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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC.

(Exact name of registrant as specified in its charter)

Commission File Number: 814-01157

(Address of principal executive offices) (Zip code)

(212) 332-5100

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name or former address, if changed since last report)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☐ Yes ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

☐ Yes ☒ No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of March 31, 2016, there were 100,000 shares of the registrant’s common stock outstanding.

 

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TAB LE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. Our forward-looking statements include information in this report regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors” as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operation and financial position. Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Under Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act, such as this quarterly report on Form 10-Q.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

●

our future operating results;

●

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets;

●

uncertainty surrounding the strength of the U.S. economic recovery;

●

our business prospects and the prospects of our portfolio companies;

●

the impact of investments that we expect to make;

●

the impact of increased competition;

●

our contractual arrangements and relationships with third parties;

●

the dependence of our future success on the general economy and its impact on the industries in which we invest;

●

the ability of our prospective portfolio companies to achieve their objectives;

●

the relative and absolute performance of our investment adviser;

●

our expected financings and investments;

●

the use of borrowed money to finance a portion of our investments;

●

our ability to make distributions;

 

●

the adequacy of our cash resources and working capital;

●

the timing of cash flows, if any, from the operations of our portfolio companies;

●

the impact of future acquisitions and divestitures;

●

the effect of changes in tax laws and regulations and interpretations thereof;

●

our ability to maintain our status as a BDC and a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”);

●

actual and potential conflicts of interest with Siguler Guff Advisers, LLC (“Siguler Guff Advisers” or the “Investment Manager”) and its affiliates;

●

general price and volume fluctuations in the stock market;

●

the ability of the Investment Manager to attract and retain highly talented professionals; and

●

the impact on our business of new legislation.

 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

 

Siguler Guff Small Business Credit

		March 31, 2016				December 31, 2015
Assets
Portfolio Investments at fair value:
Non-controlled, non-affiliated portfolio investments (amortized cost, March 31, 2016: $9,928,461; December 31, 2015: $6,833,511)		$	9,928,461			$	6,833,511
Cash and cash equivalents			158,801				102,615
Interest receivable			43,713				34,004
Net deferred tax asset			70,300				-
Total Assets		$	10,201,275			$	6,970,130
Liabilities
Accrued expenses and other liabilities		$	181,250			$	145,000
Due to Affiliate			230,979				357,228
Taxes payable			40,031				-
Total Liabilities			452,260				502,228
Net Assets		$	9,749,015			$	6,467,902
Commitments and Contingencies (Note 8)
Components of Net Assets
Common stock, $0.001 par value, 10,000,000 shares authorized, 100,000 issued and 100,000 outstanding at March 31, 2016 and December 31, 2015			100				100
Paid-in capital in excess of par			10,087,694				7,017,991
Accumulated undistributed net investment loss			(338,779	)			(525,189	)
Receivable from stockholder			-				(25,000	)
Total Net Assets		$	9,749,015			$	6,467,902
Net Asset Value Per Share		$	97.49			$	64.68

Portfolio Investment		Industry		Interest Rate			Maturity		Principal			Fair Value
Senior Subordinated Notes (102%) (1)/(2)
United States
La Tavola, LLC		Commercial Retail			11.00	%	06/01/2021		$	2,481,600		$	2,448,240
Medsurant Holdings, LLC		Healthcare Services			12.25	%	06/18/2021		$	1,987,456			1,949,227
Trachte, LLC		Manufacturing			11.00	%	04/13/2021		$	2,493,194			2,452,310
Rudy's Food Products, Inc.		Processed & Packaged Goods			11.00	%	07/05/2021		$	3,139,488			3,078,684
Total United States												$	9,928,461
Total Senior Subordinated Notes (102%)												$	9,928,461
Total Portfolio Investments (Amortized Cost: $9,928,461)												$	9,928,461

Portfolio Investment		Industry		Interest Rate			Maturity		Principal			Fair Value
Senior Subordinated Notes (106%) (1)/(2)
United States
La Tavola, LLC		Commercial Retail			11.00	%	06/01/2021		$	2,481,600		$	2,440,650
Medsurant Holdings, LLC		Healthcare Services			12.25	%	06/18/2021		$	1,987,456			1,948,151
Trachte, LLC		Manufacturing			11.00	%	04/13/2021		$	2,486,977			2,444,710
Total United States												$	6,833,511
Total Senior Subordinated Notes (106%)												$	6,833,511
Total Portfolio Investments (Amortized Cost: $6,833,511)												$	6,833,511

		For the Three Months Ended March 31, 2016
Investment income
Non-Controlled, Non-Affiliated Investments:
Interest income		$	290,434
PIK interest income			13,705
Total Investment Income			304,139
Expenses
Investment Management Fee			43,165
Professional fees			81,913
Directors fees			41,250
Other general and administrative			1,487
Total Expenses			167,815
Investment Management Fee Waived (Note 7)			(19,817	)
Total Net Expenses			147,998
Net Investment Gain/(Loss) before income tax benefit			156,141
Income tax benefit (Note 2)			30,269
Net Investment Gain/(Loss) after income tax benefit			186,410
Net Increase/(Decrease) in Net Assets Resulting from Operations		$	186,410
Net Investment Gain/(Loss) and Net Increase/(Decrease) in Net Assets Resulting from Operations Per Share (Basic and Diluted)		$	1.86
Weighted average shares outstanding			100,000

		For the Three Months Ended March 31, 2016
Net Increase/(Decrease) in Net Assets Resulting from Operations
Net investment gain/(loss) after income tax benefit		$	186,410
Net Increase/(Decrease) in Net Assets Resulting from Operations			186,410
Capital Stock Transactions
Contributions from stockholder			3,094,703
Net Increase in Net Assets From Capital Stock Transactions			3,094,703
Total Increase in Net Assets
Net assets at beginning of period			6,467,902
Net assets at end of period		$	9,749,015
Capital Share Activity
Shares issued			-
Net Increase in Shares Outstanding			-

		For the Three Months Ended March 31, 2016
Cash Flows From Operating Activities
Net Increase/(Decrease) in Net Assets Resulting from Operations		$	186,410
Adjustments to reconcile Net Increase/(Decrease) in Net Assets from Operations to Net Cash Used in Operating Activities:
Purchases of Portfolio Investments			(3,069,360	)
PIK interest income			(13,705	)
Accretion of discount on notes			(11,885	)
Increase in interest receivable			(9,709	)
Increase in net deferred tax asset			(70,300	)
Increase in accrued expenses and other liabilities			36,250
Decrease in due to Affiliate			(126,249	)
Increase in taxes payable			40,031
Net Cash Used in Operating Activities			(3,038,517	)
Cash Flows From Financing Activities
Payment of receivable from stockholder			25,000
Contributions from stockholder			3,069,703
Net Cash Provided by Financing Activities			3,094,703
Net Increase in Cash and cash equivalents			56,186
Cash and cash equivalents
Beginning of period			102,615
End of period		$	158,801

		Assets at Fair Value as of March 31, 2016
		Level 1				Level 2				Level 3				Total
Senior Subordinated Notes		$	-			$	-			$	9,928,461			$	9,928,461
Total Portfolio Investments			-				-				9,928,461				9,928,461
Cash Equivalents			61,604				-				-				61,604
Total		$	61,604			$	-			$	9,928,461			$	9,990,065

		Assets at Fair Value as of December 31, 2015
		Level 1				Level 2				Level 3				Total
Senior Subordinated Notes		$	-			$	-			$	6,833,511			$	6,833,511
Total Portfolio Investments			-				-				6,833,511				6,833,511
Cash Equivalents			43,430				-				-				43,430
Total		$	43,430			$	-			$	6,833,511			$	6,876,941

							Unobservable Input as of March 31, 2016
Investment Type		Fair Value			Primary Valuation Technique		Input		Range
Senior Subordinated Notes		$	9,928,461		Recent Transaction		Purchase Price		$	1.9M - $3.1M
Total		$	9,928,461

							Unobservable Input as of December 31, 2015
Investment Type		Fair Value			Primary Valuation Technique		Input		Range
Senior Subordinated Notes		$	6,833,511		Recent Transaction		Purchase Price		$	1.9M - $2.4M
Total		$	6,833,511

		Senior Subordinated Notes
Beginning Balance, January 1, 2016		$	6,833,511
Purchases			3,069,360
Accretion/PIK			25,590
Ending Balance, March 31, 2016		$	9,928,461

		Senior Subordinated Notes
Beginning Balance, October 13, 2015		$	-
Purchases			6,824,051
Accretion/PIK			9,460
Ending Balance, December 31, 2015		$	6,833,511

		For the Three Months Ended March 31, 2016				For the Period October 13, 2015 (Commencement of Operations) Through December 31, 2015
Federal income taxes:
Current		$	35,851			$	-
Deferred			(63,067	)			-
State income taxes:
Current			4,180				-
Deferred			(7,233	)			-
Total		$	(30,269	)		$	0

Current:		For the Three Months Ended March 31, 2016				For the Period October 13, 2015 (Commencement of Operations) Through December 31, 2015
Federal (1)		$	35,851			$	-
State (2)			4,180				-
Total Current			40,031				-
Deferred:
Federal			(63,067	)			-
State			(7,233	)			-
Total Deferred			(70,300	)			-
Total Net Benefit		$	(30,269	)		$	0

		For the Three Months  Ended March 31, 2016				For the Period October 13, 2015 (Commencement of Operations) Through December 31, 2015
Deferred Tax Assets:
Accrued Professional Fees		$	52,892			$	56,410
Organizational Expenses			123,414				129,999
Debt Issuance Costs			11,968				-
Federal Net Operating Loss			-				15,603
State Net Operating Less			-				2,250
Total Deferred Tax Assets		$	188,274			$	204,262
Deferred Tax Liabilities:
Interest Income			-				1,071
Total Deferred Tax Liabilities			-				1,071
Valuation Allowance			(117,974	)			(203,191	)
Net Deferred Income Taxes		$	70,300			$	0

		For the Three Months Ended March 31, 2016				For the Period October 13, 2015 (Commencement of Operations) Through December 31, 2015
Computed "Expected" Tax Rate			34.00	%			34.00	%
State Income Taxes, Net of Federal Income Tax Benefit			(1.29	)%			-
Deferred Tax Asset Valuation Allowance Impact			(45.69	)%			(34.00	)%
Benefit of Lower Federal Tax Bracket			(6.41	)%			-
Effective Tax Rate			(19.39	)%			0.00	%

		For the Three Month Period Ended March 31, 2016 (Unaudited)
Total Return1			1.95	%
Per Share Amounts:
Net Asset Value, Beginning of Period		$	64.68
Net Increase/(Decrease) in Net Assets Resulting from Operations			1.86
Contributions from stockholder			30.95
Net Asset Value, End of Period		$	97.49
Net Assets, end of period		$	9,749,015
Average Net Assets		$	8,854,866
Ratios / Supplemental Data:
Ratio of net investment gain/(loss) to average net assets			2.11	%
Ratio of total expenses to average net assets before Investment Management Fee Waived			1.90	%
Ratio of total expenses to average net assets after Investment Management Fee Waived			1.67	%
Common Shares Outstanding, end of period			100,000
Portfolio Turnover Rate			0.00	%

ITEM 2.

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

Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Fund”) is a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).  The Fund is a wholly-owned subsidiary of Siguler Guff Small Business Credit Opportunities Fund, LP, a Delaware limited partnership (the “Partnership”).  The Partnership is the Fund’s sole direct shareholder and makes capital contributions to the Fund as needed for the Fund to make investments or pay its expenses, to the extent that the Partnership has available capital and in accordance with the Partnership’s governing documents.  The Fund’s investment objective is to achieve attractive risk-adjusted returns by generating current income from debt investments and capital appreciation from equity investments.

The Fund is a specialty finance investment company providing financing and advisory services to carefully selected companies in the lower middle market, which Siguler Guff Advisers (the “Investment Manager”) defines as privately-owned companies with between $2-15 million of earnings before income tax, depreciation and amortization (“EBITDA”), and between $10-100 million of revenue. The Fund’s investments generally take the form of mezzanine debt, “unitranche” loans with a first lien on the company’s assets, as well as second lien loans.  The Partnership generally seeks to purchase equity securities alongside the Fund’s investments into those same companies, generally with an aggregate cost of up to 20% of the value of the investment.  The Partnership also may extend mezzanine financing in forms other than subordinated loans, such as convertible loans and preferred stock. The Fund commenced investment operations on October 13, 2015, and its portfolio as of March 31, 2016 (excluding cash and cash equivalents) consisted of 4 investments comprising the commercial retail, healthcare services, manufacturing, and processed & packaged goods industries.

 

The Investment Manager will seek to increase the diversification of the Fund’s portfolio so as to make it possible (commencing with the fiscal year ending December 31, 2017) to meet the regulated investment company (“RIC”) diversification requirements under Section 851(b) of the Internal Revenue Code (the “Code”), although there is no assurance that the Fund will meet the RIC requirements at that time.  Until the Fund meets the requirements to qualify as a RIC, it will be taxed as an ordinary corporation on its taxable income for that year, regardless whether that income is distributed to the Partnership as the Fund’s sole direct shareholder, and all distributions out of earnings and profits will be taxable to investors as ordinary dividend income (i.e., the Fund will be subject to a double layer of tax).

CRITICAL ACCOUNTING POLICIES

The Investment Manager has identified the most critical accounting estimates upon which the financial statements depend and determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments. The two critical accounting policies relate to the valuation of investments and the recognition of income and expense.

Valuation of Portfolio Investments

The Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, fair valuation techniques are applied. These techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the Fund’s consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs used in the fair valuation of these assets and liabilities, are as follows:

●

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

●

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

●

Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the fair valuation technique and the risk inherent in the inputs to the model.

Under ASC 820, the Fund performs detailed valuations of its debt investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate. In certain instances, the Fund may use alternative methodologies, including recent purchase transactions, asset liquidation, expected recovery model or other alternative approaches to estimate the fair value.

 

Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.

Under the bond yield approach, the Fund uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Fund reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

Under the market approach, the Fund estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Fund derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Fund analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income or revenues. The Fund generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, the Fund generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

The fair value of the Fund’s portfolio investments at March 31, 2016 and December 31, 2015 was determined in good faith by the Fund’s Board of Directors. The Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Fund’s valuation policy and a consistently applied valuation process.

The following table summarizes the level of the Fund’s assets measured at fair value as of March 31, 2016 and December 31, 2015.

 

At March 31, 2016 and December 31, 2015, 100% of the Fund’s portfolio investments have been classified within Level 3.  Assumptions used by the Fund due to the lack of observable inputs may significantly impact fair value determinations and therefore the Fund’s results of operations.  The following table summarizes the significant unobservable inputs the Fund used to value investments categorized within Level 3.  The below table is not intended to be all-inclusive, but instead captures the significant unobservable inputs relevant to the determination of fair values:

Critical factors in determining the fair value of investments include payment history, collateral position, financial strength of borrower, financial performance relative to covenants, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan, as well as the general interest rate environment. The actual value realized from investments may differ from management’s estimates and such differences could be material.   In addition, such differences would impact the carrying value of investments presented in the financial statements, as well as, the Fund’s change in net assets resulting from operations.

Income and Expense

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected.  The Fund stops accruing interest on investments when it is determined that interest is no longer collectible.  Fees received upon closing a transaction generally are treated as a reduction in the cost basis of the investment.  Any resulting discount, or closing fee received, from recording the loan or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan using the effective-yield method.

The Fund has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions.  PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.  The Fund stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.

Expenses include investment management fees, legal fees, directors’ fees, audit and tax expenses, and other general and administrative expenses.  Expenses are recognized on an accrual basis.

Results of Operations – For the three months ended March 31, 2016

The Fund commenced operations on October 13, 2015, so the operating results are limited.  Total investment income for the three months ended March 31, 2016 was $304,139 which primarily consisted of interest and income on investments held during the period.  The average outstanding principal amount of loans made by the Fund (calculated on a monthly basis) during the three months ended March 31, 2016 was $9,308,459.

 

At March 31, 2016, all investments held by the Fund incorporated fixed interest rates.  The weighted average interest rate on outstanding loans was 12.05% for the three months ended March 31, 2016.  Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on factors including, but not limited to, pre-payments of outstanding loans, defaults or uncollectibility of payments, and changes in interest rates.

Total Fund expenses for the three months ended March 31, 2016 was $147,998.  This amount consisted of investment management fees of $23,348 (gross fees of $43,165 less waived fees of $19,817), professional fees of $81,913, directors’ fees of $41,250 and other expenses of $1,487.  There was an income tax benefit of $30,269 for the three months ended March 31, 2016.

The Fund’s investment management fee, amounting to $23,348 (gross fees of $43,165 less waived fees of $19,817) for the period ended March 31, 2016, was computed and paid quarterly in arrears in an amount equal to 1.75% per annum of the Fund’s Invested Capital, as measured as of the close of business on the last business day of each quarterly period, provided that, as reflected in the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 4, 2016, the Investment Manager has elected to voluntarily waive all fees greater than 1.25% per annum of the Fund’s Invested Capital received since the Fund’s inception, retroactively and going forward.  “Invested Capital” means the cost basis of the Fund’s portfolio investments (excluding cash and cash equivalents) that have not been written off or disposed of, including portfolio investments acquired with borrowed funds, and excluding any portfolio investments held indirectly through any wholly-owned subsidiary of the Fund (if one is formed) that has obtained a license as a Small Business Investment Company from the U.S. Small Business Administration.  The amount of fees waived for the period ended March 31, 2016, includes the investment management fees that were charged to the Fund for the period ended December 31, 2015 above 1.25% per annum of the Fund’s Invested Capital.

The Fund’s professional fees for the period ended March 31, 2016 were comprised of legal, audit, tax and other professional fees.  Other expenses included miscellaneous other expenses related to the operation of the Fund.

Net investment gain/(loss) for the periods ended March 31, 2016 was $186,410.  The Fund is continuing to make investments in income-producing assets and seeking additional capital commitments from investors in the Partnership; if the Fund is unsuccessful, its fixed expenses will continue to have a material adverse effect on its results of operations.

There was no realized/unrealized gain or loss from investments during the three months ended March 31, 2016. Net increase/(decrease) in net assets resulting from operations for the periods ended March 31, 2016 was $186,410.

Liquidity and Capital Resources - March 31, 2016 and December 31, 2015

During the periods ended March 31, 2016 and December 31, 2015, the Fund was wholly owned by the Partnership. The Partnership is expected, but not required, to make further contributions of capital to the Fund in an aggregate amount that will not exceed the Partnership’s limited partners’ capital commitments to the Partnership.  As of March 31, 2016, the Partnership had received subscriptions for capital in the amount of $16,710,000, of which $12,365,400 had been called and of which $10,087,794 was contributed to the Fund.  As of March 31, 2016, $4,344,600 of capital remained uncalled by the Partnership.  As of December 31, 2015 the Partnership had received subscriptions for capital in the amount of $16,710,000, of which $12,201,000 had been called and of which $6,993,091 was contributed to the Fund.  As of December 31, 2015, $4,509,000 of capital remained uncalled by the Partnership.

 

At March 31, 2016 and December 31, 2015, the Fund had adequate resources consisting of cash on hand and expected future capital contributions from the Partnership that could be used to fund future obligations.  The Fund, based upon the investments held at March 31, 2016 and December 31, 2015, expects to receive approximately $1,135,000 in scheduled interest payments over the next year.  These amounts are sufficient to meet the requirements of anticipated investments and operational expenses of the Fund over the next year.

As of March 31, 2016 and December 31, 2015, 1.6% of the Fund’s net assets consisted of cash and cash equivalents.  During the periods ended March 31, 2016 and December 31, 2015, the Fund invested its assets in senior subordinated notes. There were no distributions made by the Fund during the periods ended March 31, 2016 and December 31, 2015. The principal balance and fair value of loans in the Fund’s investment portfolio at March 31, 2016 and December 31, 2015 were $10,101,738 and $9,928,461 and $6,956,033 and $6,833,511, respectively.

The Fund’s consolidated financial statements include portfolio investments held at a fair value of $9,928,461 at March 31, 2016 and $6,833,511 at December 31, 2015. The portfolio investments represent 102% of net assets at March 31, 2016 and 106% of net assets at December 31, 2015 and their fair values have been determined in good faith by the Fund’s Board of Directors. Because of the inherent uncertainty of fair valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Because the Fund’s investments consist of privately negotiated transactions, investments in these assets are considered to be illiquid.

Contractual Obligations

The Fund has entered into certain contracts under which it has future commitments. Payments under the Investment Management Agreement, pursuant to which Siguler Guff Advisers has agreed to serve as the Fund’s investment adviser, are equal to a percentage of the net invested capital of the Fund, including assets acquired with borrowed funds, if any.  The Investment Management Agreement will continue in effect until June 8, 2017.  Thereafter, regardless of the dissolution of the Fund, the Investment Management Agreement shall continue automatically for successive periods of a year each June, if not terminated. Either party may terminate the Investment Management Agreement without penalty on least 60 days’ written notice to the other party.  The Fund has also entered into a Custodian Agreement, pursuant to which Citibank N.A. has agreed to serve as the Fund’s custodian. The Fund pays the custodian such fees as have been agreed between the Fund and the custodian, as described in the Custodian Agreement which the Fund has determined are commercially reasonable in its sole discretion.

 

During the period ended March 31, 2016, the Fund did not qualify to be treated as a regulated investment company, or RIC, for federal income tax purposes.  As such, the Fund will be treated as a corporation for U.S. federal income tax purposes.  It is anticipated that, commencing with the second full fiscal year of its investment operations, the Fund will seek to meet the requirements, including diversification, gross income, and distribution requirements, to qualify for the special pass-through status available to RICs under the Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes.  Unless and until the Fund meets these requirements, it will be taxed as an ordinary corporation on its taxable income for that year even if that income is distributed to the Partnership (its sole direct shareholder), and all distributions out of its earnings and profits will be taxable as dividends to the investors of the Partnership; thus, such income will be subject to two layers of tax (although corporate limited partners may be entitled to a dividends-received deduction).  There is no assurance that the Fund will meet the requirements to qualify as a RIC or be able to maintain such status.

If the Fund qualifies as a RIC and properly distributes to its shareholders each taxable year an amount equal to or exceeding the sum of (1) 90% of its “investment company taxable income” as that term is defined in the Code (which includes, among other things, dividends, taxable interest, and the excess of any net short-term capital gains over net long-term capital losses, as reduced by certain deductible expenses) without regard to the deduction for dividends paid and (2) 90% of the excess of its gross tax-exempt interest, if any, over certain disallowed deductions, the Fund generally will not be subject to U.S. federal income tax on any income of the fund, including “net capital gain” (the excess of net long-term capital gain over net short-term capital loss), distributed to the shareholders. However, if the Fund meets such distribution requirements and, thus, is eligible for pass-through status, but chooses to retain some portion of its investment company taxable income or net capital gain, it generally will be subject to U.S. federal income tax at regular corporate income tax rates on the amount retained. A distribution of warrants or equity investments to its shareholders will be treated as a sale by the Fund of such assets with the excess of the fair market value of those assets over their tax basis being the amount of the income or gain to the Fund arising from the distribution.

Tax Status. The Fund must meet a number of requirements, described above under the caption “Taxation” to qualify for the pass-through status as a RIC and, if qualified, to continue to so qualify. If the Fund experiences difficulty in meeting the diversification requirement for any fiscal quarter of its taxable year, it may accelerate capital calls or, if available, borrowings in order to increase the portion of the Fund’s total assets represented by cash, cash items and U.S. government securities as of the close of the following fiscal quarter and thus attempt to meet the diversification requirement. The Fund, however, would incur additional interest and other expenses in connection with any such accelerated borrowings, and increased investments by the Fund in cash, cash items and U.S. government securities (whether the funds to make such investments are derived from called equity capital or from accelerated borrowings) are likely to reduce the Fund’s return. Furthermore, there can be no assurance that the Fund would be able to meet the diversification requirements through such actions. Failure to qualify as a RIC would deny the Fund pass-through status and, in a year in which the Fund has taxable income, would have a significant adverse effect on the returns of the Fund.

 

When the Fund elects to convert its status from that of an ordinary, or C, corporation to that of a RIC, it must choose either to (i) pay tax whenever an asset is sold during the subsequent “conversion period” (generally, ten years) following the conversion on the amount of gain which would have been realized had the asset been sold on the conversion date, or (ii) treat the entire amount of “built-in gain” as income at the time of conversion.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.

The Fund’s business activities entail various elements of risk.  The Fund considers the principal types of market risk to be interest rate risk (including risks associated with changing interest rates), credit risk and valuation risk.

Changes in interest rates may affect the cost of funding, interest income earned, and the fair value of portfolio investments. The Investment Manager’s risk management processes and procedures for the Fund are designed to identify and analyze risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of administrative and information systems and other policies and programs. The Fund’s investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent its debt investments include floating interest rates. In addition, the Fund’s investments are carried at fair value as determined in good faith by the Fund’s Board of Directors. The Fund’s fair valuation methodology in part utilizes discount rates, and changes in those discount rates may have an impact on the fair valuation of Fund investments.

The Fund’s sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund uses various methods to assess interest rate risk in terms of the potential effect on interest income and fair valuation of Fund investments.  Assuming no changes in investment and capital structure, a hypothetical increase in discount rates of 100 basis points would decrease the Fund’s net assets resulting from operations by an estimated $377,000 as of March 31, 2016 and $268,512 as of December 31, 2015. The Fund had no outstanding borrowings as of March 31, 2016 and December 31, 2015. Should the Fund elect to use leverage, its sensitivity to changes in interest rates and other risks would be substantially greater.

 

The Fund also intends to manage its risk by maintaining a portfolio that is diverse by industry, size of investment, and borrowers.  The Fund continually monitors the financial condition of its borrowers and reports thereon to the Fund’s Board of Directors.  The Fund has limited exposure to public market price fluctuations as the Fund invests in the debt of private business enterprises.  The equity investment accompanying most debt investments (which, if it becomes publicly-traded, is subject to enhanced market risk) is generally made by the Partnership.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Fund carried out an evaluation under the supervision and with the participation of its President and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the President and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and in providing reasonable assurance that information required to be disclosed by the Fund in such reports was accumulated and communicated to the Fund’s management, including its President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

During the period covered by this report, there were no changes in the Fund’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Fund’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

The Fund is not currently a party to any legal proceedings.

ITEM 1A.

RISK FACTORS.

There have been no material changes from the risk factors discussed in Part I, Item 1A, “Risk Factors,” with respect to the Fund’s 2016 Annual Report on Form 10-K.  The risks described in the Annual Report on Form 10-K are not the only risks facing the Fund.  Additional risks and uncertainties not currently known to the Fund or the Investment Manager or that the Fund or the Investment Manager currently believe to be insignificant may materially affect the Fund’s business and financial condition in the future.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Prior to the Fund’s commencement of operations on October 13, 2015, the Fund sold 100,000 shares to the Fund’s sole shareholder, the Partnership, for $25,000 on September 19, 2014.  No other shares of the Funds have been sold; however, the Fund received paid in capital during the period from October 13, 2015, commencement of operations, through March 31, 2016, which is expected to be used for fund investments and operations.  The Fund may receive additional paid in capital from the Partnership in the future.

Purchases of Equity Securities

This table provides certain information with respect to purchases of securities registered under Section 12 of the Exchange Act made by the Fund or its affiliates during the first fiscal quarter of 2016:

There will be no dividend payments made until the final closing of the Fund.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

(a)	Material changes made to the Fund’s investment terms with respect to management fees, carried interest, and commitment periods were disclosed and reported in Form 8-K filed with the SEC on April 4, 2016, and documented in the Fund’s Amended and Restated Limited Partnership Agreement (“LPA”).

(b)	No material changes have been made to the procedures with respect to the recommendation and nomination of members to the Fund’s Board of Directors.

ITEM 6.

EXHIBITS.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.

 

 

 

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