 

(2)Results for ATA are for the period from April 1, 2021 (the date we acquired our investments in ATA) to June 30, 2021.

 

Adjusted Free Cash Flow

 

We monitor Adjusted FCF to measure the liquidity of our portfolio companies. We present Adjusted FCF as a supplemental measure of the performance of our portfolio companies since such measure reflects the cash generated by the operating activities of our portfolio companies and to the extent such cash is not distributed to us, it generally represents cash used by the portfolio companies for the repayment of debt, investing in expansions or acquisitions, reserve requirements or other corporate uses by such portfolio companies, and such uses reduce our potential need to make capital contributions to the portfolio companies for our proportionate share of cash needed for such items. We use Adjusted FCF as a key factor in our planning for, and consideration of, acquisitions, the payment of dividends and share repurchases.

 

We define Adjusted FCF as cash from operating activities less capital expenditures, net of proceeds from the sale of property and equipment, of our portfolio companies, as further adjusted for certain non-recurring items. These further adjustments are itemized below. Our proportionate share of Adjusted FCF is calculated based on our equity ownership percentage at period end. Adjusted FCF does not represent cash available to our business except to the extent it is distributed to us, and to the extent actually distributed to us, we may not have control in determining the timing and amount of distributions from our portfolio companies, and therefore, we may not receive such cash.

 

Adjusted FCF has limitations as an analytical tool. Some of these limitations are: (i) Adjusted FCF does not account for future contractual commitments; (ii) Adjusted FCF excludes required debt service payments; (iii) Adjusted FCF does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the on-going operations of our portfolio companies; and (iv) other companies in similar industries as our portfolio companies may calculate Adjusted FCF differently, limiting its usefulness as a comparative measure. This non-GAAP measure should not be considered in isolation, as a measure of residual cash flow available for discretionary purposes or as an alternative to operating cash flows presented in accordance with GAAP.

 

The tables below reconcile our proportionate share of Adjusted FCF of our portfolio companies from cash provided by (used in) operating activities of such portfolio companies for the six months ended June 30, 2021 and 2020:

 

   Six Months Ended June 30, 2021(1) 
   Lawn Doctor   Polyform   Roundtables   HSH   ATA(3) 
Cash provided by operating activities (GAAP)  $2,645,258   $2,185,352   $6,027,097   $443,963   $5,658,709 
Capital expenditures(2)   (70,532)   (453,493)   (13,789)   (121,895)   (57,786)
Adjusted FCF (non-GAAP)  $2,574,726   $1,731,859   $6,013,308   $322,068   $5,600,923 
                          
Our Ownership Percentage   61%   87%   81%   75%   75%
Our Proportionate Share of Adjusted FCF (non-GAAP)  $1,582,427   $1,508,969   $4,856,348   $239,973   $4,200,692 

 

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   Six Months Ended June 30, 2020(1) 
   Lawn Doctor   Polyform   Roundtables 
Cash provided by operating activities (GAAP)  $2,677,771   $300,285   $4,597,278 
Capital expenditures(2)   (29,850)   (167,979)   (8,871)
Adjusted FCF (non-GAAP)  $2,647,921   $132,306   $4,588,407 
                
Our Ownership Percentage   62%   87%   81%
Our Proportionate Share of Adjusted FCF (non-GAAP)  $1,648,304   $115,239   $3,707,433 

 

FOOTNOTES:

 

(1)Excludes three portfolio companies in which we owned a minority equity interest as of June 30, 2021 and 2020.

 

(2)Capital expenditures relate to the purchase of property, plant and equipment.

 

(3)Results for ATA are for the period from April 1, 2021 (the date we acquired our investments in ATA) to June 30, 2021.

 

Our aggregate proportionate share of Adjusted FCF was approximately $12.4 million and $5.5 million for the six months ended June 30, 2021 and 2020, respectively. As discussed above, cash not distributed to us is used by our portfolio companies for various reasons, including, but not limited to, repayment of debt, investing in acquisitions and general cash reserves.

 

COVID-19

 

See Item 1A. “Risk Factors” in Part I and Item 7. “Management’s Discussion of Analysis of Financial Condition and Results of Operations” in Part II of our Form 10-K for the year ended December 31, 2020 for information regarding the risks of COVID-19. The Company and the operations of its portfolio companies have not been materially adversely affected as a result of the COVID-19 pandemic. However, we continue to monitor federal, state and local government initiatives to manage the continued spread of COVID-19 as well as the efficacy of the vaccines or other remedies and the speed of their distribution and administration. As of June 30, 2021, all of the manufacturing facilities were open and safety procedures have been implemented across our portfolio companies; however, there is a continued risk of temporary business interruptions resulting from employees contracting COVID-19 or from the reinstitution of business closures or work and travel restrictions.

 

Size of assets

 

If we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make. The size of our assets will be a key revenue driver. Generally, as the size of our assets grows, the amount of income we receive will increase. In addition, our assets may grow at an uneven pace as opportunities to acquire assets may be irregularly timed, and the timing and extent of the Manager’s and the Sub-Manager’s success in identifying such opportunities, and our success in making acquisitions, cannot be predicted.

 

Market conditions

 

From time to time, the global capital markets may experience periods of disruption and instability, as we have seen and continue to see with the COVID-19 pandemic, which could materially and adversely impact the broader financial and credit markets and reduce the availability of debt and equity capital. Significant changes or volatility in the capital markets have and may continue to have a negative effect on the valuations of our businesses and other assets. While all of our assets are likely to not be publicly traded, applicable accounting standards require us to assume as part of our valuation process that our assets are sold in a principal market to market participants (even if we plan on holding an asset long term or through its maturity) and impairments of the market values or fair market values of our assets, even if unrealized, must be reflected in our financial statements for the applicable period, which could result in significant reductions to our net asset value for the period. Significant changes in the capital markets may also affect the pace of our activity and the potential for liquidity events involving our assets. Thus, the illiquidity of our assets may make it difficult for us to sell such assets to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our assets if we were required to sell them for liquidity purposes.

 

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Liquidity and Capital Resources

 

General

 

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, make additional investments in our portfolio companies, make distributions to our shareholders and fund our operations. Our primary sources of cash will generally consist of:

 

the net proceeds from the Offerings;

 

distributions and interest earned from our assets;

 

expense support; and

 

proceeds from sales of assets and principal repayments from our assets.

 

We expect we will have sufficient cash from current sources to meet our liquidity needs for the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In light of the current COVID-19 pandemic and its impact on the global economy, we are closely monitoring overall liquidity levels and changes in the business performance of our portfolio companies to be in a position to enact changes to ensure adequate liquidity going forward.

 

While we generally intend to hold our assets for the long term, certain assets may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty.

 

As of June 30, 2021 and December 31, 2020, we had cash of approximately $63.0 million and $82.7 million, respectively.

 

Sources of Liquidity and Capital Resources

 

Offerings. We received approximately $56.8 million and $48.2 million in net proceeds during the six months ended June 30, 2021 and 2020, respectively, from the Offerings, which excludes approximately $1.6 million and $0.9 million raised through our distribution reinvestment plan during the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, we had approximately 836 million common shares available for sale through the Initial Public Offering.

 

Operating Activities. During the six months ended June 30, 2021 and 2020, we generated operating cash flows (excluding amounts related to purchases of investments) of approximately $4.7 million and $2.7 million, respectively. The increase in operating cash flows (excluding amounts related to purchases of investments) is primarily attributable to the following:

 

an increase in net investment income of approximately $1.4 million;

 

a change in third-party operating payables approximately $0.3 million;

 

a change in net amounts paid to related parties of approximately $0.2 million; and

 

a decrease in payment of deferred offering expenses, net of amortization, of approximately $0.1 million.

 

Borrowings. We had not borrowed any amounts under our $20.0 million 2020 Line of Credit as of June 30, 2021. In July 2021, we amended the 2020 Loan Agreement to extend the maturity date to October 2021, as described in Note 8. “Borrowings” of “Financial Statements” included in the company’s Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information. The purpose of the 2020 Line of Credit is for general Company working capital and acquisition financing purposes.

 

Uses of Liquidity and Capital Resources

 

Investments. We used approximately $73.0 million and $22.5 million of cash proceeds from the Offerings to purchase investments during the six months ended June 30, 2021 and 2020, respectively.

 

Distributions. We paid distributions to our shareholders of approximately $5.0 million and $3.3 million (which excludes distributions reinvested of approximately $1.6 million and $0.9 million, respectively) during the six months ended June 30, 2021 and 2020, respectively. See “Distributions” below for additional information.

 

Share Repurchases. We paid approximately $3.2 million and $2.2 million during the six months ended June 30, 2021 and 2020, respectively, to repurchase shares in accordance with our Share Repurchase Program.

 

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Distributions Declared

 

During the six months ended June 30, 2021 and 2020, our board of directors declared cash distributions to shareholders based on monthly record dates, and such distributions were paid monthly in arrears. See Note 6. “Distributions” in the “Financial Statements” included in the company’s Form 10-Q for the period ended June 30, 2021 and incorporated herein by referencefor additional information, including distributions declared per share for each share class.

 

Cash distributions declared during the periods presented were funded from the following sources noted below:

 

   Six Months Ended June 30, 
   2021   2020 
   Amount   % of Cash
Distributions
Declared
   Amount   % of Cash
Distributions
Declared
 
Net investment income(1)  $4,832,909    70.0%  $3,421,603    77.4%
Distributions in excess of net investment income(2)   2,075,537    30.0%   1,001,586    22.6%
Total distributions declared(3)  $6,908,446    100.0%  $4,423,189    100.0%

 

FOOTNOTES:

 

(1)Net investment income includes expense support from the Manager and Sub-Manager of $4,495,242 and $1,597,728 for the six months ended June 30, 2021 and 2020, respectively. See Note 5. “Related Party Transactions” in the “Financial Statements” included in the company’s Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information.

 

(2)Consists of offering proceeds for both periods presented.

 

(3)For the six months ended June 30, 2021, includes $1,760,794 of distributions reinvested pursuant to our distribution reinvestment plan, of which $360,174 was reinvested in July 2021 with the payment of distributions declared in June 30, 2021. For the six months ended June 30, 2020, includes $944,968 of distributions reinvested pursuant to our distribution reinvestment plan, of which $184,080 was reinvested in July 2020.

 

Distribution amounts and sources of distributions declared vary among share classes. We calculate each shareholder’s specific distribution amount for the period using record and declaration dates. Distributions are made on all classes of our shares at the same time. Amounts distributed are allocated among each class in proportion to the number of shares of each class outstanding. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. The per share amount of distributions on Class A, Class T, Class D and Class I shares will differ because of different allocations of certain class-specific expenses. Specifically, distributions paid to our shareholders of share classes with ongoing distribution and shareholder servicing fees may be lower than distributions on certain other of our classes without such ongoing distribution and shareholder servicing fees that we are required to pay. Additionally, distributions on the Non-founder shares may be lower than distributions on Founder shares because we are required to pay higher management and total return incentive fees to the Manager and the Sub-Manager with respect to the Non-founder shares. There is no assurance that we will pay distributions in any particular amount, if at all. See Note 6. “Distributions” in “Financial Statements” included in the company’s Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information and for additional disclosures regarding distributions, including per share amounts declared per share class for the periods presented.

 

Distribution Reinvestment Plan

 

We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in the Initial Public Offering have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash, are residents of Opt-In States, or are clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan. Opt-In States include Alabama, Arkansas, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Vermont, and Washington. Shareholders who are residents of Opt-In States, holders of Class FA shares, and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.

 

The purchase price for shares purchased under our distribution reinvestment plan is equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under the Share Repurchase Program.

 

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We do not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in the Initial Public Offering is allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.

 

Our shareholders will be taxed on their allocable share of income, even if their distributions are reinvested in additional shares of our common shares and even if no distributions are made.

 

Share Repurchase Program

 

We adopted the Share Repurchase Program effective March 2019, as further amended in January 2020 and in June 2021, pursuant to which we conduct quarterly share repurchases to allow our shareholders to sell all or a portion of their shares (at least 5% of his or her shares) back to us at a price equal to the net asset value per share of the month immediately prior to the repurchase date. The repurchase date is generally the last business day of the month of a calendar quarter end. We are not obligated to repurchase shares under the Share Repurchase Program. If we determine to repurchase shares, the Share Repurchase Program also limits the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The Share Repurchase Program also includes certain restrictions on the timing, amount and terms of our repurchases intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.

 

The aggregate amount of funds under the Share Repurchase Program is determined on a quarterly basis at the sole discretion of our board of directors. During any calendar quarter, the total amount of aggregate repurchases is limited to the aggregate proceeds from our distribution reinvestment plan during the previous quarter unless our board of directors determines otherwise. At the sole discretion of our board of directors, we may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. 

 

To the extent that the number of shares submitted to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, from among the requests for repurchase received by us based upon the total number of shares for which repurchase was requested and the order of priority described in the Share Repurchase Program. We may repurchase shares including fractional shares, computed to three decimal places.

 

Under the Share Repurchase Program, our ability to make new acquisitions of businesses or increase the current distribution rate may become limited if, over any two-year period, we experience repurchase demand in excess of capacity. If, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, we will not make any new acquisitions of businesses (excluding short-term cash management investments under 90 days in duration) and we will use all available investable assets (as defined below) to satisfy repurchase requests (subject to the limitations under the Share Repurchase Program) until all Unfulfilled Repurchase Requests have been satisfied. Additionally, during such time as there remains any Unfulfilled Repurchase Requests outstanding from such period, the Manager and the Sub-Manager will defer their total return incentive fee until all such Unfulfilled Repurchase Requests have been satisfied. “Investable assets” includes net proceeds from new subscription agreements, unrestricted cash, proceeds from marketable securities, proceeds from the distribution reinvestment plan, and net cash flows after any payment, accrual, allocation, or liquidity reserves or other business costs in the normal course of owning, operating or selling our acquired businesses, debt service, repayment of debt, debt financing costs, current or anticipated debt covenants, funding commitments related to our businesses, customary general and administrative expenses, customary organizational and offering costs, asset management and advisory fees, performance or actions under existing contracts, obligations under our organizational documents or those of our subsidiaries, obligations imposed by law, regulations, courts or arbitration, or distributions or establishment of an adequate liquidity reserve as determined by our board of directors.

 

During the six months ended June 30, 2021 and 2020, we received requests for the repurchase of approximately $2.1 million (68,890 shares) and $3.4 million (125,326 shares), respectively, of our common shares, which exceeded proceeds received from our distribution reinvestment plan in the applicable periods by approximately $0.6 million and $2.7 million, respectively. Our board of directors approved the use of other sources to satisfy repurchase requests received in excess of proceeds received from the distribution reinvestment plan.

 

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The following table summarizes the shares repurchased during the six months ended June 30, 2021 and 2020:

 

   Shares Repurchased   Total Consideration  

Average Price Paid

per Share

 
Class FA shares   10,000   $318,939   $31.89 
Class A shares   17,095    510,298    29.85 
Class T shares   15,850    472,904    29.84 
Class D shares   4,855    142,210    29.29 
Class I shares   21,090    644,233    30.55 
Six Months Ended June 30, 2021   68,890   $2,088,584   $30.32 
                
Class FA shares   75,393   $2,077,424   $27.55 
Class A shares   4,098    109,345    26.68 
Class T shares   4,710    125,510    26.65 
Class I shares   41,125    1,106,976    26.92 
Six Months Ended June 30, 2020   125,326   $3,419,255   $27.28 

 

Results of Operations

 

Since we commenced operations, we have acquired nine portfolio companies using the net proceeds from our Offerings. As of June 30, 2021 and 2020, the fair value of our investment portfolio totaled approximately $333.0 million and $169.9 million, respectively. See “Portfolio and Investment Activity” above for discussion of the general terms and characteristics of our investments, and for information regarding investment activities during the quarter and six months ended June 30, 2021 and 2020. The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto.

 

The following is a summary of our operating results for the quarter and six months ended June 30, 2021 and 2020:

 

  

Quarter Ended

June 30,

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Total investment income  $6,326,501   $2,509,061   $10,285,757   $4,805,098 
Total operating expenses   (5,620,176)   (1,723,520)   (9,808,296)   (2,981,223)
Expense support   1,845,313    990,098    4,495,242    1,597,728 
Net investment income before taxes   2,551,638    1,775,639    4,972,703    3,421,603 
Income tax expense   (139,794)       (139,794)    
Net investment income   2,411,844    1,775,639    4,832,909    3,421,603 
Net change in unrealized appreciation on investments   14,875,000    6,618,272    28,787,000    3,224,610 
Net change in provision for taxes on unrealized appreciation on investments   (86,219)       (18,929)    
Net increase in net assets resulting from operations  $17,200,625   $8,393,911   $33,600,980   $6,646,213 

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Investment Income

 

Investment income consisted of the following for the quarter and six months ended June 30, 2021 and 2020:

 

  

Quarter Ended

June 30,

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Interest income  $4,448,640   $2,156,784   $7,506,540   $4,266,075 
Dividend income   1,877,861    352,277    2,779,217    539,023 
Total investment income  $6,326,501   $2,509,061   $10,285,757   $4,805,098 

 

The majority of our interest income is generated from our debt investments, all of which had fixed rate interest as of June 30, 2021 and 2020. As of June 30, 2021 and 2020, our weighted average annual yield on our accruing debt investments was 15.3% and 15.5%, respectively, based on amortized cost as defined above in “Portfolio and Investment Activity.” Interest income from our debt investments was approximately $4.4 million and $2.1 million for the quarter ended June 30, 2021 and 2020, respectively, and approximately $7.4 million and $4.1 million for the six months ended June 30, 2021 and 2020. In addition, we earned interest income on our cash accounts of approximately $0.1 million during the six months ended June 30, 2021, and approximately $0.1 million and $0.2 million during the quarter and six months ended June 30, 2020, respectively. The increase in interest income during the quarter and six months ended June 30, 2021, as compared to the quarter and six months ended June 30, 2020, is primarily attributable to additional debt investments during the twelve months ended June 30, 2021 of approximately $61.4 million.

 

During the quarters ended June 30, 2021 and 2020, we received dividend income of approximately $1.9 million and $0.4 million, respectively. We received dividend income of approximately $2.8 million and $0.5 million during the six months ended June 30, 2021 and 2020, respectively, from equity investments in our portfolio companies.

 

Our total investment income for the six months ended June 30, 2021, resulted in annualized cash yields ranging from 3.2% to 13.3% based on our investment cost, as compared to 3.3% to 8.2% for the six months ended June 30, 2020.

 

We do not believe that our interest income, dividend income and total investment income are representative of either our stabilized performance or our future performance. We expect investment income to increase in future periods as we increase our base of investments that we expect to acquire from existing cash, borrowings and an expected increase in capital available for investment using proceeds from the Offerings.

 

Operating Expenses

 

Our operating expenses for the quarter and six months ended June 30, 2021 and 2020 were as follows:

 

  

Quarter Ended

June 30,

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Total return incentive fees  $2,577,081   $345,381   $4,870,403   $345,381 
Base management fees   1,156,085    561,903    1,990,308    1,077,501 
Organization and offering expenses   700,389    239,758    1,114,350    461,647 
Professional services   387,524    351,951    772,606    684,709 
Distribution and shareholder servicing fees   78,929    37,113    142,668    63,472 
Insurance expense   57,886    57,637    112,907    110,510 
Custodian and accounting fees   61,384    41,035    115,270    82,325 
Director fees and expenses   51,110    52,462    101,658    103,595 
General and administrative expenses   36,266    21,666    74,496    30,520 
Pursuit costs   513,522    14,614    513,630    21,563 
Total operating expenses   5,620,176    1,723,520    9,808,296    2,981,223 
Expense support   (1,845,313)   (990,098)   (4,495,242)   (1,597,728)
Net operating expenses  $3,774,863   $733,422   $5,313,054   $1,383,495 

 

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We consider the following expense categories to be relatively fixed in the near term: insurance expenses and director fees and expenses. Variable operating expenses include total return incentive fees, base management fees, organization and offering expenses, professional services, distribution and shareholder servicing fees, custodian and accounting fees, general and administrative, and pursuit costs. We expect these variable operating expenses to increase in connection with the growth in our asset base (base management fees, total return incentive fees, accounting fees and general and administrative expenses), the number of shareholders and open accounts (professional services, distribution and shareholder servicing fees and custodian fees), and/or the complexity of our investment processes and capital structure (professional services).

 

Total Return Incentive Fee

 

The Manager and Sub-Manager are eligible to receive incentive fees based on the Total Return to Shareholders, as defined in the Management Agreement and Sub-Management Agreement, for each share class in any calendar year, payable annually in arrears. We accrue (but do not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and perform a final reconciliation at completion of each calendar year. The total return incentive fee is due and payable to the Manager and Sub-Manager no later than ninety (90) calendar days following the end of the applicable calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement.

 

We recorded total return incentive fees of approximately $2.6 million and $4.9 million during the quarter and six months ended June 30, 2021. The total return incentive fees of approximately $0.3 million were recorded during the quarter and six months ended June 30, 2020. The increase in total return incentive fees during the quarter and six months ended June 30, 2021 is primarily due to an increase in the change in unrealized appreciation on investments, net of tax, as compared to the same periods of 2020.

 

Base Management Fee

 

Our base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares, 2% of the product of (x) our average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears.

 

We incurred base management fees of approximately $1.2 million and $0.6 million during the quarter ended June 30, 2021 and 2020, respectively, and approximately $2.0 million and $1.1 million during the six months ended June 30, 2021 and 2020, respectively. The increase in base management fees is primarily attributable to the increase in our average gross assets which were approximately $276.8 million and $159.6 million during the six months ended June 30, 2021 and 2020, respectively.

 

Organization and Offering Expenses

 

Organization expenses are expensed on our condensed consolidated statements of operations as incurred. Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the Offerings, are capitalized on our condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to our condensed consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the Sub-Manager.

 

We expensed organization and offering expenses of approximately $0.7 million and $0.2 million during the quarter ended June 30, 2021 and 2020, respectively, and approximately $1.1 million and $0.5 million during the six months ended June 30, 2021 and 2020, respectively.

 

Pursuit Costs

 

Pursuit costs relate to transactional expenses incurred to identify, evaluate and negotiate investments that ultimately were not consummated. We incurred pursuit costs of approximately $0.5 million during each of the quarter and six months ended June 30, 2021, as compared to $0.01 million and $0.02 million incurred during the quarter and six months ended June 30, 2020, respectively. The increase in pursuit costs is primarily attributable to an investment which progressed to advanced stages of due diligence and negotiation but did not close due to circumstances outside of our control. While pursuit costs vary by investment, we expect pursuit costs to decrease in future periods as compared to the quarter and six months ended June 30, 2021.

 

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Distribution and Shareholder Servicing Fee

 

The Managing Dealer is eligible to receive a distribution and shareholder servicing fee, subject to certain limits, with respect to our Class T and Class D shares sold in the Initial Public Offering (excluding Class T shares and Class D shares sold through our distribution reinvestment plan and those received as share distributions) in an amount equal to 1.00% and 0.50%, respectively, of the current net asset value per share.

 

We incurred distribution and shareholder servicing fees of approximately $0.1 million and $0.04 million during the quarter ended June 30, 2021 and 2020, respectively, and approximately $0.1 million during each of the six months ended June 30, 2021 and 2020. The increase in distribution and shareholder servicing fees during the quarter and six months ended June 30, 2021, is attributable to an increase in Class T and Class D shareholders.

 

Other Operating Expenses

 

Other operating expenses (consisting of professional services, insurance expenses, custodian and accounting fees, director fees and expenses, and general and administrative expenses) were approximately $0.6 million and $0.5 million during the quarter ended June 30, 2021 and 2020, respectively, and approximately $1.2 million and $1.0 million during the six months ended June 30, 2021 and 2020, respectively. The increase in other operating expenses during the quarter and six months ended June 30, 2021 is primarily attributable to an increase in accounting, legal, tax and valuation professional services resulting from an increase in the number of shareholders and investments, as compared to the quarter and six months ended June 30, 2020.

 

Expense Support and Conditional Reimbursement Agreement

 

Expense support from the Manager and Sub-Manager partially offsets operating expenses. Expense support totaled approximately $1.8 million and $1.0 million during the quarter ended June 30, 2021 and 2020, respectively, and approximately $4.5 million and $1.6 million during the six months ended June 30, 2021 and 2020, respectively. The actual amount of expense support is determined as of the last business day of each calendar year and is paid within 90 days after each year end per the terms of the Expense Support and Conditional Reimbursement Agreement described below.

 

We have entered into an Expense Support and Conditional Reimbursement Agreement with the Manager and the Sub-Manager, pursuant to which each of the Manager and the Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the Sub-Manager under the Management Agreement and the Sub-Management Agreement, as applicable, to the extent that our annual regular cash distributions exceed our annual net income (with certain adjustments). Expense Support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of our distribution reinvestment plan) to shareholders minus (b) the available operating funds. The Expense Support amount is borne equally by the Manager and the Sub-Manager and is calculated as of the last business day of the calendar year. The Manager and Sub-Manager equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the Sub-Management Agreement, as applicable to the Manager or the Sub-Manager.

 

If, on the last business day of the calendar year, the annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the “Excess Operating Funds”), we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to the Conditional Reimbursements as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. We did not have any Excess Operating Funds as of June 30, 2021 for any share class which had received expense support.

 

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Other Expenses and Changes in Net Assets

 

Income Tax Expense

 

We incur income tax expense to the extent we have or expect to have taxable income for the current year related to our Taxable Subsidiaries. During each of the quarter and six months ended June 30, 2021, we recorded current income tax expense of approximately $0.1 million in the condensed consolidated statements of operations, which primarily relates to our controlling equity interest in ATA acquired in April 2021. We did not record current income tax expense during the quarter and six months ended June 30, 2020.

 

Net Change in Unrealized Appreciation on Investments

 

Unrealized appreciation is based on the current fair value of our investments as determined by our board of directors based on inputs from the Sub-Manager and our independent valuation firm and consistent with our valuation policy, which take into consideration, among other factors, actual results of our portfolio companies in comparison to budgeted results for the year, future growth prospects, and the valuations of publicly traded comparable companies as determined by our independent valuation firm. 

 

During the quarter and six months ended June 30, 2021, we recognized a net change in unrealized appreciation on investments of approximately $14.9 million and $28.8 million, respectively, due to EBITDA growth of our portfolio companies and changes in public market multiples. Additionally, we recorded a net change in provision for taxes on unrealized appreciation on investments of $(0.1) million and $(0.02) million during the quarter and six months ended June 30, 2021, respectively, related to unrealized appreciation on investments held by our Taxable Subsidiaries. During the quarter and six months ended June 30, 2020, we recognized unrealized appreciation of approximately $6.6 million and $3.2 million, respectively. We did not record a net change in provision for taxes on unrealized appreciation on investments during the quarter and six months ended June 30, 2020.

 

Net Assets

 

During the quarter and six months ended June 30, 2021 and 2020, the change in net assets consisted of the following:

 

  

Quarter Ended

June 30, 

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Operations  $17,200,625   $8,393,911   $33,600,980   $6,646,213 
Distributions to shareholders   (3,618,610)   (2,331,838)   (6,908,446)   (4,423,189)
Capital share transactions   44,005,543    21,337,428    68,411,501    45,627,208 
Change in net assets  $57,587,558   $27,399,501   $95,104,035   $47,850,232 

 

Operations increased by approximately $8.8 million and $27.0 million during the quarter and six months ended June 30, 2021, respectively, as compared to the quarter and six months ended June 30, 2020. The increase in operations is primarily due to (i) an increase of approximately $8.2 million and $25.6 million, respectively, in the net change in unrealized appreciation on investments, net of taxes and (ii) an increase in net investment income of approximately $0.6 million and $1.4 million, respectively. Distributions increased approximately $1.3 million and $2.5 million during the quarter and six months ended June 30, 2021, respectively, as compared to the quarter and six months ended June 30, 2020, primarily as a result of an increase in shares outstanding. Capital share transactions increased approximately $22.7 million and $22.8 million during the quarter and six months ended June 30, 2021, respectively, as compared to the quarter and six months ended June 30, 2020, primarily due to (i) an increase in proceeds received through the Initial Public Offering of approximately $35.6 million and $47.9 million, respectively, (ii) a decrease in share repurchases of approximately $0.6 million and $1.3 million, respectively, and (iii) an increase in proceeds received through our distribution reinvestment plan of approximately $0.4 million and $0.8 million, respectively, offset partially by a decrease in proceeds received through our Private Offerings of approximately $13.9 million and $27.2 million, respectively.

 

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Total Returns

 

The following table illustrates year-to-date (“YTD”), trailing 12 months (“One Year”), trailing 36 months (“Three Year”), Three Year annual average and cumulative total returns with and without upfront selling commissions and placement agent / dealer manager fees (“sales load”), as applicable. All total returns with sales load assume full upfront selling commissions and placement agent / dealer manager fees. Total returns are calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other share classes assume distributions are reinvested in the same share class. Management believes total return is a useful measure of the overall investment performance of our shares.

 

    Year-To-Date
Total
Return
 

One Year

Total Return(1)

  Three Year
Total
Return(2)
  Three Year
Annual
Average
Total
Return(2)
 

Cumulative

Total
Return(3)

  Cumulative Total Return Period(3)
Class FA (no sales load)   10.2%   20.6%   45.1%   15.0%   50.0%   February 7, 2018 - June 30, 2021
Class FA (with sales load)   3.0%   12.8%   35.7%   11.9%   40.2%   February 7, 2018 - June 30, 2021
Class A (no sales load)   9.8%   19.7%   39.9%   13.3%   43.6%   April 10, 2018 - June 30, 2021
Class A (with sales load)   0.5%   9.5%   28.0%   9.3%   31.4%   April 10, 2018 - June 30, 2021
Class I   9.9%   19.8%   41.2%   13.7%   44.9%   April 10, 2018 - June 30, 2021
Class T (no sales load)   9.0%   17.8%   34.9%   11.6%   36.9%   May 25, 2018 - June 30, 2021
Class T (with sales load)   3.8%   12.2%   28.5%   9.5%   30.4%   May 25, 2018 - June 30, 2021
Class D   9.6%   18.8%   35.4%   11.8%   36.3%   June 26, 2018 - June 30, 2021
Class S (no sales load)   10.4%   21.2%   N/A   N/A   24.6%   March 31, 2020 - June 30, 2021
Class S (with sales load)   6.6%   17.0%   N/A   N/A   20.2%   March 31, 2020 - June 30, 2021

 

FOOTNOTES:

 

(1)For the period from July 1, 2020 to June 30, 2021.
(2)For the period from July 1, 2018 to June 30, 2021. The Three Year annual average total return is calculated as a simple average of the Three Year total return.
(3)For the period from the date the first share was issued for each respective share class to June 30, 2021.

 

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above and the risk factors identified our Form 10-K for the year ended December 31, 2020, incorporated by reference, and this prospectus, including the negative impacts from the continued spread of COVID-19. Our shares are illiquid investments for which there currently is no secondary market. Investors should not expect to be able to resell their shares regardless of how we perform. If investors are able to sell their shares, they will likely receive less than their purchase price. Our net asset value and total returns — which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations — are inherently uncertain. Past performance is not a guarantee of future results. Current performance may be higher or lower than the performance data quoted.

 

Hedging Activities

 

As of June 30, 2021, we had not entered into any derivatives or other financial instruments. However, in an effort to stabilize our revenue and input costs where applicable, we may enter into derivatives or other financial instruments in an attempt to hedge our commodity risk. With respect to any potential financings, general increases in interest rates over time may cause the interest expense associated with our borrowings to increase, and the value of our debt investments to decline. We may seek to stabilize our financing costs as well as any potential decline in our assets by entering into derivatives, swaps or other financial products in an attempt to hedge our interest rate risk. In the event we pursue any assets outside of the United States we may have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We may in the future, enter into derivatives or other financial instruments in an attempt to hedge any such foreign currency exchange risk. It is difficult to predict the impact hedging activities may have on our results of operations.

 

78

 

 

Contractual Obligations

 

We have entered into the Management Agreement with the Manager and the Sub-Management Agreement with the Manager and the Sub-Manager pursuant to which the Manager and the Sub-Manager are entitled to receive a base management fee and reimbursement of certain expenses. Certain incentive fees based on our performance are payable to the Manager and the Sub-Manager after our performance thresholds are met. Each of the Manager and the Sub-Manager is entitled to 50% of the base management fee and incentive fees, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement. If, on the last business day of the calendar year, there are Excess Operating Funds, we will use such Excess Operating Funds to pay the Manager and the Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to certain conditions as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements will automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. As of June 30, 2021, the amount of expense support collected from the Manager and Sub-Manager since inception is approximately $5.1 million. The following table reflects the expense support that may become reimbursable, subject to the conditions of reimbursement defined in the Expenses Support and Conditional Reimbursement Agreement:

 

For the Year Ended  Amount of Expense Support  Reimbursement Eligibility Expiration
December 31, 2018  $389,774  March 31, 2022
December 31, 2019   1,372,020  March 31, 2023
December 31, 2020   3,301,473  March 31, 2024
   $5,063,267   

 

As of June 30, 2021, management believes that reimbursement payments by the Company to the Manager and Sub-Manager are not probable under the terms of the Expense Support and Conditional Reimbursement Agreement. We have also entered into the Administrative Services Agreement with the Administrator and the Sub-Administration agreement with the Administrator and the Sub-Administrator pursuant to which the Administrator and the Sub-Administrator will provide us with administrative services and are entitled to reimbursement of expenses for such services. For a discussion of the compensation we pay in connection with the management of our business, see Note 5. “Related Party Transactions” in the “Financial Statements” included in the company’s Form 10-Q for the period ended June 30, 2021 and incorporated herein by reference for additional information.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

 

Inflation

 

Inflation may affect the fair value of our investments or affect the performance of our portfolio companies. As inflation increases, the fair value of our portfolio companies could decline. Additionally, during periods of inflation, income and expenses of our portfolio companies may increase, including interest expense that our portfolio companies pay on variable rate third part debts. Any increases in income may not be sufficient to cover increases in expenses of our portfolio companies.

 

Seasonality

 

We do not anticipate that seasonality will have a significant effect on our results of operations.

 

79

 

BUSINESS

 

Overview

 

CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. We refer to the strategy of owning both the debt and equity of our target private companies as a “private capital” strategy. We intend to target businesses that are highly cash flow generative, with annual revenues primarily between $15 million and $250 million and whose management teams seek an ownership stake in the company. Our business strategy is to acquire controlling equity interests in combination with debt positions and in doing so, provide long-term capital appreciation and current income while protecting invested capital. We define controlling equity interests as companies in which we own more than 50% of the voting securities of such companies. This business strategy, which has been used by affiliates of the Sub-Manager over many different business cycles, will provide us with a high level of operational control and the opportunity to receive current cash income in the form of monthly coupon payments from our debt and periodic cash distributions from our equity ownership in the businesses we acquire. We believe that our business strategy also allows us to partner with management teams that are highly incentivized to support the growth and profitability of our businesses. We also expect that in the businesses in which we acquire controlling equity positions, we will be provided with direct access to the acquired business’s financial information and the right to appoint a majority of the board of directors. We will use the global origination networks of the Manager and the Sub-Manager to identify potential acquisitions and management teams that embrace our transaction structure and management philosophy.

 

We target businesses with proven and demonstrable track records of recurring cash flow and stable and predictable operating performance, all of which is intended to produce attractive risk-adjusted returns over a long-term time horizon. We seek to structure our investment with limited, if any, third-party senior leverage. Our target businesses are expected to fall within the following industries (without limitation): business services, consumer products, education, franchising, light manufacturing / specialty engineering, non-FDA regulated healthcare and safety companies. We do not intend to acquire businesses in industries that we believe are not stable or predictable, including oil and gas, commodities, high technology, internet and ecommerce. We also do not intend to acquire businesses that at the time of our acquisition are distressed or in the midst of a turnaround.

 

We believe we will have the flexibility to make acquisitions with a long-term perspective that will provide an opportunity to generate long-term capital appreciation over various economic cycles. Additionally, we believe our capital structure will provide downside protection while preserving the opportunity for long-term value appreciation through our investment in the debt position. We believe the use of limited third party leverage will prevent influence by third-party investors and/or debt providers that may have different business objectives and priorities. We believe that our long-term philosophy combined with conservative capital structure is particularly attractive to entrepreneurs and management teams and provides a more attractive solution than our competitors.

 

We commenced operations on February 7, 2018, following a private offering of $81.7 million of our Class FA shares. On March 7, 2018, we commenced our initial public offering of up to $1.1 billion in our common shares, consisting of Class A shares, Class T shares, Class D shares and Class I shares. Through September 1, 2021, we had issued 7,488,574 common shares in our Initial Public Offering consisting of 1,324,464 Class A shares, 1,191,058 Class T shares, 833,229 Class D shares and 4,139,823 Class I shares issued in this offering (including 79,624 Class A shares, 19,891 Class T shares, 24,235 Class D shares and 67,408 Class I shares issued pursuant to our distribution reinvestment plan) and we had received aggregate gross offering proceeds of $217.5 million. As of September 30, 2021, we had invested in eight businesses, consisting of approximately $217.2 million of equity investments and approximately $115.0 million of debt investments. For a discussion of our businesses, see “Our Portfolio.”

 

The Manager and the Sub-Manager

 

We are managed by the Manager under the Management Agreement, pursuant to which the Manager is responsible for the overall management of our activities. The Manager is registered as an investment adviser under the Advisers Act. The Manager is controlled by CFG, an investment management firm specializing in alternative investment products. Anchored by over 45 years of investing in relationships, CFG or its affiliates have formed or acquired companies with more than $34 billion in assets.

 

The Manager has engaged the Sub-Manager under the Sub-Management Agreement, pursuant to which the Sub-Manager is responsible for the day-to-day management of our assets. The Sub-Manager is registered as an investment adviser under the Advisers Act. The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisition and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions.

 

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The Sub-Manager is an affiliate of LLCP. LLCP is an asset manager that has made private capital investments in middle-market companies located primarily in the United States for 38 years. Since its inception in 1984 through June 30, 2021, LLCP and the LLCP Senior Executives have managed approximately $12.2 billion of capital. From 1994 through June 30, 2021, LLCP has sponsored and managed fifteen private funds in addition to our company, raised a total of approximately $9.9 billion of capital commitments from over 175 institutional and other investors, and invested approximately $6.4 billion in 96 middle-market companies across various industries, including franchisors, business services, and light manufacturing and engineered products. LLCP currently has a team of more than 58 transactional and supporting professionals.  As of June 30, 2021, LLCP had approximately $8.7 billion under management. LLCP was managed by a tenured, seven-person Executive Committee, comprised of Lauren B. Leichtman, Arthur E. Levine, Matthew G. Frankel, Michael B. Weinberg, Stephen J. Hogan, David I. Wolmer and Andrew M. Schwartz (together, the “LLCP Senior Executives”), an experienced team supported by approximately 27 Corporate Finance professionals and 7 Originations professionals.

 

Our acquisition process is a collaborative effort between the Manager and the Sub-Manager, and we believe we will benefit from their combined business and industry-specific knowledge and experience in the middle-market and the Sub-Manager’s transaction expertise and acquisition capabilities. To facilitate communication and coordination, the Manager and the Sub-Manager hold, and intend to continue to hold, regular meetings to plan and discuss our business strategy, potential acquisition and financing opportunities, current market developments and strategic goals. Through the Sub-Manager, we believe that we will benefit from LLCP’s experience and expertise in acquiring U.S. middle-market businesses and that the Manager and the Sub-Manager will provide us with substantial market insight and valuable access to acquisition and financing opportunities.

 

The Manager also provides us with certain administrative services under the Administrative Services Agreement with us. The Sub-Manager will also provide certain other administrative services to us under the Sub-Administration Agreement with the Manager.

 

Business Strategy

 

Our business strategy seeks to provide current income and long-term appreciation, while protecting invested capital through our ownership of durable and growing, middle-market businesses. We intend to acquire controlling equity interests in combination with debt positions (typically in the form of senior or subordinated notes) in such businesses which will become our majority owned subsidiaries and provide us with current interest income from our debt positions and cash distributions from our equity ownership. We define controlling equity interests as companies in which we own more than 50% of the voting securities of such companies. We believe that this flexibility will help us competitively bid for businesses by providing certainty of funding to meet the comprehensive capital needs of such businesses, without depending on third-party financing sources and prevailing market conditions. Our target businesses are highly durable companies that can generate consistent cash flow and can continue to grow over time and through various economic cycles. We plan to manage and grow the businesses we acquire to create value over a long-term time horizon. We intend for our acquisitions of long-term controlling equity interests in combination with debt positions in the businesses we acquire to comprise a significant majority of our total assets. It is not our current intention to merge with or into these businesses. Further, we have no current intention of engaging in a strategic merger or acquisition.

 

In addition, and to a lesser extent, we intend to acquire other debt and minority equity positions, which may include acquiring debt in the secondary market and minority equity interests in combination with other funds managed by LLCP from co-investments with other partnerships managed by LLCP or its affiliates. We expect that these positions will comprise a minority of our total assets. We expect to generate additional interest income from various types of debt we acquire in the secondary market. See “—Other Business Activities.”

 

Our policy is to acquire middle-market businesses with the expectation of operating these businesses over a long-term basis that for us will involve a minimum holding period of four to six years. Actual holding periods for many of our businesses are expected to exceed this minimum holding period, but each business will be acquired with the expectation of an eventual exit transaction after a reasonable time frame to allow for the realization of shareholder appreciation. In limited circumstances in order to manage liquidity needs, meet other operating objectives or adapt to changing market conditions, we may also exit businesses prior to the expected minimum holding period. Exit decisions in relation to our businesses after the expiration of the minimum holding period will be made with the objective of maximizing shareholder value and allowing us to realize capital appreciation to the extent available from individual businesses. We will also assess the impact that any exit decision may have on our exclusion from registration as an investment company under the Investment Company Act. See “Risk Factors—Risks Related to Our Organization and Structure—Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.” Potential exit transactions that we may pursue for our businesses include recapitalizations, public offerings, asset sales, mergers and other business combinations. In each case, in selecting the form of exit transaction we expect to assess prevailing market conditions, the timing and cost of implementation, whether we will be required to assume any post-transaction liabilities and other factors determined by the Manager and the Sub-Manager. No assurance can be given relating to the actual timing or impact of any exit transaction on our business.

 

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Business Approach

 

Our business approach is summarized below:

 

Focus on Durable and Growing Middle-Market Businesses. We intend to acquire businesses with established market positions, experienced management teams and a proven ability to grow through different market cycles, including, without limitation, providers of business services, consumer products, education, franchising, light manufacturing / specialty engineering, and non-FDA regulated healthcare companies. For example, the LLCP Senior Executives have acquired businesses in the following industries: healthcare products and services, education, safety companies, restaurants, manufacturing, consumer products, franchising and aerospace. We do not intend to acquire businesses in industries that we believe are not stable or predictable, including, but not limited to, oil and gas, commodities, start-ups, high technology, internet and e-commerce. We do not intend to acquire businesses that at the time of our acquisition are distressed or in the midst of a turnaround.

 

Capitalize on Extensive Sourcing Network. We intend to leverage the Sub-Manager’s extensive network for acquisition and financing opportunities, which resulted in over 3,500 investment referrals in 2020. In 2020, LLCP reviewed more than 1,000 of these potential acquisition opportunities resulting in 13 funded investments. We intend to additionally leverage the Manager’s extensive network.

 

Long-term Value Creation Through Tailored Acquisitions. We intend to employ a consistent strategy that can be tailored to the capital structure required to meet the needs of entrepreneurial management teams who require a long-term strategic solution. We will seek to partner with management teams that seek an equity ownership stake in their businesses and therefore be highly incentivized to support the growth and profitability of our businesses. We believe our capital and the sophisticated financial and strategic advice that the Manager and the Sub-Manager are able to provide to our businesses will provide the opportunity for long-term value creation.

 

Create Current Income. In connection with our acquisitions, we intend to also provide debt financing typically in the form of senior or subordinated notes from which we expect to receive current interest income. We expect to provide financing at annual interest rates between 13% and 16%. The high free cash flow nature of the businesses that we seek to acquire affords them the ability to make interest payments without impeding the business. Additionally, the businesses typically generate enough excess cash to make periodic distributions to shareholders. We believe that this structure will provide income for regular distributions to our shareholders.

 

Mitigate Risk Through Less Third-Party Leverage. We intend to create what we believe to be a capital structure that mitigates downside risk by using modest, if any, third party leverage on the businesses we acquire. We expect to provide the businesses we acquire with a portion of the debt they need, resulting in companies with less external third-party debt. By doing so, we expect to secure a stream of income that can provide for distributions to our shareholders as well as prevent influence by third-party investors and/or debt providers that may have different business objectives and priorities.

 

Rely on the Skills and Experience of the Manager and the Sub-Manager to Provide Value-Added Expertise. The respective affiliates of the Manager and the Sub-Manager have significant experience in acquiring, managing and financing middle-market companies. Through the Manager and the Sub-Manager, we intend to add value to the businesses we acquire by offering sophisticated financial and strategic advice while respecting the management team’s operating autonomy. The Sub-Manager intends to meet regularly with senior management of the businesses we acquire in an operating committee format to discuss a business’s strategic, financial and operating performance. The Manager and the Sub-Manager intend to assist the senior management of our businesses in several areas including the following:

 

strategic direction and planning,

 

introductions to acquisition opportunities and new business contacts,

 

follow-on growth and acquisition capital and financing,

 

capital market strategies, and

 

optimization of working capital.

 

In addition, we believe that the Manager’s and the Sub-Manager’s proactive assistance to the businesses we acquire will help us mitigate risks and will create value for our shareholders.

 

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Acquisition Approach

 

We intend to acquire controlling equity interests in combination with debt positions in durable and growing, middle-market U.S. companies. We believe that this business strategy will allow us the opportunity for long-term growth and the receipt of current cash income in the form of monthly coupon payments from our debt and periodic cash distributions from our equity ownership in the businesses we acquire. We will primarily seek to acquire controlling positions by owning more than 50% of the voting securities in businesses that will become our majority-owned subsidiaries. We expect to invest side-by-side with the management teams of the acquired businesses, resulting in the management teams’ ownership accounting for a meaningful portion of the remaining equity in the business and representing a large percentage of their overall net worth. Accordingly, we believe that the management teams’ incentive towards long-term growth will align with our business strategy. We also expect that our controlling equity positions in the businesses we acquire will provide us with direct access to each acquired business’ financial information and the right to appoint a majority of the board of directors of each business we acquire.

 

We intend to manage and grow our businesses with a long-term perspective. Our policy is to acquire middle-market businesses with the expectation of operating these businesses over a long-term basis that for us will involve a minimum holding period of four to six years. We will seek to acquire businesses that are highly durable and yet capable of attractive long-term growth rates with dedicated management teams that have a desire to retain a meaningful equity stake in the company. We intend to own the businesses with a long-term philosophy. In addition, we believe that we can use the LLCP Senior Executives’ years of experience in owning businesses and the Manager’s and the Sub-Manager’s extensive networks to supplement the efforts of highly capable management teams in order to manage their businesses efficiently and identify and execute on growth initiatives for such businesses.

 

We intend to acquire businesses that will produce stable and growing cash flows through a differentiated and time-tested acquisition strategy.

 

Differentiated Acquisition Strategy. We believe that our acquisition strategy is differentiated from others as we intend to acquire control of businesses with a long-term time horizon in combination with debt positions. We believe that shareholders will benefit from a risk mitigating capital structure and current income in the form of interest income from our debt positions and cash distributions from our equity ownership. We believe that this acquisition approach is particularly attractive to business-owners and management teams who are seeking less dilutive forms of capital.

 

Control of Capital Structure. By acquiring controlling equity interests in combination with debt positions (typically in the form of senior or subordinated notes) in the businesses we acquire, we expect to have a greater degree of control over the capital structure of a business. We expect that this will prevent influence by third-party investors and/or debt providers that may have different business objectives and priorities. We expect that this approach will mitigate downside risk and provide significant protection to us and our shareholders.

 

Transactions at Lower Leverage Multiples. We intend to use modest leverage on our businesses, and limited, if any, third party leverage. We will tailor the mix of equity and debt used in a transaction based on a conservative assumption of the leverage capacity of the underlying business we acquire. If we choose to use third party financing, we expect at relatively low leverage multiples (typically less than 3.0x debt to EBITDA) at the time of investment.

 

Strong Current Income. We intend to provide long-term strategic solutions to our businesses and expect to receive current income in the form of interest income from our debt positions and cash distributions from our equity ownership in the businesses we acquire. We believe that the combination of interest income and cash distributions will result in the return of a substantial amount of our invested capital in the years following the initial acquisition of a business. In addition, the receipt of current income not only reduces risk but allows us to hold companies for the long term, thereby reducing the dependence on an exit event for a return of capital.

 

Targeting the Largest and Fastest Growing Segment of the U.S. Economy. We intend to acquire durable and growing middle-market businesses primarily located in the United States. We seek to acquire businesses that are highly cash flow generative with annual revenues primarily between $15 million and $250 million. This is a target rich environment. According to Hoover’s, as of December 31, 2020 there were over 83,000 middle-market companies in the United States in our target range.

 

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Other Business Activities

 

In addition, and to a lesser extent, we may acquire other debt and minority equity positions. We intend to acquire various types of debt in the secondary market including secured and senior unsecured debt and syndicated senior secured corporate loans of U.S. and, to a lesser extent, non-U.S. corporations, partnerships, limited liability companies and other business entities other than companies. We may also co-invest with other vehicles managed by the Sub-Manager or its affiliates to acquire minority equity positions and debt positions in a co-investment capacity. We expect that these positions will comprise a minority of our total assets.

 

Market Opportunity

 

We will seek to acquire and actively manage middle-market businesses. We characterize middle-market businesses as those with annual revenues of primarily between $15 million and $250 million. We believe that the merger and acquisition market for middle-market businesses is highly fragmented and provides opportunities to purchase businesses at attractive prices. We believe that the following factors contribute to the opportunities to acquire middle-market businesses:

 

target rich environment with more than 83,000 middle-market companies in the U.S. today within our target range of companies with annual revenues primarily between $15 million and $250 million as of December 31, 2020;

 

there are fewer potential acquirers for these businesses compared to other market segments; and

 

sellers of these businesses frequently consider non-economic factors, such as operational autonomy, continuing board membership or the effect of the sale on their employees.

 

The Sub-Manager believes that lower middle-market and small-cap companies’ access to institutional capital has always been well below that of the upper middle market, and even more so following the Great Recession of 2008. The Sub-Manager believes that many traditional providers of privately placed debt and equity capital to lower middle market companies moved up-market following the Great Recession in search of increased liquidity and less perceived risk.

 

Furthermore, the Sub-Manager believes increases in average fund size, even within the broadly defined U.S. middle market, have accelerated these trends as multi-billion-dollar funds typically target larger investment opportunities.

 

The Sub-Manager believes there are very few U.S. private equity firms offering creative and flexible capital solutions to lower middle market and small cap companies. The Sub-Manager’s private capital strategy seeks to provide lower middle market and small cap companies with much needed capital that is less dilutive to entrepreneurial management teams, allowing them to retain operating autonomy, and encouraging them to work collaboratively with the Sub-Manager. This investment strategy further mitigates risk by significantly reducing third-party leverage on businesses relative to traditional private equity approaches. Moreover, the Sub-Manager’s strategy provides its management teams the opportunity to invest alongside the Sub-Manager, including in the debt security, which pays monthly cash distributions from the outset of the investment.

 

The Sub-Manager is not aware of any U.S. private equity firm that has successfully executed this investment strategy on any significant scale. Of those U.S. private equity firms providing capital to lower middle-market companies, we believe most are focused on traditional LBO, mezzanine or private credit transactions, which are often not the best solutions for sellers. The Sub-Manager expects to take advantage of this mismatch by providing flexible capital and by further educating U.S. lower middle market entrepreneurs and deal sourcing intermediaries of its compelling alternative.

 

Potential Competitive Strengths

 

We believe an investment in our company represents an attractive opportunity for the following reasons:

 

Proven Track Record. We believe that our ability to leverage the LLCP platform and the knowledge and experience that LLCP’s professionals have garnered in acquiring and growing businesses over many different business cycles will benefit the Sub-Manager’s sourcing of attractive acquisition opportunities for us. Since its inception in 1984 through June 30, 2021, LLCP and the LLCP Senior Executives have managed approximately $12.2 billion of capital. From 1994 through June 30, 2021, LLCP has sponsored and managed fifteen private funds in addition to our company, raised a total of approximately $9.9 billion of capital commitments from over 175 institutional and other investors, and invested approximately $6.4 billion in 96 middle-market companies across various industries, including franchisors, business services, and light manufacturing and engineered products. LLCP currently has a team of more than 58 transactional and supporting professionals.  As of June 30, 2021, LLCP had approximately $8.7 billion under management. LLCP was managed by a tenured, seven-person Executive Committee, comprised of the LLCP Senior Executives, an experienced team supported by approximately 27 Corporate Finance professionals and 7 Originations professionals.

 

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Differentiated Acquisition Strategy that is Attractive to Business Owners. For 38 years, LLCP has applied its acquisition strategy of acquiring entrepreneurially led middle-market companies primarily located in the United States. The Sub-Manager’s acquisition strategy is differentiated from others as it typically acquires controlling equity interests in combination with debt positions (typically in the form of senior or subordinated notes) in the businesses it acquires. We expect that our acquisition and financing activities will generate current income in the form of interest income and cash distributions, allowing us to pay current distributions to our shareholders. We believe that our shareholders will benefit from a capital structure with substantial equity participation and current cash income. Additionally, we believe our acquisition strategy will provide downside protection while preserving the opportunity for long-term value appreciation. Finally, we believe that our acquisition approach is particularly attractive to entrepreneurs and management teams who prefer capital structures with less third-party leverage.

 

Partnering with Strong Management Teams. By targeting transactions in which we encourage entrepreneurs and management teams to retain, or increase, their equity ownership in the business, we believe we offer an attractive partnership with the Manager and the Sub-Manager as partners and financial sponsors. Because we expect that the management teams’ investment will account for much of the remaining equity in the business and represent a large percentage of their overall net worth, we believe that the management teams’ incentive towards long-term growth will align with our business strategy

 

Proactive Generation of Proprietary Opportunities. The Sub-Manager has a dedicated group of professionals that focus on originating new acquisition opportunities for us (the “Originations team”). Located in Los Angeles, Chicago, New York, Charlotte, and London, the members of the Originations team have spent the majority of their careers in the middle-market and have developed a vast network that have generated proprietary acquisition and financing opportunities. For example, in 2020, the Sub-Manager or its affiliates received approximately 3,000 investment referrals and reviewed approximately 900 potential acquisition and/or financing opportunities resulting in 10 funded investments. The Originations team is actively in the market at all times and meets weekly to coordinate deal sourcing activities and review new acquisition and financing opportunities. As a result of significant awareness of the Sub-Manager’s brand and acquisition approach, we expect that many of our acquisitions will likely be sourced through proprietary channels.

 

Established Middle-Market Presence. The LLCP Senior Executives have gained extensive middle-market knowledge and acquisition experience during LLCP’s 38-year history, respectively. We believe that successful acquisitions in the middle-market require specialized knowledge, geographic presence and investment experience. We believe that the middle-market knowledge and geographic presence of the Manager and the Sub-Manager will allow us to (i) quickly identify and capture acquisition opportunities, (ii) rapidly respond to the needs of our businesses and (iii) properly evaluate and diligence new acquisition opportunities.

 

Experience Acquiring and Managing Middle-Market Companies. Our acquisition activities will be overseen and approved by the Sub-Manager subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors. The Sub-Manager’s executive team consists of the LLCP Senior Executives. These executives bring significant experience acquiring and managing middle-market companies, stability and cohesiveness to our management. The Manager’s management committee consists of Chirag J. Bhavsar, Brett A. Schlemovitz and Tammy J. Tipton.

 

A Cohesive Team of Professionals. The Sub-Manager has an experienced and cohesive team of more than 55 transactional and supporting professionals who have successfully acquired and managed middle-market companies through all economic cycles.

 

The LLCP Senior Executives in addition to three key investment team members comprise the Sub-Manager’s management committee which approves all acquisition, financing and exit decisions. The Sub-Manager’s management team is organized into three groups:

 

the Originations team, which sources and evaluates new acquisition opportunities;

 

the Corporate Finance group, which structures, actively monitors and exits positions in the businesses we acquire; and

 

the administration and compliance group, which manages partner relationships and oversees the day-to-day operations.

 

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This organizational structure enables the Sub-Manager to maximize each professional’s skill set and creates internal accountability among the management team. Additionally, this approach allows the Originations team to be actively in the market at all times and permits the monitoring group to focus primarily on post-acquisition activities.

 

Tiered Transaction Review Process. By utilizing personnel of both the Manager and the Sub-Manager we believe our process of sourcing and evaluating acquisition opportunities will result in greater selectivity in our transaction process. All recommendations from the Sub-Manager’s Originations team must be approved by the Sub-Manager’s investment committee prior to the Sub-Manager’s recommendation of the transaction to the Manager’s management committee. The acquisition will then be subject to approval by the Manager’s management committee that the acquisition opportunity meets our investment objections and final approval by our board of directors.

 

Role as an Active Partner. The Manager and the Sub-Manager intend to be actively involved with the businesses we acquire. They expect to add value to the existing management teams of our businesses by offering sophisticated financial and strategic advice while respecting their operating autonomy. The Manager and the Sub-Manager intend to monitor the critical success factors of our businesses and meet regularly with senior management to discuss the respective business’ strategic, financial and operating performance. They intend to contribute to the success of the businesses we acquire and assist senior management of these businesses in the following areas:

 

strategic direction and planning,

 

introductions to acquisition opportunities and new business contacts,

 

follow-on growth and acquisition capital and financing,

 

capital market strategies, and

 

optimization of working capital.

 

The Manager and the Sub-Manager intend to proactively assist our businesses, which the Manager and the Sub-Manager believe will protect our interests, while creating value for our shareholders.

 

Long-Term Time Horizon. We believe we have the flexibility to make acquisitions with a long-term perspective that will provide us with the opportunity to generate long-term appreciation and to provide a more attractive solution for business owners. Our policy is to acquire middle market businesses with the expectation of operating these businesses over a long-term basis that for us will involve a minimum holding period of four to six years. Actual holding periods for many of our businesses are expected to exceed this minimum holding period, but each business will be acquired with the expectation of an eventual exit transaction after a reasonable time frame to allow for the realization of shareholder appreciation. We believe that the long-term nature of our capital will help us avoid the need to exit the businesses we acquire at inopportune times and will make us a better partner for the business.

 

Acquisition Process

 

Our acquisition process is focused on prudently selecting businesses through a rigorous sourcing and due diligence process and then actively managing and monitoring these businesses. The Manager and the Sub-Manager are collectively responsible for sourcing potential acquisition and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions. Our board of directors shall have the right to approve the acquisition of each of the company’s investments.

 

Acquisition Criteria

 

We believe that successful acquisitions in the middle-market require specialized knowledge, geographic presence and experience. Middle-market knowledge and geographic presence allow the Manager and the Sub-Manager to (i) quickly identify and capture acquisition opportunities and (ii) rapidly respond to the needs of our businesses. Furthermore, we believe that the Sub-Manager and its affiliates have developed an acquisition strategy that meets the growing business and operational needs of middle-market companies and that the middle market has come to recognize the benefits of the Sub-Manager’s approach.

 

We have developed disciplined criteria for selecting quality businesses to acquire.

 

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Focus on Middle-Market Businesses. We intend to focus exclusively on durable and growing middle-market businesses located primarily in the United States. We believe the middle market, which we define as businesses with annual revenues of primarily between $15 million to $250 million, is the fastest growing segment of the economy. Middle-market businesses have experienced a significant gap between the capital and financing needed and the capital and financing available.

 

Strong Entrepreneurial Management with a Significant Equity Stake. We intend to look for management teams of the businesses that we acquire to have an articulated vision, proven leadership abilities and a desire to maintain or increase an equity ownership stake in the businesses after we acquire them. The senior management of our businesses may maintain an ownership interest in the business of up to 49%.

 

Businesses with Proven Historical Performance. We will seek to acquire companies that have a strategic plan that capitalizes on growth opportunities, can generate stable and predictable cash flow, which we expect to provide current cash income while mitigating downside risk, demonstrated by a track record spanning multiple market cycles. We believe that companies that are stable and predictable include, without limitation, providers of well-established consumer products, business services, education and light