Section 1: 10-K (10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
o
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011
Commission File Number
814-00839
814-00832
814-00902
Exact name of registrant as specified in their charters, addresses of principal executive offices,
telephone numbers and states or other jurisdictions of incorporation or organization
New Mountain Finance Holdings, L.L.C.
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware
New Mountain Finance Corporation
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware
New Mountain Finance AIV Holdings Corporation
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware
Securities registered pursuant to Section 12(b) of the Act:
I.R.S. Employer Identification Number
26-3633318
27-2978010
80-0721242
Registrant
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation None
Title of each class
None
Common stock, $0.01 par value The New York Stock Exchange
Name of each exchange on which registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Title of each class
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Common membership units
None
Common stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Yes o No ý
Yes o No ý
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Yes o No ý
Yes o No ý
Yes o No ý
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.
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Yes ý No o
Yes ý No o
Yes ý No o
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).
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Yes o No o
Yes o No o
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
ý
ý
ý
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 the definitions of "large accelerated
filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
New Mountain Finance Holdings,
L.L.C.
Large accelerated
Accelerated filer o
filer o
New Mountain Finance Corporation
Non-accelerated filer
Smaller reporting
ý
company o
Large accelerated
filer o
Accelerated filer o
Non-accelerated filer
Smaller reporting
ý
company o
New Mountain Finance AIV Holdings
Corporation
Large accelerated
filer o
Accelerated filer o
Non-accelerated filer
Smaller reporting
ý
company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
New Mountain Finance AIV Holdings Corporation
Yes o No ý
Yes o No ý
Yes o No ý
There is no established market for New Mountain Finance AIV Holdings Corporation's shares of common stock. Additionally, there is no established market for New Mountain Finance
Holdings, L.L.C.'s common membership units.
The aggregate market value of common stock held by non-affiliates of the publically traded registrant, New Mountain Finance Corporation, on June 30, 2011 based on the closing price
on that date of $12.70 on the New York Stock Exchange was $95.1 million. For the purposes of calculating this amount only, all directors and executive officers of the registrant have been treated
as affiliates.
Registrant
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Corporation
Description
Common membership units
Common stock, $0.01 par value
Shares / Units as of March 7, 2012
30,919,629
10,697,691
New Mountain Finance AIV Holdings Corporation Common stock, $0.01 par value
100
This combined Form 10-K is filed separately by three registrants: New Mountain Finance Holdings, L.L.C., New Mountain Finance Corporation and New Mountain Finance AIV
Holdings Corporation (collectively, the "New Mountain Finance Registrants"). Information contained herein relating to any New Mountain Finance Registrant is filed by such registrant solely on
its own behalf. Each New Mountain Finance Registrant makes no representation as to information relating exclusively to the other registrants.
Portions of the New Mountain Finance Registrants' Joint Proxy Statement for their joint 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the
fiscal year covered by this Annual Report on this combined Form 10-K are incorporated by reference into Part III on this combined Form 10-K.
Table of Contents
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Item 6.
Item 7.
Market for Registrants' Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
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Table of Contents
PART I
The information in this combined Form 10-K relates to each of the three separate registrants: New Mountain Finance Holdings, L.L.C., New
Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation (collectively, "we", "us", "our" or the "Companies").
Information that relates to an individual registrant will be specifically referenced to the respective company. None of the Companies make any
representation as to the information related solely to the other registrants other than itself.
Item 1. Business
New Mountain Finance Holdings, L.L.C.
New Mountain Finance Holdings, L.L.C. ("NMF Holdings", the "Operating Company" or the "Master Fund") is a Delaware limited liability
company. NMF Holdings is externally managed and has elected to be treated as a business development company ("BDC") under the Investment
Company Act of 1940, as amended (the "1940 Act"). As such, NMF Holdings is obligated to comply with certain regulatory requirements. NMF
Holdings intends to be treated as a partnership for federal income tax purposes for so long as it has at least two members.
NMF Holdings is externally managed by New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser"). New Mountain Finance
Administration, L.L.C. (the "Administrator") provides the administrative services necessary for operations. The Investment Adviser and
Administrator are wholly-owned subsidiaries of New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates). New
Mountain Capital is a firm with a track record of investing in the middle market and with assets under management (which includes amounts
committed, not all of which have been drawn down and invested to date) totaling approximately $9.0 billion as of December 31, 2011. New Mountain
Capital focuses on investing in defensive growth companies across its private equity, public equity, and credit investment vehicles. NMF Holdings,
formerly known as New Mountain Guardian (Leveraged), L.L.C., was originally formed as a subsidiary of New Mountain Guardian AIV, L.P.
("Guardian AIV") by New Mountain Capital in October 2008. Guardian AIV was formed through an allocation of approximately $300.0 million of the
$5.1 billion of commitments supporting New Mountain Partners III, L.P., a private equity fund managed by New Mountain Capital. In February 2009,
New Mountain Capital formed a co-investment vehicle, New Mountain Guardian Partners, L.P., comprising $20.4 million of commitments. New
Mountain Guardian (Leveraged), L.L.C. and New Mountain Guardian Partners, L.P., together with their respective direct and indirect wholly-owned
subsidiaries, are defined as the "Predecessor Entities".
New Mountain Finance Corporation
New Mountain Finance Corporation ("New Mountain Finance") is a Delaware corporation that was incorporated on June 29, 2010. New
Mountain Finance is a closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act.
As such, New Mountain Finance is obligated to comply with certain regulatory requirements. New Mountain Finance intends to be treated, and
intends to comply with the requirements to qualify annually, as a regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended, (the "Code") commencing with its taxable year ended December 31, 2011.
On May 19, 2011, New Mountain Finance priced its initial public offering (the "IPO") of 7,272,727 shares of common stock at a public offering
price of $13.75 per share. Concurrently with the closing of the IPO and at the public offering price of $13.75 per share, New Mountain Finance sold
an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain
Capital in a concurrent private placement (the "Concurrent Private Placement"). Additionally, 1,252,964 shares were issued to the limited partners of
New Mountain Guardian Partners, L.P. at that time for their ownership interest in the Predecessor Entities.
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New Mountain Finance AIV Holdings Corporation
New Mountain Finance AIV Holdings Corporation ("AIV Holdings") is a Delaware corporation that was incorporated on March 11, 2011.
Guardian AIV, a Delaware limited partnership, is AIV Holdings' sole stockholder. AIV Holdings is a closed-end, non-diversified management
investment company that has elected to be treated as a BDC under the 1940 Act. As such, AIV Holdings is obligated to comply with certain
regulatory requirements. AIV Holdings intends to be treated, and intends to comply with the requirements to qualify annually, as a RIC under the
Code commencing with its taxable year ended December 31, 2011.
Structure
In connection with New Mountain Finance's IPO and through a series of transactions, NMF Holdings acquired all of the operations of the
Predecessor Entities, including all of the assets and liabilities related to such operations. The current structure was designed to generally prevent
New Mountain Finance from being allocated taxable income with respect to unrecognized gains that existed at the time of the IPO in the
Predecessor Entities' assets, and rather such amounts would be allocated generally to AIV Holdings. The result is that any distributions made to
New Mountain Finance's stockholders that are attributable to such gains generally will not be treated as taxable dividends but rather as return of
capital.
New Mountain Finance and AIV Holdings are holding companies with no direct operations of their own, and their sole asset is their ownership
in NMF Holdings. New Mountain Finance and AIV Holdings each entered into a joinder agreement with respect to the Limited Liability Company
Agreement, as amended and restated, of NMF Holdings, pursuant to which New Mountain Finance and AIV Holdings were admitted as members of
NMF Holdings. New Mountain Finance acquired from NMF Holdings, with the gross proceeds of the IPO and the Concurrent Private Placement,
common membership units ("units") of NMF Holdings (the number of units are equal to the number of shares of New Mountain Finance's common
stock sold in the IPO and the Concurrent Private Placement). Additionally, New Mountain Finance received units of NMF Holdings equal to the
number of shares of common stock of New Mountain Finance issued to the limited partners of New Mountain Guardian Partners, L.P.
As a result of the transactions completed in connection with the IPO, Guardian AIV obtained units in NMF Holdings. Guardian AIV
contributed its units in NMF Holdings to its newly formed subsidiary, AIV Holdings, in exchange for common stock of AIV Holdings. AIV
Holdings has the right to exchange all or any portion of its units in NMF Holdings for shares of New Mountain Finance's common stock on a one-
for-one basis. As of December 31, 2011, New Mountain Finance and AIV Holdings own approximately 34.6% and 65.4%, respectively, of the units
of the Operating Company.
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The current organizational structure of NMF Holdings, New Mountain Finance, and AIV Holdings is depicted below.
New Mountain Finance and AIV Holdings apply an investment company master-feeder financial statement preparation, as described in
Accounting Standards Codification 946, Financial Services—Investment Companies, ("ASC 946") to their interest in NMF Holdings. New
Mountain Finance and AIV Holdings observe that it is industry practice to follow the presentation prescribed for a Master Fund-Feeder fund
structure in ASC 946 in instances in which a Master Fund is owned by more than one feeder fund and that such presentation provides stockholders
of New Mountain Finance and AIV Holdings with a clearer depiction of their investment in the Master Fund.
New Mountain Finance Advisers BDC, L.L.C.
The Investment Adviser manages the Operating Company's day-to-day operations and provides it with investment advisory and management
services. In particular, the Investment Adviser is responsible for identifying attractive investment opportunities, conducting research and due
diligence on prospective investments, structuring the Operating Company's investments and monitoring and servicing the Operating Company's
investments. The Investment Adviser is managed by a five member investment committee, which is responsible for approving purchases and sales
of NMF Holdings' investments above $5.0 million in aggregate by issuer. For additional information on the investment committee, see below
"Investment Committee".
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New Mountain Finance Administration, L.L.C.
The Administrator provides the administrative services necessary to conduct our day-to-day operations. The Administrator also performs, or
oversees the performance of, our financial records, our reports to stockholders and reports filed with the Securities and Exchange Commission. The
Administrator performs the calculation and publication of our net asset values, the payment of our expenses and oversees the performance of
various third-party service providers and the preparation and filing of our tax returns. The Administrator may also provide, on the Operating
Company's behalf, managerial assistance to its portfolio companies.
Competition
The Operating Company competes for investments with a number of BDCs and investment funds (including private equity and hedge funds),
as well as traditional financial services companies such as commercial banks and other sources of financing. Many of these entities have greater
financial and managerial resources than we do. We believe the Operating Company is able to be competitive with these entities primarily on the
basis of the experience and contacts of its management team, the Operating Company's responsive and efficient investment analysis and decision-
making processes, the investment terms the Operating Company offers, the leveraged model that the Operating Company employs to perform its
due diligence with the broader New Mountain Capital team and the Operating Company's model of investing in companies and industries it knows
well.
We believe that some of the Operating Company's competitors may make investments with interest rates and returns that are comparable to or
lower than the rates and returns that the Operating Company targets. Therefore, the Operating Company does not seek to compete solely on the
interest rates and returns that it offers to potential portfolio companies. For additional information concerning the competitive risks the Operating
Company faces, see Item 1A.—Risk Factors.
Investment Objectives and Portfolio
The Operating Company's investment objective is to generate current income and capital appreciation through the sourcing and origination of
debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the
Operating Company's investments may also include equity interests such as preferred stock, common stock, warrants or options received in
connection with the Operating Company's debt investments or may include a direct investment in the equity of private companies.
The Operating Company makes investments through both primary originations and open-market secondary purchases. The Operating
Company primarily targets loans to, and invests in, the United States ("U.S.") middle market businesses, a market segment we believe continues to
be underserved by other lenders. We define middle market businesses as those businesses with annual earnings before interest, taxes,
depreciation, and amortization ("EBITDA") between $20.0 million and $200.0 million. The primary focus is in the debt of defensive growth
companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high barriers to
competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) opportunities for
niche market dominance. The Operating Company's targeted investments typically have maturities of between five and ten years and generally
range in size between $10.0 million and $50.0 million. This investment size may vary proportionately as the size of the Operating Company's capital
base changes. At December 31, 2011, the Operating Company's portfolio consisted of 55 portfolio companies and was invested 58.3% in first lien
loans, 37.3% in second lien loans, 4.0% in subordinated debt and 0.4% in equity and other, as measured at fair value versus 43 portfolio companies
invested 72.8% in first lien loans, 22.5% in second lien loans, 4.6% in subordinated debt and 0.1% in equity and other at December 31, 2010.
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The fair value of the Operating Company's investments was approximately $703.5 million in 55 portfolio companies at December 31, 2011,
$441.1 million in 43 portfolio companies at December 31, 2010 and $320.5 million in 24 portfolio companies at December 31, 2009. For the year ended
December 31, 2011, NMF Holdings made approximately $493.3 million of new investments in 37 portfolio companies. For the year ended
December 31, 2010, NMF Holdings made approximately $332.7 million of new investments in 34 portfolio companies. For the year ended
December 31, 2009, NMF Holdings made approximately $268.4 million of new investments in 29 portfolio companies.
For the year ended December 31, 2011, NMF Holdings had approximately $146.4 million in debt repayments in existing portfolio companies and
sales of securities in 17 portfolio companies aggregating approximately $85.6 million. In addition, during the year ended December 31, 2011, NMF
Holdings had a change in unrealized appreciation on 17 portfolio companies totaling approximately $6.1 million, which was offset by a change in
unrealized depreciation on 48 portfolio companies totaling approximately $29.2 million. For the year ended December 31, 2010, NMF Holdings had
approximately $40.3 million in debt repayments in existing portfolio companies and sales of securities in 16 portfolio companies aggregating
approximately $217.9 million. During the year ended December 31, 2010, NMF Holdings had a change in unrealized appreciation on 36 portfolio
companies totaling approximately $13.0 million, which was offset by a change in unrealized depreciation on 18 portfolio companies totaling
approximately $53.0 million. For the year ended December 31, 2009, NMF Holdings had approximately $10.1 million in debt repayments in existing
portfolio companies and sales of securities in 12 portfolio companies aggregating approximately $115.3 million. During the year ended December 31,
2009, NMF Holdings had a change in unrealized appreciation on 21 portfolio companies totaling approximately $69.3 million, which was offset by a
change in unrealized depreciation on four portfolio companies totaling approximately $1.2 million.
At December 31, 2011, the Operating Company's weighted average Unadjusted and Adjusted Yield to Maturity was approximately 10.7% and
13.1%, respectively. "Adjusted Yield to Maturity" assumes that the investments in the Operating Company's portfolio are purchased at fair value
on December 31, 2011 and held until their respective maturities with no prepayments or losses and exited at par at maturity. This calculation
excludes the impact of existing leverage, except for the non-recourse debt of the Operating Company's wholly-owned subsidiary, New Mountain
Finance SPV Funding, L.L.C ("NMF SLF"). NMF SLF is treated as a fully levered asset of the Operating Company, with NMF SLF's net asset value
being included for yield calculation purposes. The actual yield to maturity may be higher or lower due to the future selection of LIBOR contracts by
the individual companies in the Operating Company's portfolio or other factors. References to "Unadjusted Yield to Maturity" have the same
assumptions as Adjusted Yield to Maturity except that NMF SLF is not treated as a fully levered asset of the Operating Company, but rather the
assets themselves are consolidated into the Operating Company.
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The following summarizes the Operating Company's ten largest portfolio company investments and top ten industries in which the Operating
Company was invested as of December 31, 2011, calculated as a percentage of total assets as of December 31, 2011.
Portfolio Company
Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)
Decision Resources, LLC
Lawson Software, Inc. (fka SoftBrands, Inc.)
Global Knowledge Training LLC
Meritas Schools Holdings, LLC
Managed Health Care Associates, Inc.
Insight Pharmaceuticals LLC
Renaissance Learning, Inc.
Learning Care Group (US), Inc.
Transplace Texas, L.P.
Percent of Total Assets
4.5%
4.3%
4.3%
4.2%
4.0%
3.9%
3.4%
2.8%
2.7%
2.7%
Industry
Software
Healthcare Services
Education
Business Services
Federal Services
Consumer Services
Information Services
Healthcare Products
Logistics
Industrial Services
Investment Criteria
Percent of Total Assets
21.3%
16.1%
13.9%
10.5%
9.7%
4.1%
4.1%
3.4%
3.4%
2.4%
The Investment Adviser has identified the following investment criteria and guidelines for use in evaluating prospective portfolio companies.
However, not all of these criteria and guidelines were, or will be, met in connection with each of the Operating Company's investments.
•
•
•
•
•
Defensive growth industries. The Operating Company seeks to invest in industries that can succeed in both robust and weak
economic environments but which are also sufficiently large and growing to achieve high valuations providing enterprise value
cushion for our targeted debt securities.
High barriers to competitive entry. The Operating Company targets industries and companies that have well defined end-markets
and well established, understandable barriers to competitive entry.
Recurring revenue. Where possible, the Operating Company focuses on companies that have a high degree of predictability in
future revenue.
Flexible cost structure. The Operating Company seeks to invest in businesses that have limited fixed costs and therefore modest
operating leverage.
Strong free cash flow and high return on assets. The Operating Company focuses on businesses with a demonstrated ability to
produce meaningful free cash flow from operations. The Operating Company typically targets companies that are not asset intensive
and that have minimal capital expenditure and minimal working capital growth needs.
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•
•
•
•
Sustainable business and niche market dominance. The Operating Company seeks to invest in businesses that exert niche market
dominance in their industry and that have a demonstrated history of sustaining market leadership over time.
Established companies. The Operating Company seeks to invest in established companies with sound historical financial
performance. The Operating Company does not intend to invest in start-up companies or companies with speculative business
plans.
Private equity sponsorship. The Operating Company generally seeks to invest in companies in conjunction with private equity
sponsors who it knows and trusts and who have proven capabilities in building value.
Seasoned management team. The Operating Company generally requires that its portfolio companies have a seasoned management
team with strong corporate governance. Oftentimes the Operating Company has a historical relationship with or direct knowledge of
key managers from previous investment experience.
Investment Selection and Process
The Investment Adviser believes it has developed a proven, consistent and replicable investment process to execute the Operating Company's
investment strategy. The Investment Adviser seeks to identify the most attractive investment sectors from the top down and then works to become
the most advantaged investor in these sectors. The steps in the Investment Adviser's process include:
•
•
•
Identifying attractive investment sectors top down;
Creating competitive advantages in the selected industry sectors; and
Targeting companies with leading market share and attractive business models in its chosen sectors.
Investment Committee
The Investment Adviser's investment committee (the "Investment Committee") currently consists of Steven B. Klinsky, Robert Hamwee, Adam
Collins, Douglas Londal and Alok Singh. The Investment Committee is responsible for approving all of the Operating Company's investment
purchases above $5.0 million. The Investment Committee also monitors investments in the Operating Company's portfolio and approves all asset
dispositions above $5.0 million. Purchases and dispositions below $5.0 million may be approved by the Operating Company's Chief Executive
Officer. These approval thresholds are subject to change over time. We expect to benefit from the extensive and varied relevant experience of the
investment professionals serving on the Investment Committee, which includes expertise in private equity, primary and secondary leveraged credit,
private mezzanine finance and distressed debt.
The purpose of the Investment Committee is to evaluate and approve, as deemed appropriate, all investments by the Investment Adviser,
subject to certain thresholds. The Investment Committee process is intended to bring the diverse experience and perspectives of the Investment
Committee's members to the analysis and consideration of every investment. The Investment Committee also serves to provide investment
consistency and adherence to the Investment Adviser's investment philosophies and policies. The Investment Committee also determines
appropriate investment sizing and suggests ongoing monitoring requirements.
In addition to reviewing investments, the Investment Committee meetings serve as a forum to discuss credit views and outlooks. Potential
transactions and investment opportunities are also reviewed on a regular basis. Members of the Operating Company's investment team are
encouraged to share
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information and views on credits with the committee early in their analysis. This process improves the quality of the analysis and assists the deal
team members to work more efficiently.
Investment Structure
The Operating Company targets debt investments that will yield meaningful current income and occasionally provide the opportunity for
capital appreciation through equity securities. The Operating Company's debt investments are typically structured with the maximum seniority and
collateral that the Operating Company can reasonably obtain while seeking to achieve its total return target.
Debt Investments
The terms of the Operating Company's debt investments are tailored to the facts and circumstances of the transaction and prospective
portfolio company and structured to protect its rights and manage its risk while creating incentives for the portfolio company to achieve its
business plan. A substantial source of return is the cash interest that the Operating Company collects on its debt investments.
•
•
•
First Lien Loans and Bonds. First lien loans and bonds generally have terms of four to seven years, provide for a variable or fixed
interest rate, may contain prepayment penalties and are secured by a first priority security interest in all existing and future assets of
the borrower.
Second Lien Loans and Bonds. Second lien loans and bonds generally have terms of five to eight years, provide for a variable or
fixed interest rate, may contain prepayment penalties and are secured by a second priority security interest in all existing and future
assets of the borrower. These second lien loans and bonds may include payment-in-kind ("PIK") interest, which represents
contractual interest accrued and added to the principal that generally becomes due at maturity.
Unsecured Senior, Subordinated and "Mezzanine" Loans and Bonds. Any unsecured investments are generally expected to have
terms of five to ten years and provide for a fixed interest rate. Unsecured investments may include PIK interest, which represents
contractual interest accrued and added to the principal that generally becomes due at maturity, and may have an equity component,
such as warrants to purchase common stock in the portfolio company.
In addition, from time to time the Operating Company may also enter into bridge or other commitments which can result in providing future
financing to a portfolio company.
Equity Investments
When the Operating Company makes a debt investment, it may be granted equity in the portfolio company in the same class of security as the
sponsor receives upon funding. In addition, the Operating Company may from time to time make non-control, equity co-investments in conjunction
with private equity sponsors. The Operating Company generally seeks to structure its equity investments, such as direct equity co-investments, to
provide it with minority rights provisions and event-driven put rights. The Operating Company also seeks to obtain limited registration rights in
connection with these investments, which may include "piggyback" registration rights.
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Portfolio Company Monitoring
The Operating Company monitors the performance and financial trends of its portfolio companies on at least a quarterly basis. The Operating
Company attempts to identify any developments within the portfolio company, the industry or the macroeconomic environment that may alter any
material element of its original investment strategy. The Operating Company uses several methods of evaluating and monitoring the performance of
its investments, including but not limited to, the following:
•
•
•
•
review of monthly and quarterly financial statements and financial projections for portfolio companies provided by its management;
ongoing dialogue with and review of original diligence sources;
periodic contact with portfolio company management (and, if appropriate the private equity sponsor) to discuss financial position,
requirements and accomplishments; and
assessment of business development success, including product development, profitability and the portfolio company's overall
adherence to its business plan.
The Operating Company uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each
investment in the portfolio. The Operating Company uses a four-level numeric rating scale as follows:
•
•
•
•
Investment Rating 1—Investment is performing above expectations;
Investment Rating 2—Investment is performing in-line with expectations. All new loans are rated 2 at initial purchase;
Investment Rating 3—Investment is performing below expectations and risk has increased since the original investment; and
Investment Rating 4—Investment is performing substantially below expectations and risks have increased substantially since the
original investment.
The following table shows the distribution of the Operating Company's investments on the 1 to 4 investment rating scale at fair value as of
December 31, 2011:
Investment Rating
Investment Rating 1
Investment Rating 2
Investment Rating 3
Investment Rating 4
(1)
Excludes shares and warrants.
Exit Strategies/Refinancing
Par
Value(1)
142.4
642.4
—
4.5
789.3
As of December 31, 2011
Percent
Fair
Value
Percent
18.0% $
81.4%
—%
0.6%
100.0% $
130.2
572.5
—
0.8
703.5
18.5%
81.4%
—%
0.1%
100.0%
$
$
The Operating Company exits its investments typically through one of four scenarios: (i) the sale of the portfolio company itself resulting in
repayment of all outstanding debt, (ii) the recapitalization of the portfolio company in which the Operating Company's loan is replaced with debt or
equity from a third party or parties (in some cases, the Operating Company may choose to participate in the newly issued loan(s)), (iii) the
repayment of the initial or remaining principal amount of the Operating Company's loan then outstanding at maturity or (iv) the sale of the debt
investment by the Operating
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Company. In some investments, there may be scheduled amortization of some portion of the Operating Company's loan which would result in a
partial exit of its investment prior to the maturity of the loan.
Valuation
The Operating Company conducts the valuation of assets, pursuant to which its net asset value, and, consequently, New Mountain Finance
Holdings' and AIV Holdings' net asset value is determined, at all times consistent with accounting principles generally accepted in the United
States of America ("GAAP") and the 1940 Act. New Mountain Finance and AIV Holdings value their ownership interest on a quarterly basis, or
more frequently if required under the 1940 Act.
The Operating Company applies fair value accounting in accordance with GAAP. The Operating Company values its assets on a quarterly
basis, or more frequently if required under the 1940 Act. In all cases, the Operating Company's board of directors is ultimately and solely
responsible for determining the fair value of its portfolio investments on a quarterly basis in good faith, including investments that are not publicly
traded, those whose market prices are not readily available and any other situation where its portfolio investments require a fair value determination.
Security transactions are accounted for on a trade date basis. The Operating Company's quarterly valuation procedures are set forth in more detail
below:
(1)
(2)
Investments for which market quotations are readily available on an exchange are valued at such market quotations based on the
closing price indicated from independent pricing services.
Investments for which indicative prices are obtained from various pricing services and/or brokers or dealers are valued through a
multi-step valuation process, as described below, to determine whether the quote(s) obtained is representative of fair value in
accordance with GAAP.
a.
b.
Bond quotes are obtained through independent pricing services. Analytics are performed by the investment professionals of
the Investment Adviser to ensure that the quote obtained is representative of fair value in accordance with GAAP and if so,
the quote is used. If the Investment Adviser is unable to sufficiently validate the quote(s) internally and if the investment's
par value exceeds the materiality threshold, the investment is valued similarly to those assets with no readily available quotes
(see (3) below); and
For investments other than bonds, the Operating Company looks at the number of quotes readily available and performs the
following:
i.
ii.
Investments for which more than two quotes are received from a pricing service are valued using the mean of the
mean of the bid and ask of the quotes obtained;
Investments for which one or two quotes are received from a pricing service are validated internally. The investment
professionals of the Investment Adviser analyze the market quotes obtained using an array of valuation methods
(further described below) to validate the fair value. If the Investment Adviser is unable to sufficiently validate the
quote(s) internally and if the investment's par value exceeds the materiality threshold, the investment is valued
similarly to those assets with no readily available quotes (see (3) below).
(3)
Investments for which quotations are not readily available through exchanges, pricing services, brokers, or dealers are valued
through a multi-step valuation process:
a.
Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser
responsible for the credit monitoring;
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b.
c.
d.
Preliminary valuation conclusions will then be documented and discussed with the Operating Company's senior
management;
If an investment falls into (3) above for four consecutive quarters and if the investment's par value exceeds the materiality
threshold, then at least once each fiscal year, the valuation for each portfolio investment for which the Operating Company
does not have a readily available market quotation will be reviewed by an independent valuation firm engaged by our board
of directors; and
Also, when deemed appropriate by the Operating Company's management, an independent valuation firm may be engaged to
review and value investment(s) of a portfolio company, without any preliminary valuation being performed by the Investment
Adviser. The investment professionals of the Investment Adviser will review and validate the value provided.
Valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private securities to peer companies
that are public, the nature of and the realizable value of any collateral, the portfolio company's earnings, discounted cash flows, the ability to make
payments, the markets in which the portfolio company conducts business, and other relevant factors, including available market data such as
relevant and applicable market trading and transaction comparables; applicable market yields and multiples; security covenants; call protection
provisions; information rights; comparable merger and acquisition transactions; and the principal market and enterprise values. When an external
event such as a purchase transaction, public offering or subsequent sale occurs, the Operating Company will consider the pricing indicated by the
external event to corroborate the private valuation.
The values assigned to investments are based upon available information and do not necessarily represent amounts which might ultimately be
realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the
Operating Company's investments may fluctuate from period to period.
Operating and Regulatory Environment
As with other companies regulated by the 1940 Act, a BDC must adhere to certain regulatory requirements. The 1940 Act contains prohibitions
and restrictions relating to investments by a BDC in another investment company as well as transactions between BDCs and their affiliates,
principal underwriters and affiliates of those affiliates or underwriters. A BDC must be organized in the U.S. for the purpose of investing in or
lending to primarily private companies and making significant managerial assistance available to them. A BDC may use capital provided by public
stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the
liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
NMF Holdings, New Mountain Finance, and AIV Holdings each have a board of directors. A majority of our directors must be persons who are
not interested persons, as that term is defined in the 1940 Act. As BDCs, we are prohibited from protecting any director or officer against any
liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to
protect the BDC.
As a BDC, each of the Companies is required to meet a coverage ratio of the value of total assets to total senior securities, which include all of
its borrowings and any preferred stock we may issue in
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the future, of at least 200.0%. The Operating Company monitors its compliance with this coverage ratio on a regular basis, however, New Mountain
Finance and AIV Holdings have no material long-term liabilities themselves and their only business and sole asset is their ownership of NMF
Holdings. New Mountain Finance and AIV Holdings are relying on the provisions of Section 12(d)(1)(E) of the 1940 Act, which requires, among
other things, that their respective investment in the Operating Company be their only asset and that their respective shareholders are entitled to
vote on a "pass-through" basis with the Operating Company's other voting security holders.
New Mountain Finance may, to the extent permitted under the 1940 Act, issue additional equity capital, which would in turn increase the equity
capital available to the Operating Company. New Mountain Finance is generally not able to issue and sell its common stock at a price below net
asset value per share. New Mountain Finance may, however, sell its common stock, or warrants, options or rights to acquire its common stock, at a
price below the then-current net asset value of its common stock if its board of directors determines that such sale is in the best interests of New
Mountain Finance and the best interests of its stockholders, and its stockholders approve such sale. In addition, New Mountain Finance may
generally issue new shares of its common stock at a price below net asset value in rights offerings to existing stockholders and in certain other
limited circumstances.
As a BDC, the Operating Company is generally not permitted to invest in any portfolio company in which the Investment Adviser or any of its
affiliates currently have an investment or to make any co-investments with the Investment Adviser or its affiliates without an exemptive order from
the Securities and Exchange Commission.
We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority
of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the
1940 Act as the lesser of: (a) 67.0% or more of such company's voting securities present at a meeting if more than 50.0% of the outstanding voting
securities of such company are present or represented by proxy, or (b) more than 50.0% of the outstanding voting securities of such company. We
do not anticipate any substantial change in the nature of our business.
In addition, as BDCs, the Companies are not permitted to issue stock or units in consideration for services. New Mountain Finance, NMF
Holdings and the Investment Adviser are seeking exemptive relief to permit NMF Holdings to pay 50.0%, on an after tax basis, of the incentive fee
payable to the Investment Adviser in units of NMF Holdings, which will be exchangeable into shares of New Mountain Finance's common stock
and to treat the receipt of such units as an exempt purchase under Section 23(a) of the 1940 Act. As of December 31, 2011, the exemptive relief
requested had not been granted. There can be no assurance when or if the exemptive relief will be granted.
New Mountain Finance's and AIV Holdings' Taxation as a Regulated Investment Company
New Mountain Finance and AIV Holdings intend to elect to be treated, and intend to comply with the requirements to qualify annually, as RICs
under Subchapter M of the Code, commencing with the filing of their December 31, 2011 income tax returns. As RICs, New Mountain Finance and
AIV Holdings generally will not pay corporate-level federal income taxes on any income that they timely distribute to their stockholders as
dividends. Rather, dividends distributed by New Mountain Finance or AIV Holdings generally will be taxable to New Mountain Finance's or AIV
Holdings' stockholders, but any net operating losses, foreign tax credits and other tax attributes of New Mountain Finance or AIV Holdings
generally will not pass through to New Mountain Finance's or AIV Holdings' stockholders, subject to special rules for certain items such as net
capital gains and qualified dividend income recognized by New Mountain Finance and AIV Holdings.
To qualify as RICs, New Mountain Finance and AIV Holdings must, among other things, meet certain source-of-income and asset
diversification requirements. In addition, to qualify as RICs, New
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Mountain Finance and AIV Holdings must distribute to their stockholders, for each taxable year, at least 90.0% of their "investment company
taxable income", which is generally their net ordinary income plus the excess of realized net short-term capital gains over realized net long-term
capital losses (the "Annual Distribution Requirement").
New Mountain Finance and AIV Holdings will be subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless
they distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of their respective net ordinary income for each calendar year,
(2) 98.2% of their respective capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized,
but not distributed, in preceding years (the "Excise Tax Avoidance Requirement"). While New Mountain Finance and AIV Holdings intend to make
distributions to their stockholders in each taxable year that will be sufficient to avoid any federal excise tax on their earnings, there can be no
assurance that New Mountain Finance or AIV Holdings will be successful in entirely avoiding this tax. For the year ended December 31, 2011, no
federal excise tax was paid by either New Mountain Finance or AIV Holdings.
In order to qualify as RICs for federal income tax purposes, New Mountain Finance and AIV Holdings must, among other things:
•
•
•
Continue to qualify as BDCs under the 1940 Act at all times during each taxable year;
Derive in each taxable year at least 90.0% of their respective gross income from dividends, interest, payments with respect to loans
of certain securities, gains from the sale of stock or other securities, net income from certain "qualified publicly traded partnerships",
or other income derived with respect to New Mountain Finance's or AIV Holdings' business of investing in such stock or securities
(the "90.0% Income Test"); and
Diversify their holdings so that at the end of each quarter of the taxable year:
•
•
at least 50.0% of the respective values of New Mountain Finance's or AIV Holdings' assets consists of cash, cash
equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one
issuer do not represent more than 5.0% of the respective values of New Mountain Finance's or AIV Holdings' assets or more
than 10.0% of the outstanding voting securities of the issuer; and
no more than 25.0% of the respective values of New Mountain Finance's or AIV Holdings' assets is invested in the
securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are
controlled, as determined under applicable Code rules, by New Mountain Finance or AIV Holdings and that are engaged in
the same or similar or related trades or businesses or of certain "qualified publicly traded partnerships" (the "Diversification
Tests").
Failure to Qualify as a Regulated Investment Company
If New Mountain Finance or AIV Holdings fail to satisfy the 90.0% Income Test or the Diversification Tests for any taxable year or quarter of
such taxable year, they may nevertheless continue to qualify as a RIC for such year if certain relief provisions of the Code apply (which may, among
other things, require it to pay certain corporate-level federal taxes or to dispose of certain assets). If New Mountain Finance or AIV Holdings fail to
qualify for treatment as a RIC and such relief provisions do not apply to New Mountain Finance or AIV Holdings, New Mountain Finance or AIV
Holdings will be subject to federal income tax on all of its taxable income at regular corporate rates (and also will be subject to any applicable state
and local taxes), regardless of whether New Mountain Finance or AIV Holdings made any distributions to its stockholders. Distributions would not
be required. However, if distributions were made, any such distributions would be taxable to its stockholders as ordinary dividend income and,
subject to certain limitations under the Code. Any such
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distributions made in taxable years beginning before January 1, 2013 would be eligible for the 15.0% maximum rate applicable to non-corporate
taxpayers to the extent of New Mountain Finance's or AIV Holdings' current or accumulated earnings and profits. Subject to certain limitations
under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of New Mountain Finance's
or AIV Holdings' current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax
basis, and any remaining distributions would be treated as a capital gain.
Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to
disqualification and that re-qualify as a RIC no later than the second year following the non-qualifying year, New Mountain Finance and AIV
Holdings could be subject to tax on any unrealized net built-in gains in the assets held by New Mountain Finance or AIV Holdings during the
period in which New Mountain Finance or AIV Holdings failed to qualify as a RIC that are recognized during the 10-year period after its
requalification as a RIC, unless New Mountain Finance or AIV Holdings made a special election to pay corporate-level federal income tax on such
built-in gain at the time of New Mountain Finance's or AIV Holdings' requalification as a RIC. New Mountain Finance or AIV Holdings may decide
to be taxed as a regular corporation even if New Mountain Finance or AIV Holdings would otherwise qualify as a RIC if New Mountain Finance or
AIV Holdings determines that treatment as a corporation for a particular year would be in its best interests.
Investment Management Agreement
The Companies are closed-end, non-diversified management investment companies that have elected to be treated as BDCs under the 1940
Act. New Mountain Finance and AIV Holdings are holding companies with no direct operations of their own, and their only business and sole
asset are their ownership of units of the Operating Company. As a result, New Mountain Finance and AIV Holdings will not pay any external
investment advisory or management fees. However, the Operating Company is externally managed by the Investment Adviser and will pay the
Investment Adviser a fee for its services. The following summarizes the arrangements between the Operating Company and the Investment Adviser
pursuant to an investment advisory and management agreement (the "Investment Management Agreement").
Management Services
The Investment Adviser is registered as an Investment Adviser under the Investment Advisers Act of 1940 (the "Advisers Act"). The
Investment Adviser will serve pursuant to the Investment Management Agreement in accordance with the 1940 Act. Subject to the overall
supervision of the Operating Company's board of directors, the Investment Adviser will manage the Operating Company's day-to-day operations
and provide it with investment advisory and management services. Under the terms of the Investment Management Agreement, the Investment
Adviser will:
•
•
•
•
•
determine the composition of the Operating Company's portfolio, the nature and timing of the changes to its portfolio and the
manner of implementing such changes;
determine the securities and other assets that the Operating Company will purchase, retain or sell;
identify, evaluate and negotiate the structure of the Operating Company's investments that the Operating Company makes;
execute, monitor and service the investments the Operating Company makes;
perform due diligence on prospective portfolio companies;
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•
•
vote, exercise consents and exercise all other rights appertaining to such securities and other assets on behalf of the Operating
Company; and
provide the Operating Company with such other investment advisory, research and related services as the Operating Company may,
from time to time, reasonably require.
The Investment Adviser's services under the Investment Management Agreement are not exclusive, and the Investment Adviser (so long as
its services to the Operating Company are not impaired) and/or other entities affiliated with New Mountain are permitted to furnish similar services
to other entities.
Management Fees
Pursuant to the Investment Management Agreement, the Operating Company has agreed to pay the Investment Adviser a fee for investment
advisory and management services consisting of two components—a base management fee and an incentive fee. The cost of both the base
management fee payable to the Investment Adviser and any incentive fees paid in cash to the Investment Adviser are borne by the Operating
Company's members, including New Mountain Finance and AIV Holdings and, as a result, are indirectly borne by New Mountain Finance's and
AIV Holdings' common stockholders.
Base Management Fees
The base management fee is calculated at an annual rate of 1.75% of the Operating Company's gross assets less (i) the borrowings under the
Operating Company's senior loan fund's Loan and Security Agreement with Wells Fargo Bank, National Association, dated October 27, 2010, as
amended, (the "SLF Credit Facility") and (ii) cash and cash equivalents. The base management fee is payable quarterly in arrears, and is calculated
based on the average value of the Operating Company's gross assets, borrowings under the SLF Credit Facility, and cash and cash equivalents at
the end of each of the two most recently completed calendar quarters, and appropriately adjusted on a pro rata basis for any equity capital raises or
repurchases during the current calendar quarter.
Incentive Fees
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of the Operating
Company's "Pre-Incentive Fee Adjusted Net Investment Income" for the immediately preceding quarter, subject to a "preferred return", or "hurdle",
and a "catch-up" feature. "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income (including any
other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or
other fees that the Operating Company receives from portfolio companies) accrued during the calendar quarter, minus the Operating Company's
operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, as amended and
restated, with the Administrator, and any interest expense and distributions paid on any issued and outstanding preferred membership units (of
which there are none as of December 31, 2011), but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of
investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities),
accrued income that the Operating Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized
capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under GAAP, New Mountain Finance's IPO did not step-up the cost basis of the Operating Company's existing investments to fair market
value at the IPO date. Since the total value of the Operating Company's investments at the time of the IPO was greater than the investments' cost
basis, a larger amount of amortization of purchase or original issue discount, as well as different amounts in realized gain and unrealized
appreciation, may be recognized under GAAP in each period than if the
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step-up had occurred. This will remain until such predecessor investments are sold or mature in the future. The Operating Company tracks the
transferred (or fair market) value of each of its investments as of the time of the IPO and, for purposes of the incentive fee calculation, adjusts Pre-
Incentive Fee Net Investment Income to reflect the amortization of purchase or original issue discount on the Operating Company's investments as
if each investment was purchased at the date of the IPO, or stepped up to fair market value. This is defined as "Pre-Incentive Fee Adjusted Net
Investment Income". The Operating Company also uses the transferred (or fair market) value of each of its investments as of the time of the IPO to
adjust capital gains ("Adjusted Realized Capital Gains") or losses ("Adjusted Realized Capital Losses") and unrealized capital appreciation
("Adjusted Unrealized Capital Appreciation") and unrealized capital depreciation ("Adjusted Unrealized Capital Depreciation").
Pre-Incentive Fee Adjusted Net Investment Income, expressed as a rate of return on the value of the Operating Company's net assets at the
end of the immediately preceding calendar quarter, will be compared to a "hurdle rate" of 2.0% per quarter (8.0% annualized), subject to a "catch-
up" provision measured as of the end of each calendar quarter. The hurdle rate is appropriately pro-rated for any partial periods. The calculation of
the Operating Company's incentive fee with respect to the Pre-Incentive Fee Adjusted Net Investment Income for each quarter is as follows:
•
•
•
No incentive fee is payable to the Investment Adviser in any calendar quarter in which the Operating Company's Pre-Incentive Fee
Adjusted Net Investment Income does not exceed the hurdle rate of 2.0% (the "preferred return" or "hurdle").
100.0% of the Operating Company's Pre-Incentive Fee Adjusted Net Investment Income with respect to that portion of such Pre-
Incentive Fee Adjusted Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any calendar
quarter (10.0% annualized) is payable to the Investment Adviser. This portion of the Operating Company's Pre-Incentive Fee
Adjusted Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) is referred to as the "catch-up".
The catch-up provision is intended to provide the Investment Adviser with an incentive fee of 20.0% on all of the Operating
Company's Pre-Incentive Fee Adjusted Net Investment Income as if a hurdle rate did not apply when the Operating Company's Pre-
Incentive Fee Adjusted Net Investment Income exceeds 2.5% in any calendar quarter.
20.0% of the amount of the Operating Company's Pre-Incentive Fee Adjusted Net Investment Income, if any, that exceeds 2.5% in
any calendar quarter (10.0% annualized) is payable to the Investment Adviser once the hurdle is reached and the catch-up is
achieved.
The second part will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment
Management Agreement) and will equal 20.0% of the Operating Company's Adjusted Realized Capital Gains, if any, on a cumulative basis from
inception through the end of each calendar year, computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital
Depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee.
In accordance with GAAP, the Operating Company accrues a hypothetical capital gains incentive fee based upon the cumulative net Adjusted
Realized Capital Gains and Adjusted Realized Capital Losses and the cumulative net Adjusted Unrealized Capital Appreciation and Adjusted
Unrealized Capital Depreciation on investments held at the end of each period. Actual amounts paid to the Investment Adviser are consistent with
the Investment Management Agreement and are based only on actual Adjusted Realized Capital Gains computed net of all Adjusted Realized
Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis from inception through the end of each calendar year.
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New Mountain Finance, the Operating Company and the Investment Adviser are seeking exemptive relief from the Securities and Exchange
Commission to permit the Operating Company to pay 50.0%, on an after tax basis, of the incentive fee in units of the Operating Company, which will
be exchangeable into shares of New Mountain Finance's common stock on a one-for-one basis. If such exemptive relief is granted, the number of
the Operating Company's units payable to the Investment Adviser will be calculated based on the greater of (i) the net asset value (as of the last
publicly available annual or quarterly report filed with the Securities and Exchange Commission) on the last day of each calendar quarter in which
the Investment Adviser is entitled to receive an incentive fee (the "Incentive Fee Date"), or (ii) the market price of New Mountain Finance's common
stock on the Incentive Fee Date, and in accordance with such restrictions and conditions as may be required by the exemptive relief. There can be
no assurance that this exemptive relief will be granted. In addition, if New Mountain Finance, the Operating Company and the Investment Adviser
receive exemptive relief from the Securities and Exchange Commission, any units so received by the Investment Adviser will be subject to a three-
year lock-up agreement, pursuant to which one-third of the common membership units received by the Investment Adviser will be released from the
lock-up on an annual basis until the expiration of each three-year lock-up period. If exemptive relief is not granted, the Operating Company will
continue to pay the entire incentive fee in cash. If the Investment Management Agreement is terminated by the Operating Company, then the lock-
up provisions with respect to any units or shares of the Operating Company or New Mountain Finance received by the Investment Adviser or its
transferees pursuant to the Investment Management Agreement immediately expire.
Example 1: Income Related Portion of Incentive Fee for Each Calendar Quarter*:
Alternative 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 2.00%
Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income - (management fee + other expenses)) = 0.61%
Pre-Incentive Fee Adjusted Net Investment Income does not exceed the hurdle rate, therefore there is no income-related incentive fee.
Alternative 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.90%
Hurdle rate(1) = 2.00%
Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income - (management fee + other expenses)) = 2.26%
Incentive fee = 100.00% × Pre-Incentive Fee Adjusted Net Investment Income (subject to "catch-up")(4)
= 100.00% × (2.26% - 2.00%)
= 0.26%
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Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, but does not fully satisfy the "catch-up" provision, therefore the
income related portion of the incentive fee is 0.26%.
Alternative 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Hurdle rate(1) = 2.00%
Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income - (management fee + other expenses)) = 2.86%
Incentive fee = 100.00% × Pre-Incentive Fee Adjusted Net Investment Income (subject to "catch-up")(4)
Incentive fee = 100.00% × "catch-up" + (20.00% × (Pre-Incentive Fee Adjusted Net Investment Income - 2.50%))
Catch-up = 2.50% - 2.00%
= 0.50%
Incentive fee = (100.00% × 0.50%) + (20.00% × (2.86% - 2.50%))
= 0.50% + (20.00% × 0.36%)
= 0.50% + 0.07%
= 0.57%
Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, and fully satisfies the "catch-up" provision, therefore the income
related portion of the incentive fee is 0.57%.
*
(1)
(2)
(3)
(4)
The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets and assumes, for
the Operating Company's investments held prior to the IPO, interest income has been adjusted to reflect the amortization of purchase or
original issue discount as if each investment was purchased at the date of the IPO, or stepped up to fair market value.
Represents 8.00% annualized hurdle rate.
Assumes 1.75% annualized base management fee.
Excludes organizational and offering expenses.
The "catch-up" provision is intended to provide the Investment Adviser with an incentive fee of 20.00% on all Pre-Incentive Fee Adjusted
Net Investment Income as if a hurdle rate did not apply when the Operating Company's net investment income exceeds 2.50% in any
calendar quarter.
Example 2: Capital Gains Portion of Incentive Fee*:
Alternative 1:
Assumptions
Year 1: $20.0 million investment made in Company A ("Investment A"), and $30.0 million investment made in Company B
("Investment B")
Year 2: Investment A sold for $50.0 million and fair market value ("FMV") of Investment B determined to be $32.0 million
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Year 3: FMV of Investment B determined to be $25.0 million
Year 4: Investment B sold for $31.0 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of $6.0 million—($30.0 million realized capital gains on sale of Investment A multiplied by 20.0%)
Year 3: None—$5.0 million (20.0% multiplied by ($30.0 million cumulative capital gains less $5.0 million cumulative capital
depreciation)) less $6.0 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $0.2 million—$6.2 million ($31.0 million cumulative realized capital gains multiplied by 20.0%)
less $6.0 million (capital gains incentive fee taken in Year 2)
Alternative 2
Assumptions
Year 1: $20.0 million investment made in Company A ("Investment A"), $30.0 million investment made in Company B ("Investment
B") and $25.0 million investment made in Company C ("Investment C")
Year 2: Investment A sold for $50.0 million, FMV of Investment B determined to be $25.0 million and FMV of Investment C
determined to be $25.0 million
Year 3: FMV of Investment B determined to be $27.0 million and Investment C sold for $30.0 million
Year 4: FMV of Investment B determined to be $35.0 million
Year 5: Investment B sold for $20.0 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $5.0 million capital gains incentive fee—20.0% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A
less $5.0 million unrealized capital depreciation on Investment B)
Year 3: $1.4 million capital gains incentive fee—$6.4 million (20.0% multiplied by $32.0 million ($35.0 million cumulative realized capital
gains less $3.0 million unrealized capital depreciation)) less $5.0 million capital gains incentive fee received in Year 2
Year 4: $0.6 million capital gains incentive fee—$7.0 million (20.0% multiplied by $35.0 million cumulative realized capital gains) less
cumulative $6.4 million capital gains incentive fee received in Year 2 and Year 3
Year 5: None—$5.0 million (20.0% multiplied by $25.0 million (cumulative realized capital gains of $35.0 million less realized capital
losses of $10.0 million)) less $7.0 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4(1)
*
The hypothetical amounts of returns shown are based on a percentage of the Operating Company's total net assets and assume no
leverage. There is no guarantee that positive returns will
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be realized and actual returns may vary from those shown in this example. The capital gains incentive fees are calculated on an "adjusted"
basis for the Operating Company's investments held prior to the IPO and assumes those investments have been adjusted to reflect the
amortization of purchase or original issue discount as if each investment was purchased at the date of the IPO, or stepped up to fair market
value.
(1)
As noted above, it is possible that the cumulative aggregate capital gains fee received by the Investment Adviser ($7.0 million) is effectively
greater than $5.0 million (20.0% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation
($25.0 million)).
Payment of Expenses
The Operating Company's primary operating expenses are the payment of a base management fee and any incentive fees under the Investment
Management Agreement and the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to
the Companies under the Administration Agreement. The Operating Company bears all other expenses of the Companies' operations and
transactions, including (without limitation) fees and expenses relating to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
organizational and offering expenses;
the investigation and monitoring of the Operating Company's investments;
the cost of calculating net asset value;
interest payable on debt, if any, to finance its investments;
the cost of effecting sales and repurchases of shares of New Mountain Finance's common stock and other securities;
management and incentive fees payable pursuant to the Investment Management Agreement;
fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party
valuation firms);
transfer agent and custodial fees;
fees and expenses associated with marketing efforts (including attendance at investment conferences and similar events);
federal and state registration fees;
any exchange listing fees;
federal, state, local and foreign taxes;
independent directors' fees and expenses;
brokerage commissions;
costs of proxy statements, stockholders' reports and notices;
costs of preparing government filings, including periodic and current reports with the Securities and Exchange Commission;
fees and expenses associated with independent audits and outside legal costs;
costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;
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•
•
fidelity bond, liability insurance and other insurance premiums; and
printing, mailing and all other direct expenses incurred by either the Investment Adviser or the Companies in connection with
administering our business, including payments under the Administration Agreement that is based upon the Company's allocable
portion of overhead and other expenses incurred by the Administrator in performing its obligations to the Companies under the
Administration Agreement, including the allocable portion of the compensation of the Companies' chief financial officer and chief
compliance officer and their respective staffs.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to
as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70.0% of the BDC's total assets. Since New
Mountain Finance and AIV Holdings have no assets other than their ownership of units of the Operating Company and have no material long-term
liabilities, New Mountain Finance and AIV Holdings look to the Operating Company's assets for purposes of satisfying these requirements. The
principal categories of qualifying assets relevant to our business are any of the following:
1)
Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to
certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months,
an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the
Securities and Exchange Commission. An eligible portfolio company is defined in the 1940 Act as any issuer which:
(a)
(b)
(c)
is organized under the laws of, and has its principal place of business in, the U.S.;
is not an investment company (other than a small business investment company wholly owned by the BDC) or a company
that would be an investment company but for certain exclusions under the 1940 Act; and
satisfies any of the following:
(i)
(ii)
(iii)
(iv)
does not have any class of securities that is traded on a national securities exchange;
has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding
voting and non-voting common equity of less than $250.0 million;
is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a
director of the eligible portfolio company; or
is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less
than $2.0 million.
2)
3)
Securities of any eligible portfolio company that the Operating Company controls.
Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the
issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately
prior to the purchase of its securities was unable to meet its obligations as they came prior to the purchase of its securities was
unable to meet its obligations as they came due without material assistance other than conventional lending or financing
arrangements.
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4)
5)
6)
Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such
securities and the Operating Company already owns 60.0% of the outstanding equity of the eligible portfolio company.
Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to
the exercise of warrants or rights relating to such securities.
Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of
investment.
In addition, a BDC must have been organized and have its principal place of business in the U.S. and must be operated for the purpose of
making investments in the types of securities described in (1), (2) or (3) above.
As of December 31, 2011, 1.3% of the Operating Company's total assets were not qualifying assets.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70.0% test, the Operating Company must either control the
issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above)
significant managerial assistance, except that, where the Operating Company purchases such securities in conjunction with one or more other
persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial
assistance means, among other things, any arrangement whereby the BDC offers to provide, and, if accepted, does so provide, significant guidance
and counsel concerning the management, operations or business objectives and policies of a portfolio company. The Administrator or its affiliate
provides such managerial assistance on the Operating Company's behalf to portfolio companies that request this assistance.
Temporary Investments
Pending investments in other types of qualifying assets, the Operating Company's investments may consist of cash, cash equivalents, U.S.
government securities or high-quality debt securities maturing in one year or less from the time of investment (collectively, as "temporary
investments"), so that 70.0% of the Operating Company's assets are qualifying assets. Typically, the Operating Company will invest in U.S.
Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S.
government or its agencies. A repurchase agreement involves the purchase by an investor, such as the Operating Company, of a specified security
and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by
an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of the Operating Company's assets that
may be invested in such repurchase agreements. However, if more than 25.0% of the Operating Company's total assets constitute repurchase
agreements from a single counterparty, New Mountain Finance and AIV Holdings would not meet the Diversification Tests in order to qualify as a
RIC for federal income tax purposes. Thus, the Operating Company does not intend to enter into repurchase agreements with a single counterparty
in excess of this limit. The Investment Adviser will monitor the creditworthiness of the counterparties with which the Operating Company enters
into repurchase agreement transactions.
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Senior Securities
The Operating Company is permitted, under specified conditions, to issue multiple classes of debt and one class of membership units senior to
its common membership units if the Operating Company's asset coverage, as defined in the 1940 Act, is at least equal to 200.0% immediately after
each such issuance. In addition, while any senior securities remain outstanding (other than any indebtedness issued in consideration of a privately
arranged loan, such as any indebtedness outstanding under the Operating Company's Amended and Restated Loan and Security Agreement with
Wells Fargo Bank, National Association, dated May 19, 2011 (the "Holdings Credit Facility"), or the SLF Credit Facility), the Companies must make
provisions to prohibit any distribution to their stockholders or unit holders, as applicable, or the repurchase of their equity securities unless the
Operating Company meets the applicable asset coverage ratios at the time of the distribution or repurchase. The Operating Company may also
borrow amounts up to 5.0% of the value of its total assets for temporary or emergency purposes without regard to its asset coverage. The
Operating Company will include the assets and liabilities of NMF SLF for purposes of calculating the asset coverage ratio. For a discussion of the
risks associated with leverage, see Item 1A.—Risk Factors.
Code of Ethics
The Companies have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments
and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts,
including securities that may be purchased or held by the Operating Company so long as such investments are made in accordance with the code's
requirements. You may read and copy the code of ethics at the Securities and Exchange Commission's Public Reference Room located at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330, and copies of the code of ethics may be obtained, after paying a duplication fee, by electronic request at
the following e-mail address: publicinfo@sec.gov. In addition, the code of ethics is available on the Securities and Exchange Commission's Internet
site at http://www.sec.gov.
Compliance Policies and Procedures
The Companies and the Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent
violation of the federal securities laws and the Companies are required to review these compliance policies and procedures annually for their
adequacy and the effectiveness of their implementation. The Companies' chief compliance officer is responsible for administering these policies and
procedures.
Proxy Voting Policies and Procedures
The Operating Company has delegated its proxy voting responsibility to the Investment Adviser. The proxy voting policies and procedures of
the Investment Adviser are set forth below. The guidelines will be reviewed periodically by the Investment Adviser and the Operating Company's
non-interested directors, and, accordingly, are subject to change.
Introduction
As an investment adviser registered under the Advisers Act, the Investment Adviser has a fiduciary duty to act solely in the best interests of
its clients. As part of this duty, it recognizes that it must vote the Operating Company's securities in a timely manner free of conflicts of interest and
in the best interests of the Companies.
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The policies and procedures for voting proxies for the investment advisory clients of the Investment Adviser are intended to comply with
Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy policies
The Investment Adviser will vote proxies relating to the Operating Company's securities in the best interest of the Companies. It will review on
a case-by-case basis each proposal submitted for a stockholder vote to determine its impact on the portfolio securities held by the Operating
Company. Although the Investment Adviser will generally vote against proposals that may have a negative impact on its clients' portfolio
securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.
The proxy voting decisions of the Investment Adviser are made by the senior officers who are responsible for monitoring each of its clients'
investments. To ensure that its vote is not the product of a conflict of interest, it will require that: (a) anyone involved in the decision making
process disclose to its chief compliance officer any potential conflict that he or she is aware of and any contact that he or she has had with any
interested party regarding a proxy vote; and (b) employees involved in the decision making process or vote administration are prohibited from
revealing how the Investment Adviser intends to vote on a proposal in order to reduce any attempted influence from interested parties.
Proxy voting records
You may obtain, without charge, information regarding how the Operating Company voted proxies with respect to the Operating Company's
portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, 787 Seventh Avenue, 48th Floor, New
York, NY 10019.
Staffing
The Companies do not have any employees. Day-to-day investment operations that are conducted by the Operating Company are managed by
the Investment Adviser. See "Investment Management Agreement". The Operating Company reimburses the Administrator for the allocable
portion of overhead and other expenses incurred by it in performing its obligations to the Companies under the Administration Agreement,
including the compensation of the Companies' chief financial officer and chief compliance officer, and their respective staffs. For a more detailed
discussion of the Administration Agreement, see Item 8.—Financial Statements and Supplementary Data—Note 5, Agreements.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a variety of regulatory requirements on publicly-held companies and their insiders. Many of these
requirements affect the Companies. For example:
•
•
•
pursuant to Rule 13a-14 of the Exchange Act, the chief executive officer and chief financial officer of the Companies will be required
to certify the accuracy of the financial statements contained in the Companies' periodic reports;
pursuant to Item 307 of Regulation S-K, the Companies' periodic reports will be required to disclose their respective conclusions
about the effectiveness of their disclosure controls and procedures;
pursuant to Rule 13a-15 of the Exchange Act, beginning for the fiscal year ending December 31, 2012, the Companies' management
will be required to prepare a report regarding their
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assessment of their respective internal control over financial reporting and will be required to obtain an audit of the effectiveness of
internal control over financial reporting performed by their independent registered public accounting firm as of December 31, 2012;
and
•
pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, the Companies' periodic reports will be required to
disclose whether there were significant changes in their respective internal controls over financial reporting or in other factors that
could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
The Sarbanes-Oxley Act of 2002 requires the Companies to review their current policies and procedures to determine whether they comply with
the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder. The Companies intend to monitor their compliance with all regulations
that are adopted under the Sarbanes-Oxley Act of 2002 and will take actions necessary to ensure that they are in compliance therewith.
Available Information
We file with or submit to the Securities and Exchange Commission annual, quarterly and current periodic reports, proxy statements and other
information as required by the 1940 Act. You may inspect and copy any materials we file with the Securities and Exchange Commission at the Public
Reference Room of the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549 or by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information
statements, and other information filed electronically by us with the Securities and Exchange Commission at http://www.sec.gov.
We make available free of charge on our website, http://www.newmountainfinance.com, our reports, proxies and information statements, and
other information as soon as reasonably practicable after we electronically file such materials with, or furnish to, the Securities and Exchange
Commission. Information contained on our website is not incorporated by reference into this annual report and should not be considered to be a
part of this annual report.
Privacy Notice
We are committed to protecting your privacy. This privacy notice sets forth our policies with respect to non-public personal information about
our stockholders and prospective and former stockholders. These policies apply to stockholders of the Companies and may be changed at any
time, provided notice of such change is given to you. This notice supersedes any other privacy notice you may have received from us.
We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. The only information we
collect from you is your name, address, number of shares you hold and your social security number. This information is used only so that we can
send you annual reports and other information about us, and send you proxy statements or other information required by law.
We do not share this information with any non-affiliated third party except as described below.
•
•
Authorized Employees of the Investment Adviser. It is our policy that only authorized employees of the Investment Adviser who
need to know your personal information will have access to it.
Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as
recordkeeping, processing your trades, and mailing you information.
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These companies are required to protect your information and use it solely for the purpose for which they received it.
•
Courts and Government Officials. If required by law, we may disclose your personal information in accordance with a court order or
at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.
We seek to carefully safeguard your private information and, to that end, restrict access to non-public personal information about you to those
employees and other persons who need to know the information to enable us to provide services to you. We maintain physical, electronic and
procedural safeguards to protect your non-public personal information.
If you have any questions regarding this policy or the treatment of your non-public personal information, please contact our Chief Compliance
Officer at (212) 655-0024.
Item 1A. Risk Factors
You should carefully consider the significant risks described below, together with all of the other information included in this combined
Form 10-K, including our financial statements and the related combined notes, before making an investment decision in any of the Companies.
The risks set forth below are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial may materially affect our business, our structure, the Operating Company's financial condition, the Operating Company's
investments and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be
materially affected. In such case, our net asset value and the trading price of New Mountain Finance's common stock could decline. There can
be no assurance that we will achieve the Operating Company's investment objective and you may lose all or part of your investment.
RISKS IN THE CURRENT ENVIRONMENT
The downgrade of the U.S. credit rating and the economic crisis in Europe could negatively impact the Operating Company's liquidity,
financial condition and earnings, thus affecting the financial condition and earnings of New Mountain Finance and AIV Holdings.
Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased
the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal
debt ceiling, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the U.S. from "AAA" to "AA+" in August 2011.
The impact of this or any further downgrades to the U.S. government's sovereign credit rating, or its perceived creditworthiness, and the impact of
the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is
inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that
governmental or other measures to aid economic recovery will be effective. These developments, and the government's credit concerns in general,
could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with the Operating
Company's debt portfolio and its ability to access the debt markets on favorable terms. In addition, the decreased credit rating could create broader
financial turmoil and uncertainty, which may weigh heavily on New Mountain Finance's stock price. Continued adverse economic conditions could
have a material adverse effect on the Companies' business, financial condition and results of operations.
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RISKS RELATED TO OUR BUSINESS AND STRUCTURE
We have a limited operating history.
New Mountain Finance and AIV Holdings are newly-formed entities while the Operating Company commenced operations in October 2008,
owning all of the operations, including all of the assets and liabilities, of the Predecessor Entities. New Mountain Finance and AIV Holdings are
holding companies with no direct operations of their own, and their only business and sole asset are their ownership of common membership units
of the Operating Company. As a result, we are subject to many of the business risks and uncertainties associated with any new business, including
the risk that we may not achieve the Operating Company's investment objective and that, as a result, the value of New Mountain Finance's common
stock and the Operating Company's units could decline substantially.
The Operating Company may suffer credit losses.
Investments in small and middle market businesses are highly speculative and involve a high degree of risk of credit loss. These risks are likely
to increase during volatile economic periods, such as the U.S. and many other economies have recently been experiencing.
The Operating Company does not expect to replicate the Predecessor Entities' historical performance or the historical performance of other
entities managed or supported by the New Mountain Capital.
The Operating Company does not expect to replicate the Predecessor Entities' historical performance or the historical performance of New
Mountain Capital's investments. The Operating Company's investment returns may be substantially lower than the returns achieved by the
Predecessor Entities. Although the Predecessor Entities commenced operations during otherwise unfavorable economic conditions, this was a
favorable environment in which the Operating Company could conduct its business in light of its investment objectives and strategy. In addition,
the Operating Company's investment strategies may differ from those of New Mountain Capital or its affiliates. The Companies, as BDCs, and New
Mountain Finance and AIV Holdings, as RICs, are subject to certain regulatory restrictions that do not apply to New Mountain Capital or its
affiliates.
The Operating Company is generally not permitted to invest in any portfolio company in which New Mountain Capital or any of its affiliates
currently have an investment or to make any co-investments with New Mountain Capital or its affiliates, except to the extent permitted by the 1940
Act. This may adversely affect the pace at which the Operating Company makes investments. Moreover, the Operating Company may operate with
a different leverage profile than the Predecessor Entities. Furthermore, none of the prior results from the Predecessor Entities were from public
reporting companies, and all or a portion of these results were achieved in particularly favorable market conditions for the Operating Company's
investment strategy which may never be repeated. Finally, we can offer no assurance that the Operating Company's investment team will be able to
continue to implement its investment objective with the same degree of success as it has had in the past.
There is uncertainty as to the value of the Operating Company's portfolio investments because most of its investments are, and may continue to
be in private companies and recorded at fair value. In addition, because New Mountain Finance and AIV Holdings are holding companies, the
fair values of the Operating Company's investments are determined by the Operating Company's board of directors in accordance with the
Operating Company's valuation policy.
Some of the Operating Company's investments are and may be in the form of securities or loans that are not publicly traded. The fair value of
these investments may not be readily determinable. Under the 1940 Act, the Operating Company is required to carry its portfolio investments at
market value or, if there is no readily available market value, at fair value as determined in good faith by its
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board of directors, including to reflect significant events affecting the value of its securities. The Operating Company values its investments for
which it does not have readily available market quotations quarterly, or more frequently as circumstances require, at fair value as determined in
good faith by its board of directors in accordance with its valuation policy, which is at all times consistent with GAAP. See Item 8.—Financial
Statements and Supplementary Data—Note 2, Summary of Significant Accounting Policies or Note 4, Fair Value for additional information on
around valuations.
The Operating Company's board of directors utilizes the services of one or more independent third-party valuation firms to aid it in determining
the fair value with respect to its material unquoted assets in accordance with its valuation policy. The inputs into the determination of fair value of
these investments may require significant management judgment or estimation. Even if observable market data is available, such information may be
the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an
actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of
such information.
The types of factors that the board of directors takes into account in determining the fair value of its investments generally include, as
appropriate: available market data, including relevant and applicable market trading and transaction comparables, applicable market yields and
multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio
company's ability to make payments, its earnings and discounted cash flows and the markets in which it does business, comparisons of financial
ratios of peer companies that are public, comparable merger and acquisition transactions and the principal market and enterprise values. Since these
valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time
and may be based on estimates, the Operating Company's determinations of fair value may differ materially from the values that would have been
used if a ready market for these securities existed.
Due to this uncertainty, the Operating Company's fair value determinations may cause its net asset value and, consequently, New Mountain
Finance's and AIV Holdings' net asset value, on any given date, to materially understate or overstate the value that the Operating Company may
ultimately realize upon the sale of one or more of our investments. In addition, investors purchasing New Mountain Finance's common stock based
on an overstated net asset value would pay a higher price than the realizable value of our investments might warrant. Since New Mountain Finance
and AIV Holdings are holding companies and their only business and sole asset are their ownership of common membership units of the Operating
Company, New Mountain Finance's and AIV Holdings' net asset values are based on the Operating Company's valuation and their percentage
interest in the Operating Company.
Although the Operating Company's current board of directors is comprised of the same individuals as New Mountain Finance's and AIV
Holdings' board of directors, there can be no assurances that the Operating Company's board composition will remain the same as New Mountain
Finance and AIV Holdings. As a result, the value of your investment in New Mountain Finance or AIV Holdings could be similarly understated or
overstated based on the Operating Company's fair value determinations. However, in the event that New Mountain Finance and/or AIV Holdings'
board of directors believes that a different fair value for the Operating Company's investments is appropriate, New Mountain Finance and/or AIV
Holdings' board of directors may discuss the differences in the valuations with the Operating Company's board of directors for the purposes of
resolving the differences in valuation. The valuation procedures of New Mountain Finance and AIV Holdings are substantially similar to those
utilized by the Operating Company described above.
The Operating Company may adjust quarterly the valuation of its portfolio to reflect its board of directors' determination of the fair value of
each investment in its portfolio. Any changes in fair value
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are recorded in the Operating Company's statement of operations as net change in unrealized appreciation or depreciation.
The Operating Company's ability to achieve its investment objective depends on key investment personnel of the Investment Adviser. If the
Investment Adviser were to lose any of its key investment personnel, the Operating Company's ability to achieve its investment objective could
be significantly harmed.
The Operating Company depends on the investment judgment, skill and relationships of the investment professionals of the Investment
Adviser, particularly Steven B. Klinsky and Robert Hamwee, as well as other key personnel to identify, evaluate, negotiate, structure, execute,
monitor and service its investments. The Investment Adviser, as an affiliate of New Mountain Capital, is supported by New Mountain Capital's
team, which as of December 31, 2011 consisted of approximately 94 staff members of New Mountain Capital and its affiliates to fulfill its obligations
to the Operating Company under the Investment Management Agreement. The Investment Adviser may also depend upon New Mountain Capital
to obtain access to investment opportunities originated by the professionals of New Mountain Capital and its affiliates. The Operating Company's
future success depends to a significant extent on the continued service and coordination of the key investment personnel of the Investment
Adviser. The departure of any of these individuals could have a material adverse effect on the Operating Company's ability to achieve its
investment objective.
The Investment Committee, which provides oversight over the Operating Company's investment activities, is provided by the Investment
Adviser. The Investment Committee currently consists of five members. The loss of any member of the Investment Committee or of other senior
professionals of the Investment Adviser and its affiliates without suitable replacement could limit the Operating Company's ability to achieve its
investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition, results of operation and
cash flows. To achieve the Operating Company's investment objective, the Investment Adviser may hire, train, supervise and manage new
investment professionals to participate in its investment selection and monitoring process. If the Investment Adviser is unable to find investment
professionals or do so in a timely manner, our business, financial condition and results of operations could be adversely affected.
The Investment Adviser does not have any prior experience managing a BDC or a RIC, which could adversely affect our business.
The Investment Adviser has not previously managed a BDC or a RIC. The 1940 Act and the Code impose numerous constraints on the
operations of BDCs and RICs that do not apply to the other investment vehicles previously managed by the investment professionals of the
Investment Adviser. For example, under the 1940 Act, BDCs are required to invest at least 70.0% of their total assets primarily in securities of
qualifying U.S. private or thinly traded companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that
mature in one year or less. Moreover, qualification for taxation as a RIC under subchapter M of the Code requires satisfaction of source-of-income,
asset diversification and annual distribution requirements. New Mountain Finance and AIV Holdings have no assets other than their ownership of
common membership units of the Operating Company and have no material long-term liabilities. As a result, New Mountain Finance and AIV
Holdings look to the Operating Company's assets and income for purposes of satisfying the requirements under the 1940 Act applicable to BDCs
and the requirements under the Code applicable to RICs. The failure to comply with these provisions in a timely manner could prevent New
Mountain Finance, AIV Holdings and the Operating Company from qualifying as BDCs or New Mountain Finance and AIV Holdings from
qualifying as a RIC and could force us to pay unexpected taxes and penalties, which would have a material adverse effect on our performance. The
Investment Adviser's lack of experience in managing a portfolio of assets under the constraints applicable to BDCs and RICs may hinder its ability
to take advantage of attractive investment opportunities and, as a result, achieve
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the Operating Company's investment objective. If the Operating Company fails to maintain its status as a BDC or operate in a manner consistent
with New Mountain Finance's and AIV Holdings' status as RICs, its operating flexibility could be significantly reduced and New Mountain Finance
and AIV Holdings may be unable to maintain their status as BDCs or RICs.
The Operating Company operates in a highly competitive market for investment opportunities and may not be able to compete effectively.
The Operating Company competes for investments with other BDCs and investment funds (including private equity and hedge funds), as well
as traditional financial services companies such as commercial banks and other sources of funding. Many of its competitors are substantially larger
and have considerably greater financial, technical and marketing resources than it does. For example, some competitors may have a lower cost of
capital and access to funding sources that are not available to the Operating Company. In addition, some of the Operating Company's competitors
may have higher risk tolerances or different risk assessments than the Operating Company has. Furthermore, many of the Operating Company's
competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on the Companies
as BDCs or the source-of-income, asset diversification and distribution requirements that New Mountain Finance and AIV Holdings must satisfy to
obtain and maintain their RIC status. These characteristics could allow the Operating Company's competitors to consider a wider variety of
investments, establish more relationships and offer better pricing and more flexible structuring than the Operating Company is able to do. There are
a number of new BDCs that have recently completed their initial public offerings or that have filed registration statements with the Securities and
Exchange Commission, which could create increased competition for investment opportunities.
The Operating Company may lose investment opportunities if it does not match its competitors' pricing, terms and structure. With respect to
the investments the Operating Company makes, it does not seek to compete based primarily on the interest rates it may offer, and we believe that
some of the Operating Company's competitors may make loans with interest rates that may be lower than the rates it offers. In the secondary market
for acquiring existing loans, we expect the Operating Company to compete generally on the basis of pricing terms. If the Operating Company
matches its competitors' pricing, terms and structure, it may experience decreased net interest income, lower yields and increased risk of credit loss.
If the Operating Company is forced to match its competitors' pricing, terms and structure, it may not be able to achieve acceptable returns on its
investments or may bear substantial risk of capital loss. Part of the Operating Company's competitive advantage stems from the fact that we believe
the market for middle-market lending is underserved by traditional bank lenders and other financial sources. A significant increase in the number
and/or the size of the Operating Company's competitors in this target market could force it to accept less attractive investment terms. The Operating
Company may also compete for investment opportunities with accounts managed by the Investment Adviser or its affiliates. Although the
Investment Adviser allocates opportunities in accordance with its policies and procedures, allocations to such other accounts reduces the amount
and frequency of opportunities available to the Operating Company and may not be in the best interests of the Operating Company and,
consequently, New Mountain Finance's and AIV Holdings' stockholders. Moreover, the performance of investment opportunities is not known at
the time of allocation. If the Operating Company is not able to compete effectively, its business, financial condition and results of operations may
be adversely affected, thus affecting the business, financial condition and results of operations of New Mountain Finance and AIV Holdings.
Because of this competition, there can be no assurance that the Operating Company will be able to identify and take advantage of attractive
investment opportunities that it identifies or that it will be able to fully invest its available capital.
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Our business, results of operations and financial condition depends on the Operating Company's ability to manage future growth effectively.
The Operating Company's ability to achieve its investment objective and to grow depends on the Investment Adviser's ability to identify,
invest in and monitor companies that meet the Operating Company's investment criteria. Accomplishing this result on a cost-effective basis is
largely a function of the Investment Adviser's structuring of the investment process, its ability to provide competent, attentive and efficient
services to the Operating Company and its ability to access financing on acceptable terms. The Investment Adviser has substantial responsibilities
under the Investment Management Agreement and may also be called upon to provide managerial assistance to the Operating Company's portfolio
companies. These demands on the time of the Investment Adviser and its investment professionals may distract them or slow the Operating
Company's rate of investment. In order to grow, the Operating Company and the Investment Adviser may need to retain, train, supervise and
manage new investment professionals. However, these investment professionals may not be able to contribute effectively to the work of the
Investment Adviser. If the Operating Company is unable to manage its future growth effectively, our business, results of operations and financial
condition could be materially adversely affected.
The incentive fee may induce the Investment Adviser to make speculative investments.
The incentive fee payable to the Investment Adviser may create an incentive for the Investment Adviser to pursue investments that are risky
or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses,
particularly during cyclical economic downturns. The incentive fee payable to the Investment Adviser is calculated based on a percentage of the
Operating Company's return on investment capital. This may encourage the Investment Adviser to use leverage to increase the return on the
Operating Company's investments. In addition, because the base management fee is payable based upon the Operating Company's gross assets,
which includes any borrowings for investment purposes, but excludes cash and cash equivalents for investment purposes, the Investment Adviser
may be further encouraged to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the
likelihood of default, which would impair the value of New Mountain Finance's and AIV Holdings' common membership units of the Operating
Company and, consequently, the value of New Mountain Finance's and AIV Holdings' common stock.
The incentive fee payable to the Investment Adviser also may create an incentive for the Investment Adviser to invest in instruments that
have a deferred interest feature, even if such deferred payments would not provide the cash necessary for the Operating Company to make
distributions to New Mountain Finance and AIV Holdings that enable New Mountain Finance and AIV Holdings to pay current distributions to
their stockholders. Under these investments, the Operating Company would accrue the interest over the life of the investment but would not
receive the cash income from the investment until the end of the investment's term, if at all. The Operating Company's net investment income used
to calculate the income portion of the incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on
income that the Operating Company has not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such
interest payment obligations. In addition, the "catch-up" portion of the incentive fee may encourage the Investment Adviser to accelerate or defer
interest payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations in timing and dividend amounts.
The Operating Company may be obligated to pay the Investment Adviser incentive compensation even if the Operating Company incurs a loss.
The Investment Adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of the
Operating Company's Pre-Incentive Fee Adjusted Net
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Investment Income for that quarter (before deducting incentive compensation) above a performance threshold for that quarter. Accordingly, since
the performance threshold is based on a percentage of the Operating Company's net asset value, decreases in the Operating Company's net asset
value makes it easier to achieve the performance threshold. The Operating Company's Pre-Incentive Fee Adjusted Net Investment Income for
incentive compensation purposes excludes realized and unrealized capital losses or depreciation that it may incur in the fiscal quarter, even if such
capital losses or depreciation result in a net loss on the Operating Company's statement of operations for that quarter. Thus, the Operating
Company may be required to pay the Investment Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of its
portfolio or the Operating Company incurs a net loss for that quarter.
The Operating Company borrows money, which could magnify the potential for gain or loss on amounts invested in us and increase the risk of
investing in us.
The Operating Company borrows money as part of its business plan. Borrowings, also known as leverage, magnify the potential for gain or
loss on invested equity capital and may, consequently, increase the risk of investing in us. We expect the Operating Company to continue to use
leverage to finance its investments, through senior securities issued by banks and other lenders. The Operating Company is restricted from
incurring additional indebtedness under the Holdings Credit Facility and the SLF Credit Facility (the "Credit Facilities"), without lender consent. See
Item 8.—Financial Statements and Supplementary Data—Note 7, Borrowing Facilities for a detailed discussion on the Credit Facilities. Lenders
of these senior securities have fixed dollar claims on the Operating Company's assets that are superior to New Mountain Finance's and AIV
Holdings' claim as members of the Operating Company, and, consequently, superior to claims of New Mountain Finance's and AIV Holdings'
common stockholders. If the value of the Operating Company's assets decreases, leveraging would cause its net asset value and, consequently,
New Mountain Finance's and AIV Holdings' net asset value, to decline more sharply than it otherwise would have had it not leveraged. Similarly,
any decrease in the Operating Company's income would cause its net income and consequently New Mountain Finance's and AIV Holdings' net
income to decline more sharply than they would have had it not borrowed. Such a decline could adversely affect the Operating Company's ability to
make distributions to its members and, consequently, New Mountain Finance's and AIV Holdings' ability to make common stock dividend
payments. In addition, because the Operating Company's investments may be illiquid, the Operating Company may be unable to dispose of them or
to do so at a favorable price in the event it needs to do so if it is unable to refinance any indebtedness upon maturity and, as a result, we may suffer
losses. Leverage is generally considered a speculative investment technique.
The Operating Company's ability to service any debt that it incurs depends largely on its financial performance and is subject to prevailing
economic conditions and competitive pressures. Moreover, as the Investment Adviser's management fee is payable to the Investment Adviser
based on gross assets, including those assets acquired through the use of leverage, the Investment Adviser may have a financial incentive to incur
leverage which may not be consistent with New Mountain Finance's and AIV Holdings' interests and the interests of their common stockholders. In
addition, holders of New Mountain Finance's and AIV Holdings' common stock will, indirectly, bear the burden of any increase in the Operating
Company's expenses as a result of leverage, including any increase in the management fee payable to the Investment Adviser.
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