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TCW Direct Lending Strategic Ventures LLC

Consolidated Financial Statements

December 31, 2016


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

CONTENTS

 

     Page(s)  

Consolidated Financial Statements

  

Consolidated Schedule of Investments

     2-3  

Consolidated Statement of Assets and Liabilities

     4  

Consolidated Statement of Operations

     5  

Consolidated Statement of Changes in Members’ Capital

     6  

Consolidated Statement of Cash Flows

     7  

Notes to Consolidated Financial Statements

     8-16  

Independent Auditors’ Report

     17  

Administration

     18  

 

1


CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2016

 

Industry

 

Issuer

  Acquisition
Date
 

Investment

  % of Members’
Capital
  Par
Amount
    Maturity
Date
  Amortized
Cost
    Fair Value  

DEBT

             

Beverages

             
  Sunny Delight Beverage Company (1)   02/02/16   First Lien Term Loan   22.2%   $     69,502,785     02/02/21     $ 68,179,208       $ 69,502,785    
       

 

     

 

 

 
      7.50% (LIBOR + 6.50%, 1.00% Floor)          

Building Products

             
  Senco Brands, Inc.   08/30/16   Senior Term Loan   5.9%     18,448,077     12/26/18     18,290,572       18,466,525    
       

 

     

 

 

 
      8.50% (LIBOR + 7.50%, 1.00% Floor)          

Distributors

             
  ASC Acquisition Holdings, LLC (2)   12/16/16   First Lien Term Loan   9.5%     29,826,563     12/15/21     29,235,258       29,766,909    
       

 

     

 

 

 
      8.50% (LIBOR + 7.50%, 1.00% Floor)          

Educational Services

             
  Penn Foster Education Group, Inc. (3)   08/31/16   First Lien Term Loan   13.4%     42,104,423     08/31/21     41,253,611       41,893,901    
       

 

     

 

 

 
      8.00% (LIBOR + 7.00%, 1.00% Floor)          

Hotels, Restaurants and Leisure

             
  Controladora Dolphin Discovery, S.A. De C.V. (Mexico)   10/09/15   Senior Secured Notes   4.4%     13,966,780     10/09/20     13,756,663       13,910,913    
       

 

     

 

 

 
      11.00% (LIBOR + 10.00%, 1.00% Floor)          
  OTG Management, LLC (4)   06/30/16   First Lien Term Loan   13.7%     42,729,641     08/26/21     41,934,954       42,986,019    
       

 

     

 

 

 
      9.50% (LIBOR + 8.50%, 1.00% Floor)          
       

 

     

 

 

 
        18.1%         55,691,617       56,896,932    
       

 

     

 

 

 

Household Products

             
  Nice-Pak Products, Inc.   06/12/15   Senior Secured Term Loan   31.8%     98,888,889     06/12/20     97,867,524       99,383,333    
       

 

     

 

 

 
      7.26% (LIBOR + 6.00%, 1.00% Floor)          

Information Technology

             
  ENA Holding Corporation (5)   05/06/16   First Lien Term Loan   5.1%     16,000,391     05/06/21     15,760,681       16,016,391    
       

 

     

 

 

 
      8.00% (LIBOR + 7.00%, 1.00% Floor)          

Internet Software and Services

             
  Angie’s List, Inc. (6)   06/05/15   Term Loan   14.4%     45,000,000     09/26/19     45,000,000       44,910,000    
       

 

     

 

 

 
      7.74% (LIBOR + 6.50%, 0.50% Floor)          

Machinery

             
  Truck Bodies and Equipment International (7)   10/06/15   First Lien Term Loan   7.0%     21,815,988     03/31/21     21,436,142       21,925,068    
       

 

     

 

 

 
      8.50% (LIBOR + 7.50%, 1.00% Floor)          

Pharmaceuticals

             
  Noramco, Inc. (8)   07/01/16   Senior Term Loan   11.3%     34,887,737     07/01/21     34,644,915       35,341,278    
       

 

     

 

 

 
      9.00% (LIBOR + 8.00%, 1.00% Floor)          

Software

             
  Sierra Private Holdings II Ltd (UK) (9)   08/19/16   First Lien Term Loan   6.1%     19,000,011     08/19/22     18,521,695       19,057,011    
       

 

     

 

 

 
  (an Xura, Inc affiliate)     9.50% (LIBOR + 8.50%, 1.00% Floor)          
  Xura, Inc. (10)   08/19/16   First Lien Term Loan   7.5%     23,257,351     08/19/22     22,671,859       23,327,123    
       

 

     

 

 

 
      9.50% (LIBOR + 8.50%, 1.00% Floor)          
       

 

     

 

 

 
        13.6%         41,193,554       42,384,134    
       

 

     

 

 

 

Textiles, Apparel & Luxury Goods

             
  Differential Brands Group, Inc.   01/28/16   Term Loan   5.6%     17,820,000     01/28/21     17,566,014       17,374,500    
       

 

     

 

 

 
      9.68% (LIBOR + 9.00%, 0.50% Floor)          
       

 

     

 

 

 

TOTAL DEBT

      157.9%         486,119,096       493,861,756    
       

 

     

 

 

 
PREFERRED SECURITIES               Shares                  

Machinery

             
  Truck Bodies and Equipment International   10/06/15   Preferred Stock Series A   0.2%     555         538,260       557,682    
       

 

     

 

 

 
  Total Portfolio Investments (158.1%)         486,657,356       494,419,438    
             

 

 

   
  Cash and Cash Equivalents (28.9%)        
  Blackrock Liquidity Funds Fed Fund - Institutional Shares, Yield 0.01%   24.8%     77,554,601         77,554,601       77,554,601    
       

 

     

 

 

 
          $     564,211,957       571,974,039    
             

 

 

   

 

 

 
  Cash                 12,871,995    
               

 

 

 
  Net unrealized depreciation on unfunded commitments (0.0%)           (8,237)   
               

 

 

 
  Other Liabilities in Excess of Other Assets (-87.0%)           (272,186,440)  
               

 

 

 
  Members’ Capital (100.0%)           $     312,651,357    
               

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

(Dollar amounts in thousands)

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2016

 

(1)  Excluded from the investment total above is an unfunded revolving credit facility commitment in an amount not to exceed $8,181,611, and an interest rate of LIBOR plus 6.50%, a LIBOR Floor of 1.00%, and a maturity of February 02, 2021. This investment is accruing an unused commitment fee of 0.38% per annum. The unrealized appreciation (depreciation) on this commitment is $ 0 as of December 31, 2016.

 

(2)  Excluded from the investment above is a delayed draw term loan commitment in an amount not to exceed $9,942,188, with an interest rate of LIBOR plus 7.50%, a LIBOR Floor of 1.00%, and a maturity of December 15, 2021. The commitment to fund the delayed draw expires December 2018. This investment is accruing an unused commitment fee of 0.38% per annum. The unrealized appreciation (depreciation) on this commitment is ($19,884) as of December 31, 2016.

 

(3)  Excluded from the investment above is an unfunded revolving credit facility commitment in an amount not to exceed $3,530,769, with an interest rate of LIBOR plus 7.00%, a LIBOR Floor of 1.00%, and a maturity of August 31, 2021. This investment is accruing an unused commitment fee of 0.50% per annum. The unrealized appreciation (depreciation) on this commitment is ($17,654) as of December 31, 2016.

 

(4)  Excluded from the investment above is a delayed draw term loan commitment in an amount not to exceed $5,862,394, with an interest rate of LIBOR plus 8.50%, a LIBOR Floor of 1.00%, and a maturity of August 26, 2021. The commitment to fund the delayed draw expires December 2017. This investment is accruing an unused commitment fee of 0.50% per annum. The unrealized appreciation (depreciation) on this commitment is $35,174 as of December 31, 2016.

 

(5)  Excluded from the investment above is an unfunded revolving credit facility commitment in an amount not to exceed $2,430,406, with an interest rate of LIBOR plus 7.00%, a LIBOR Floor of 1.00%, and a maturity of May 06, 2021. This investment is accruing an unused commitment fee of 0.50% per annum. The unrealized appreciation (depreciation) on this commitment is $2,430 as of December 31, 2016.

 

(6)  Excluded from the investment above is a delayed draw term loan commitment in an amount not to exceed $18,750,000, with an interest rate of LIBOR plus 6.50%, a LIBOR Floor of 0.50%, and a maturity of September 26, 2019. The commitment to fund the delayed draw expires September 2017. This investment is accruing an unused commitment fee of 0.75% per annum. The unrealized appreciation (depreciation) on this commitment is ($37,500) as of December 31, 2016.

 

(7)  Excluded from the investment above is a delayed draw term loan commitment in an amount not to exceed $3,981,345, with an interest rate of LIBOR plus 7.50%, a LIBOR Floor of 1.00%, and a maturity of March 31, 2021. The commitment to fund the delayed draw expires March 2017. This investment is accruing an unused commitment fee of 0.38% per annum. The unrealized appreciation (depreciation) on this commitment is $19,907 as of December 31, 2016.

 

(8)  In addition to interest earned based on the stated interest rate of this loan, the Company is entitled to receive an additional interest amount on the “first out” tranche of the portfolio company’s first lien senior secured loans.

 

(9)  Sierra Private Holdings II Ltd (UK) Term Loans is held through TCW Direct Lending Strategic Luxembourg VI S.à.r.l., a special purpose vehicle. Excluded from the investment above is an unfunded revolving credit facility commitment in an amount not to exceed $1,392,371 with an interest rate of LIBOR plus 8.50%, a LIBOR Floor of 1.00%, and a maturity of August 19, 2022. This investment is accruing an unused commitment fee of 0.50% per annum. The unrealized appreciation (depreciation) on this commitment is $4,177 as of December 31, 2016.

 

(10)  Excluded from the investment above is an unfunded revolving credit facility commitment in an amount not to exceed $1,704,360, with an interest rate of LIBOR plus 8.50%, a LIBOR Floor of 1.00%, and a maturity of August 19, 2022. This investment is accruing an unused commitment fee of 0.50% per annum. The unrealized appreciation (depreciation) on this commitment is $5,113 as of December 31, 2016.

LIBOR - London Interbank Offered Rate, generally 1-Month or 3-Month

 

                 

Geographic Breakdown of Portfolio

             

 

United States

    

 

 

 

93% 

 

 

  

Mexico

       3%      

United Kingdom

       4%      
    

 

 

    

Total

               100%      
    

 

 

    

The accompanying notes are an integral part of these consolidated financial statements.

 

3


CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

 

     December 31, 2016  

Assets

  

Portfolio of Investments, at fair value (amortized cost of $486,657)

     $ 494,419   

Cash and cash equivalents

     90,427   

Interest receivable

     3,231   

Other assets

     61   
  

 

 

 

Total Assets

     $ 588,138   
  

 

 

 

Liabilities

  

Credit facility payable

     $ 272,750   

Interest and credit facility expenses payable

     2,539   

Sub-administrator and custody fees payable

     139   

Valuation fees payable

     37   

Net unrealized depreciation on unfunded commitments

      

Professional fees payable

      

Other fees payable

      
  

 

 

 

Total Liabilities

     $ 275,487   
  

 

 

 
  
  

 

 

 

Members’ Capital

     $ 312,651   
  

 

 

 

Commitments and Contingencies (Note 8)

  

Members’ Capital

  

Preferred members

     $ 308,955   

Common members

      

Noncontrolling interest in consolidated subsidiary fund

     3,696   
  

 

 

 

Members’ Capital

     $ 312,651   
  

 

 

 

 

Members Capital attributable to Preferred and Common
Members:
  Preferred
Members
    Common
Members
    Noncontrolling
interest in
consolidated
subsidiary fund
    Members’
Capital
 

Net contributed capital

    $ 412,706         $     1,000         $     3,507         $     417,213    

Net distributed capital

    (147,450)        (1,000)        -         (148,450)   

Cumulative net income, before organization costs

    43,699         704         189         44,592    

Organization costs

 

   

 

-  

 

 

 

   

 

(704) 

 

 

 

   

 

-  

 

 

 

   

 

(704) 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Total Members’ Capital attributable to Preferred and Common Members

    $     308,955         $ -         $     3,696         $ 312,651    
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

(Dollar amounts in thousands)

CONSOLIDATED STATEMENT OF OPERATIONS

 

     Year Ended
December 31, 2016
 

Investment Income:

  

Interest income

     $ 43,049   

Fee income

     330   
  

 

 

 

Total Investment Income

     43,379   
  

 

 

 

Expenses:

  

Interest and credit facility expenses

     14,983   

Sub-administrator and custody fees

     353   

Formation costs

     187   

Valuation fees

     157   

Audit fees

     102   

Insurance fees

     60   

Legal fees

     11   

Professional fees

      

Other

     42   
  

 

 

 

Total expense

     15,902   
  

 

 

 
  
  

 

 

 

Net investment income

     27,477   
  

 

 

 

Net realized and unrealized gain on investments

  

Net realized gain on investments

     3,357   

Net change in unrealized appreciation/(depreciation) on investments

     4,343   
  

 

 

 

Net realized and unrealized gain on investments

     7,700   
  

 

 

 

Net increase in Members’ Capital from operations

     $ 35,177   
  

 

 

 

Less: Net Increase in Members’ Capital Atributable to noncontrolling interest in consolidated subsidiary fund

     189   
  

 

 

 

Net increase in Members’ Capital from operations attributable to the Preferred and Common Members from operations

     $ 34,988   
  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ CAPITAL

 

                Year Ended
December 31, 2016

 

 
                Noncontrolling        
                interest in        
    Preferred     Common     consolidated        
    Members     Members     subsidiary fund     Total  

Net increase in Members’ Capital resulting from operations

       

Net investment income

    $ 26,437        $ 950        $ 90        $ 27,477   

Net realized gain on investments

    3,357                    3,357   

Net change in unrealized appreciation/(depreciation) on investments

    4,244              99        4,343   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in Members’ Capital resulting from operations

    34,038        950        189        35,177   

Increase (decrease) in Members’ Capital resulting from capital activity

       

Contributions from Members

    163,006              3,507        166,513   

Distributions to Members

    (146,333)        (1,000)              (147,333)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in Members’ Capital resulting from capital activity

    16,673        (1,000)        3,507        19,180   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in Members’ Capital

    50,711        (50)        3,696        54,357   
 

 

 

   

 

 

   

 

 

   

 

 

 

Members’ Capital, beginning of year

    258,244        50              258,294   
 

 

 

   

 

 

   

 

 

   

 

 

 

Members’ Capital, end of year

    $ 308,955        $       $ 3,696        $ 312,651   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

(Dollar amounts in thousands)

CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Year Ended
December 31, 2016

 

 

Cash Flows from Operating Activities

  

Net increase (decrease) in members’ capital resulting from operations

     $ 35,177   
Adjustments to reconcile the net increase (decrease) in members’ capital resulting from operations to net cash used in operating activities:   

Purchases of investments

     (411,553)   

Proceeds from sales and paydowns of investments

     269,762   

Net realized (gain) on investments

     (3,357)   

Net change in unrealized (appreciation)/depreciation on investments

     (4,343)   

Accretion of discount

     (1,423)   

Increase (decrease) in operating assets and liabilities:

  

(Increase) decrease in interest receivable

     (1,901)   

(Increase) decrease in other assets

     (61)   

(Increase) decrease in receivable for principal due

     260   

Increase (decrease) in interest and credit facility expenses payable

     535   

Increase (decrease) in sub-administrator and custody fees payable

     113   

Increase (decrease) in valuation fees payable

     23   

Increase (decrease) in professional fees payable

      

Increase (decrease) in other fees payable

      

Increase (decrease) in audit fees payable

     (30)   
  

 

 

 

Net cash used in operating activities

     (116,784)   
  

 

 

 

Cash Flows from Financing Activities

  

Contributions from Members

     131,874   

Distributions to Members

     (112,694)   

Proceeds from credit facility

     125,976   

Repayments of credit facility

     (103,144)   
  

 

 

 

Net cash provided by financing activities

     42,012   
  

 

 

 

Net decrease in cash and cash equivalents

     (74,772)   
  

 

 

 

Cash and cash equivalents, beginning of year

     165,199   
  

 

 

 

Cash and cash equivalents, end of year

     $ 90,427   
  

 

 

 

Supplemental disclosure of cash flow information and non-cash financing activities

  

Credit facility - origination expense paid

     $ 1,214   

Credit facility - administrative fee paid

     $ 45   

Credit facility - interest and unused fee paid

     $ 13,139   

Credit facility - miscellaneous

     $ 50   

Deemed contributions and distributions to Members not included above

     $ 34,639   

Deemed proceeds and repayments to lenders not included above

     $ 60,188   

The accompanying notes are an integral part of these consolidated financial statements.

 

7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    

 

1. ORGANIZATION

Investment Objective: TCW Direct Lending Strategic Ventures LLC (the “Fund”), is a closed-end investment company formed as a Delaware limited liability company for the purpose of investing in corporate senior secured middle-market floating rate loans. Investments may include other loans and securities received as a result of the restructuring, workout or bankruptcy of an existing loan.

Consolidated Subsidiary Fund: On September 19, 2016, the Fund formed TCW Direct Lending Strategic Luxembourg VI S.à.r.l., (the “Luxembourg Company”) a private limited liability company under the laws of Luxembourg, of which the Fund owns 81.6% of the membership interests. The Luxembourg Company was formed to invest in Luxembourg or abroad.

Limited Liability Company Agreement: The Amended and Restated Limited Liability Company agreement (the “Agreement”), dated June 5, 2015, was entered into by and among TCW Direct Lending LLC, an affiliated fund (also known as the “BDC”) and two third-party members (the “Third-Party Members”). The BDC and each Third-Party Member own a Preferred Membership Interest (collectively the “Preferred Members”) and a Common Membership Interest (collectively the “Common Members”) (together, the “Members”). The BDC owns 80% of the Preferred and Common Membership Interests and the Third-Party Members own the remaining 20% of Preferred and Common Membership Interests. The initial closing date of the Fund was June 5, 2015 (“Initial Closing Date”).

The Agreement amends and restates the original agreement, dated May 26, 2015 that the BDC entered into as the sole member of the Fund.

Term: The Fund will continue until the sixth anniversary of the Initial Closing Date unless dissolved earlier or extended for two additional one-year periods by the BDC, in its sole discretion upon notice to the Management Committee. Thereafter, the term of the Fund may be extended by the BDC for additional one-year periods, in each case with the prior consent of the Management Committee.

Commitment Period: The Commitment Period commenced on June 5, 2015, the Initial Closing Date and will end on the third anniversary of the Initial Closing Date subject to termination or extension by the Management Committee as provided in the Agreement.

Management Committee: Pursuant to the Agreement, the management committee of the Fund has exclusive responsibility for the management, policies and control of the Fund. The BDC and one of the two Third-Party Members, collectively, each appointed one voting member of the Management Committee. The Management Committee can act on behalf and in the name of the Fund to implement the objectives of the Fund and exercise any rights and powers the Fund may possess. The Management Committee will authorize portfolio investment activity, transactions between the Fund and the BDC, and other Members and borrowings of the Fund.

Administration Agreement: The Fund entered into an Administration Agreement with TCW Asset Management Company LLC (“TAMCO”), dated June 5, 2015 to furnish, or arrange for others to furnish, administrative services necessary for the operation of the Fund. In connection therein, TAMCO, as Administrator retained the services of State Street Bank and Trust Company to assist in providing certain administrative, accounting, operational, investor and financial reporting services for the Fund.

Custody Services Agreement: The Fund entered into a Custody Services Agreement dated June 3, 2015 with State Street Bank and Trust Company to provide custodian services for the Fund.

Capital Commitments: Commitments from the Preferred Members and Preferred Members as Common Members are as follows. The commitment amount funded does not include amounts contributed in anticipation of a potential investment that the Fund did not consummate and therefore returned to the Members’ as unused capital.

 

8


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

December 31, 2016

 

     Committed
Capital
     Commitments
Funded
         Percentage    
Funded
 

Preferred Membership Interests

               $ 600,000,000                $ 412,706,463        69.0%  

Common Membership Interests

     2,000,000        1,000,000        50.0%  
  

 

 

    

 

 

    

Total

               $ 602,000,000                $ 413,706,463     
  

 

 

    

 

 

    

Recallable Amounts: Each Preferred Member may be required to re-contribute amounts previously distributed equal to 100% of distributions of proceeds during the Commitment Period representing a return of capital contributions made in respect of the Preferred Membership Interest.

 

     Recallable
Amounts
     Recallable
  Amounts Funded  
         Percentage    
Funded
 

Preferred Membership Interests

   $               127,837,000        none        n/a  
  

 

 

       

 

2. SIGNIFICANT ACCOUNTING POLICIES

The Fund is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 946 Financial Services – Investment Companies.

Basis of Presentation: The Fund’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for investment companies.

These consolidated financial statements include the accounts of the Fund and the Luxembourg Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Noncontrolling interest in consolidated subsidiary fund: As the Luxembourg Company is consolidated, but not 100% owned, a portion of the income or loss and corresponding members’ capital is allocated to owners other than the Fund in proportion to their relative ownership interest. The aggregate of the income or loss and corresponding members’ capital that is not owned by the Fund is included in noncontrolling interest in consolidated subsidiary fund in the consolidated financial statements. The primary components of noncontrolling interest in the consolidated subsidiary fund are separately presented in the Fund’s consolidated statement of changes in members’ capital. The net increase in members’ capital from operations includes the net increase attributable to the noncontrolling interest in consolidated subsidiary fund on the Fund’s consolidated statement of operations.

Use of Estimates: The preparation of the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting year. Actual results could differ from those estimates.

Investments: The Fund records investment transactions on the trade date. The Fund considers trade date for investments not traded on a recognizable exchange, or traded in the over-the-counter markets, to be the date on which the Fund receives legal or contractual title to the asset and bears the risk of loss.

Income Recognition: Interest income is recorded on an accrual basis unless doubtful of collection or the related investment is in default. Realized Gains and losses on investments are recorded on a specific identification basis. The Fund typically receives a fee in the form of a discount to the purchase price at the time it funds an investment in a loan. The discount is accreted to interest income over the life of the respective loan, as reported in the Statement of Operations, and reflected in the amortized cost basis of the investment. Discounts associated with a revolver are treated as a discount to the issuers’ term loan. In the

 

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

event there is a fee associated with a delayed draw that remains unfunded, the Fund will recognize the fee as fee income immediately. Ongoing facility, commitment or other additional fees including prepayment fees, consent fees and forbearance fees are recognized immediately when earned as income.

Cash and Cash Equivalents: The Fund considers cash equivalents to be liquid investments, including money market funds or individual securities purchased with an original maturity of three months or less. Fund cash and cash equivalents are generally comprised of money market funds and demand deposits, valued at cost, which approximates fair value.

Income Taxes: The Fund is exempt from federal and state income taxes and, consequently, no income tax provision has been made in the accompanying financial statements.

The Fund has invested in numerous jurisdictions and is therefore subject to varying policies and statutory time limitations with respect to examination of tax positions. The Fund reviews and evaluates tax positions in its major jurisdictions and determines whether or not there are uncertain tax positions that require financial statement recognition.

The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as an income tax expense in the Statement of Operations. As of and during the year ended December 31, 2016, the Fund did not have a liability for any unrecognized tax benefits nor did it recognize any interest and penalties related to unrecognized tax benefits.

The Fund is subject to examination by U.S. federal tax authorities for returns filed for the prior three years and by state tax authorities for returns filed for the prior four years.

Subsequent Events: The Management Committee evaluated the activity of the Fund through March 28, 2017, the date that the financial statements are available to be issued, and concluded that no subsequent events have occurred that would require recognition or disclosure.

 

3. INVESTMENT VALUATIONS AND FAIR VALUE MEASUREMENTS

Investments at Fair Value: Investments held by the Fund for which market quotes are readily available are valued at fair value. Fair value is generally determined on the basis of last reported sales price or official closing price on the primary exchange in which each security trades, or if no sales are reported, based on the midpoint of the valuation range obtained for debt investments from a quotation reporting system, established market makers or pricing service.

Investments held by the Fund for which market quotes are not readily available or market quotations are not considered reliable are valued at fair value by the Management Committee based on similar instruments, internal assumptions and the weighting of the best available pricing inputs.

Fair Value Hierarchy: Assets and liabilities are classified by the Fund based on valuation inputs used to determine fair value into three levels.

Level 1 values are based on unadjusted quoted market prices in active markets for identical assets.

Level 2 values are based on significant observable market inputs, such as quoted prices for similar assets and quoted prices in inactive markets or other market observable inputs.

Level 3 values are based on significant unobservable inputs that reflect the Fund’s determination of assumptions that market participants might reasonably use in valuing the assets.

 

10


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

December 31, 2016

Categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation levels are not necessarily an indication of the risk associated with investing in these securities.

The following is a summary by major security type of the fair valuations according to inputs used in valuing investments listed in the Schedule of Investments.

 

                                                                                       
Investments    Level 1        Level 2        Level 3      Total  

Debt

     $ -           $                 -          $ 493,861,756          $ 493,861,756   
  

 

 

    

 

 

    

 

 

    

 

 

 

Preferred Securities

     $ -           $ -          $ 557,682          $ 557,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents

     $ 77,554,601          $ -          $ -           $ 77,554,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $         77,554,601          $ -          $   494,419,438          $   571,974,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 Roll Forward: The following is a reconciliation of Level 3 investments:

 

     Debt      Preferred
Securities
 

Balance at December 31, 2015

   $         341,877,225        $         1,619,767   

Accreted discounts

     1,422,645          —   

Purchases

     411,552,046          —   

Sales and paydowns

     (268,602,487)         (1,158,774)  

Realized gain

     3,239,495          117,964   

Change in unrealized appreciation (depreciation)

     4,372,832          (21,275)  
  

 

 

    

 

 

 

Balance at December 31, 2016

   $ 493,861,756        $ 557,682   
  

 

 

    

 

 

 
Change in unrealized appreciation (depreciation) in investments still held as of December 31, 2016    $ 7,248,533        $ (21,275)  
  

 

 

    

 

 

 

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the year ended December 31, 2016 the Fund did not have any transfers between levels.

Level 1 Assets (Investments): The valuation techniques and significant inputs used to determine fair value are as follows:

Registered Investment Companies, (Level 1), include registered open-end investment companies that are valued based upon the reported net asset value of such investment.

Level 3 Assets (Investments): The following valuation techniques and significant inputs are used to determine fair value of investments in private debt for which reliable market quotations are not available. Some of the inputs are independently observable however, a significant portion of the inputs and the internal assumptions applied are unobservable.

Debt, (Level 3), includes investments in privately originated senior secured debt. Such investments are valued based on specific pricing models, internal assumptions and the weighting of the best available pricing inputs. A discounted cash flow approach incorporating a weighted average cost of capital approach and shadow rating method are generally used to determine fair value. Standard pricing inputs include, but are

 

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

not limited to, the financial health of the issuer: place in the capital structure; value of other issuer debt; credit, industry, and market risk and events.

Preferred Equity (Level 3), includes investments in preferred equity issued under the same market conditions as the privately originated senior secured debt. Such investments are valued based on specific pricing models, internal assumptions and the weighting of the best available pricing inputs. The relative value approach is used. Relative value takes into account the implied yield of the senior secured debt measured in terms of risk, liquidity and return relative to the debt. Pricing inputs include, but not limited to, financial health, and relevant business developments of the issuer; EBITDA, market multiples of comparable companies, comparable market transactions and recent trades or transactions; issuer, industry and market expectations, risks and events.

Pricing inputs and weightings applied to determine value require subjective determination. Accordingly, valuations do not necessarily represent the amounts that may eventually be realized from sales or other dispositions of investments.

The following table summarizes by major security type the valuation techniques and quantitative information utilized in determining the fair value of the Level 3 investments.

 

    Investment

    Type

  

Fair Value at

December 31,
2016

   Valuation
Technique
   Unobservable Input    Range   

Weighted

Average

 

         Debt

   $493,861,756    Income method    Weighted average cost of capital Shadow credit rating method   

7.7% to 13.4%

CCC+ to BB-

    

9.4

NA


 

         Preferred

         Securities

   $557,682    Relative Value    Implied yield    16.8% to 17.5%      17.2

Valuation Process: Oversight for determining fair value is the responsibility of the Management Committee (with input from an independent valuation firm retained by the Fund). The Fund and Management Committee values the investments at fair value on a quarterly basis and whenever required. The Fund engaged an external, independent valuation firm to assist the Management Committee in determining the fair market value of the Fund’s investments for which market quotations are not readily available.

The Fund and its Management Committee undertakes a multi-step valuation process for investments whose market prices are not otherwise readily available. Unless noted, the Fund is utilizing the midpoint of a valuation range provided by an external, independent valuation firm. The Management Committee may approve a value other than the midpoint if it believes that is the fair value. Based on its review of the external, independent valuation firm’s range and related documentation, valuation of the Fund’s investments are determined by the Management Committee.

The Fund uses all relevant factors in determining fair value including, without limitation, any of the following factors as may be deemed relevant by the Committee: current financial position and current and historical operating results of the issuer; sales prices of recent public or private transactions in the same or similar securities, including transactions on any securities exchange on which such securities are listed or in the over-the-counter market; general level of interest rates; recent trading volume of the security; restrictions on transfer including the Fund’s right, if any, to require registration of its securities by the issuer under the securities laws; any liquidation preference or other special feature or term of the security; significant recent events affecting the Portfolio Investment, including any pending private placement, public offering, merger, or acquisition; the price paid by the Fund to acquire the asset; the percentage of the issuer’s outstanding securities that is owned by the Fund and all other factors affecting value.

 

12


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

December 31, 2016

 

4. ALLOCATIONS AND DISTRIBUTIONS

Allocation of profit and loss: Income, expenses, gains and losses of the Fund are allocated among the Members in such a manner that, at the end of each period, each Member’s capital account is equal to the respective net amount, positive or negative, which would be distributed to such Member if the Fund were to liquidate the assets of the Fund for an amount equal to book value and distribute the proceeds in a manner consistent with the distribution priorities described in the Agreement.

Distribution: Interest, dividends, other cash flow received by the Fund in respect of Portfolio Investments (“Interest Amounts”) and proceeds attributable to the repayment or disposition of Portfolio Investments (“Proceeds”) received by the Fund are distributed by the Fund to the Members to the extent that such Interest Amounts and Proceeds are available to the Fund after the application of the priority of payments stipulated in the Credit Agreement and after taking into account reserves and working capital needs.

Interest Amounts available to the Fund for distribution to the Members will be distributed in the following order and priorities:

First, one-hundred percent (100%) to the Preferred Members in an amount equal to any declared and unpaid dividends on Preferred Membership Interests, which amounts shall be distributed pro rata among the Preferred Members in accordance with their respective entitlements to such dividends.

Second, one-hundred percent (100%) to the payment of Fund expenses; and

Thereafter, one-hundred percent (100%) to the Common Members, which amounts shall be distributed among the Common Members pro rata based on their respective Unreturned Contributions or, if the Unreturned Contributions of the Common Members equal zero, pro rata based on the respective Commitments of such Common Members in their capacities as Preferred Members with respect to Preferred Membership Interest.

Proceeds available to the Fund for distribution to the Members will be distributed in the following order and priorities:

First one-hundred percent (100%) to the Preferred Members in an amount equal to any declared and unpaid dividends on Preferred Membership Interests, which amounts shall be distributed pro rata among the Preferred Members in accordance with their respective entitlements to such dividends,

Second, one-hundred percent (100%) to the Preferred Members pro rata based on, and up to the amount of, their respective Unreturned Contributions; and

Thereafter, one-hundred percent (100%) to the Common Members, which amounts shall be distributed among the Common Members pro rata based on their respective Unreturned Contributions or, if the Unreturned Contributions of the Common Members equal zero, pro rata based on the respective Commitments of such Common Members in their capacities as Preferred Members with respect to Preferred Membership Interests.

Preferred Member Dividends: Each Preferred Membership Interest is entitled to quarterly dividends at a rate equal to LIBOR plus 6.50% per annum (subject to a LIBOR floor of 1.5% per annum) of the Unreturned Contributions associated with their Preferred Membership Interest. Dividends are cumulative and paid when declared by the Management Committee.

Unreturned Contributions: With respect to any Member in respect of each class such Member holds, an amount equal to the excess, if any, of (a) the aggregate contributions of such Member over (b) the aggregate amount distributed to such Member from Proceeds (other than amounts paid in respect of dividends to such Member).

 

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. FUND EXPENSES

The Fund is responsible for all costs and expenses which include organizational expenses, operating expenses; investigative, travel, legal and other transactional expenses incurred with respect to the acquisition, formation, holding and disposition of the Fund’s Portfolio Investments or incurred in connection with Portfolio Investments or transactions not consummated; costs and expenses relating to the liquidation of the Fund; taxes, or extraordinary expenses (such as litigation expenses and indemnification payments to either the Management Committee or the Administrative Agent); valuation-related costs and expenses; and all other costs and expenses of the Fund’s operations, administration and transactions.

Organizational Expenses: Organization expenses will be paid from capital contributions called from the holders of Common Membership Interests. As of December 31, 2016, organization expenses paid inception-to-date total $704,290.

Portfolio Investment Expenses: Expenses related to Portfolio Investments will be paid from capital contributions called from Preferred Membership Interests.

Fund Expenses: Other Fund expenses including those related to unconsummated investments will be paid first from Interest Amounts as provided for in the above Distribution footnote. To the extent that such Interest Amounts are insufficient or unavailable to pay expenses when due, such expenses will be paid from capital contributions called from the holders of Common Membership Interests provided that the aggregate amount called for Fund expenses (including organizational expenses) does not exceed $2 million. To the extent that the foregoing sources of payment are insufficient or unavailable to pay when due, such expenses will be paid from capital contributions called from the Preferred Members.

 

6.

ADVISOR FEE INCOME

Any (i) transaction, advisory, consulting, management, monitoring, directors’ or similar fees, (ii) closing, investment banking, finders’, transaction or similar fees, (iii) commitment, breakup or topping fees or litigation proceeds and (iv) other fee or payment of services performed or to be performed with respect to an investment or proposed investment received from or with respect to Portfolio Companies or prospective Portfolio Companies in connection with the Fund’s activities will be allocated pro rata among the Fund and any other funds or accounts advised by the Adviser participating in such investment and the Fund’s share will be the property of the Fund. Notwithstanding the foregoing, for administrative or other reasons, certain fees described in clauses (i) through (iv) above (including any fees for administrative agent services provided by the Adviser or an affiliate with respect to a particular loan or portfolio of loans made by the Fund) may be paid to the Adviser or the affiliate (rather than directly to the Fund), in which case the amount of such fees (net of any related expenses associated with the generation of such fees borne by the Adviser or such affiliate that have not been and will not be reimbursed by the Portfolio Company) shall be paid to the Fund.

Since inception of the Fund through December 31, 2016, the Adviser was paid directly $329,667 in such fees all of which was paid during the year ended December 31, 2016. As of December 31, 2016, the Fund recognized fee income of $329,667 as reported in the Statement of Operations.

 

14


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

December 31, 2016

 

7. REVOLVING CREDIT AGREEMENT

On June 5, 2015, the Fund, as borrower entered into a Credit Facility with Cortland Capital Market Services LLC, as administrative agent and various financial institutions (the “Lending Group”) to make loans (Advances) to the Fund for the purpose of funding eligible investments. Effective August 21, 2015, the Credit Agreement was amended to increase the Credit Facility to $600 million (“Facility Amount”) from $500 million. The Commitment Period to make an Advance ends on the earlier of the end of the (i) Investment Period and (ii) the Facility Maturity Date. The Investment Period ends on June 5, 2018 or earlier if Member commitments have been reduced to zero. The Facility Maturity Date is June 4, 2021, and may be extended pursuant to the Credit Agreement or end earlier if the Facility Amount is reduced to zero or the Advances automatically become due and payable.

The lender has a priority interest in the interest, dividends and other cash flow received by the Fund (Interest Amounts) and proceeds attributable to the repayment or disposition of Portfolio Investments (Proceeds) received by the Fund as described in note 4 – distribution of Interest Amounts and distribution of Proceeds.

As of December 31, 2016, there is $272,750,000 in Advances outstanding, which approximates fair value.

Interest is payable at a rate equal to LIBOR plus 3.50% per annum (subject to a LIBOR floor of 1.50%) on the amount of Advances outstanding. The Fund received a rating from an approved rating agency commensurate with the rate of interest paid by the Fund. As of December 31, 2016 the all-in rate of interest is 5%.

An unused fee is payable at a rate of 0.50% per annum on the unutilized commitment.

Whenever the Fund is paid an origination, structuring, or similar upfront fee by the obligor of an eligible investment, the Lending Group is entitled to an origination fee equal to 0.75% of the eligible investment funded with the proceeds of Advances.

As of December 31, 2016, the Fund has complied with the covenant requirements detailed in the Credit Agreement.

 

8.

COMMITMENTS AND CONTINGENCIES

At December 31, 2016, the Fund had the following unfunded commitments and unrealized gain / (loss).

 

Unfunded Commitments                                                 

   Amount      Unrealized
gain / (loss)
 

Angie’s List, Inc. (commitment expires September 2017)

   $   18,750,000      $   (37,500)  

ASC Acquisition Holdings, LLC (commitment expires December 2018)

     9,942,188        (19,884)  

ENA Holding Corporation (matures May 2021)

     2,430,406        2,430   

OTG Management LLC (commitment expires December 2017)

     5,862,394        35,174   

Penn Foster Education Group, Inc. (matures August 2021)

     3,530,769        (17,654)  

Sierra Private Holdings II Ltd (UK) (matures August 2022)

     1,392,371        4,177   

Sunny Delight Beverage Company (matures February 2021)

     8,181,611         

Truck Bodies and Equipment International (commitment expires March 2017)

     3,981,345        19,907   

Xura Inc. (matures August 2022)

     1,704,360        5,113   
     

 

 

 

Net unrealized (depreciation)

      $ (8,237)  
     

 

 

 

The net change in unrealized appreciation (depreciation) on these unfunded commitments is included in the Statement of Operations and Statement of Assets and Liabilities.

 

15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In the normal course of business, the Fund enters into contracts which provide a variety of representations and warranties, and that provide general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Fund under these arrangements is unknown as it would involve future claims that may be made against the Fund; however, based on the Fund’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Fund has not accrued any liability in connection with such indemnifications.

 

9. FINANCIAL HIGHLIGHTS

The following summarizes the Fund’s financial highlights for the year ended December 31, 2016:

 

     Members  

As a percentage of average members’ capital

  

Net investment income ratio1

     8.83   % 
  

 

 

 

Expense ratios 1

  

Operating expenses

     5.12   % 
  

 

 

 

Total expense ratio

     5.12   % 
  

 

 

 

1    The net investment income and expense ratio attributable to the Members taken as a whole.

The Internal Rate of Return (IRR) since inception of the Members, after financing costs and other operating expenses is 11.2% through December 31, 2016.

The IRR is computed based on cash flow due dates contained in notices to Members’ (contributions from and distributions to the Member’s) and the net assets (residual value) of the Members’ capital account at year end and is calculated for the Members taken as a whole.

The IRR is calculated based on the fair value of investments using principles and methods in accordance with GAAP and does not necessarily represent the amounts that may be realized from sales or other dispositions. Accordingly, the return may vary significantly upon realization.

 

16


INDEPENDENT AUDITORS’ REPORT

To TCW Direct Lending Strategic Ventures LLC

    (A Delaware Limited Liability Company):

We have audited the accompanying financial statements of TCW Direct Lending Strategic Ventures LLC (the “Fund”), which comprise the consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2016, and the related consolidated statements of operations, changes in members’ capital, and cash flows, for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Fund’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TCW Direct Lending Strategic Ventures LLC as of December 31,2016, and the results of its operations, changes in its members’ capital, and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Los Angeles, California

March 28, 2017

 

17


TCW Direct Lending Strategic Ventures LLC

(A Delaware Limited Liability Company)

ADMINISTRATION

ADMINISTRATOR

TCW Asset Management Company LLC

1251 Avenue of the Americas, Suite 4700

New York, NY 10020

(212) 771-4000

PORTFOLIO MANAGER

Richard T. Miller

Group Managing Director

INDEPENDENT AUDITORS

Deloitte & Touche LLP

555 West 5th Street

Los Angeles, CA 90013

CUSTODIAN

State Street Bank and Trust Company

One Lincoln Street

Boston, MA 02111

SUB-ADMINISTRATOR

State Street Bank and Trust Company

One Lincoln Street

Boston, MA 02111

 

18