Item 1. BUSINESS.
New Mountain Guardian IV Income Fund L.L.C. ("we", "us" or "our"), formerly known as New Mountain Guardian IV Unlevered BDC, L.L.C., is a Delaware limited liability company formed on November 4, 2022. We are a closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). We intend to elect to be treated for United States ("U.S.") federal income tax purposes, and intend to comply with requirements to qualify annually thereafter, as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
New Mountain Finance Advisers BDC, L.L.C.
New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser") is a wholly-owned subsidiary of New Mountain Capital Group, L.P. (together with New Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky, other current and former New Mountain Capital professionals and related vehicles and a minority investor. New Mountain Capital is a global investment firm with approximately $50 billion of assets under management and a track record of investing in the middle market. New Mountain Capital focuses on investing in defensive growth companies across its private equity, credit and net lease investment strategies. The Investment Adviser also manages other funds that may have investment mandates that are similar, in whole or in part, to ours. The Investment Adviser manages our day-to-day operations and provides us 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 our investments and monitoring and servicing our investments. The Investment Adviser is managed by a six member investment committee (the "Investment Committee"), which is responsible for approving purchases and sales of our investments above the greater of: (i) $5.0 million or (ii) 1% of aggregate Capital Commitments in the aggregate by a single issuer. For additional information on the Investment Committee, see "Investment Committee".
New Mountain Finance Administration, L.L.C.
New Mountain Finance Administration, L.L.C. (the "Administrator"), a wholly-owned subsidiary of New Mountain Capital, provides the administrative services necessary to conduct our day-to-day operations. The Administrator also maintains, or oversees the maintenance of, our financial records, our reports to unitholders and reports filed with the U.S. Securities and Exchange Commission ("SEC"). The Administrator performs the calculation and publication of the value of our members' capital, 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 has hired a third party sub-administrator to assist with the provision of administrative services. The Administrator may also provide, on our behalf, managerial assistance to our portfolio companies.
Competition
We compete 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 we are able to compete with these entities primarily on the basis of the experience and contacts of our management team, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, the model that we employ to perform our due diligence with the broader New Mountain Capital team and our model of investing in companies and industries we know well.
We believe that some of our competitors may make investments with interest rates and returns that are comparable to or lower than the rates and returns that we target. Therefore, we do not seek to compete solely on the interest rates and returns that we offer to potential portfolio companies. For additional information concerning the competitive risks we face, see Item 1A.—Risk Factors in this Annual Report on Form 10-K.
Investment Objective and Portfolio
We focus on providing direct lending solutions to U.S. upper middle market companies backed by top private equity sponsors. Our investment objective is to generate current income and capital appreciation through the sourcing and origination of senior secured loans and select junior capital positions, to growing businesses in defensive industries that offer attractive risk-adjusted returns. Our differentiated investment approach leverages the deep sector knowledge and operating resources of New Mountain Capital.
We primarily invest in senior secured debt of U.S. sponsor-backed, middle market companies. We define middle market companies as those with annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of $10.0 million to $200.0 million. Our focus is on defensive growth businesses that generally exhibit the following characteristics: (i)
acyclicality, (ii) sustainable secular growth drivers, (iii) niche market dominance and high barriers to competitive entry, (iv) recurring revenue and strong free cash flow, (v) flexible cost structures and (vi) seasoned management teams.
Senior secured loans may include traditional first lien loans or unitranche loans. We invest a significant portion of our portfolio in unitranche loans, which are loans that combine both senior and subordinated debt, generally in a first-lien position. Because unitranche loans combine characteristics of senior and subordinated debt, they have risks similar to the risks associated with secured debt and subordinated debt. Certain unitranche loan investments may include “last-out” positions, which generally heighten the risk of loss. In some cases, our investments may also include equity interests.
As of December 31, 2023, our top five industry concentrations were business services, software, healthcare, food & beverage and education. At December 31, 2023, our portfolio consisted of 44 portfolio companies and was invested 96.8% in first lien loans, 0.9% in second lien loans and 2.3% in subordinated loans, as measured at fair value.
The fair value of our investments, as determined in good faith by our board of directors, was approximately $86.6 million in 44 portfolio companies at December 31, 2023.
The following table shows our portfolio and investment activity for the period from May 24, 2023 (commencement of operations) to December 31, 2023: | | | | | | | | | | | | | | | | | |
| | | For the period from May 24, 2023 (commencement of operations) to | | | | | | | |
| (in millions) | | December 31, 2023 | | | | | | | |
| New investments in 44 portfolio companies | | $ | 85.1 | | | | | | | | |
| Debt repayments in existing portfolio companies | | (0.1) | | | | | | | | |
| Sales of securities in 0 portfolio companies | | — | | | | | | | | |
| Change in unrealized appreciation on 24 portfolio companies | | 1.3 | | | | | | | | |
| Change in unrealized depreciation on 14 portfolio companies | | — | | (1) | | | | | | |
(1)For the period from May 24, 2023 (commencement of operations) to December 31, 2023, change in unrealized depreciation was less than $50 thousand.
The following summarizes our ten largest portfolio company investments and the seven industries in which we were invested as of December 31, 2023, calculated as a percentage of fair value as of December 31, 2023:
| | | | | | | | |
| Portfolio Company | | Percent of Total Investments at Fair Value |
| Al Altius US Bidco, Inc. | | 5.1 | % |
| Sierra Enterprises, LLC | | 5.0 | % |
| Affinipay Midco, LLC | | 4.6 | % |
| Associations, Inc. | | 4.6 | % |
| Geo Parent Corporation | | 4.2 | % |
| USRP Holdings, Inc. | | 4.0 | % |
| Houghton Mifflin Harcourt Company | | 3.9 | % |
| Kaseya Inc. | | 3.8 | % |
| Bluefin Holding, LLC | | 3.6 | % |
| Greenway Health, LLC | | 3.6 | % |
| | 42.4 | % |
| | | | | | | | |
| Industry Type | | Percent of Total Investments at Fair Value |
| Business Services | | 39.6 | % |
| Software | | 34.6 | % |
| Healthcare | | 10.8 | % |
| Food & Beverage | | 5.0 | % |
| Education | | 3.9 | % |
| Consumer Services | | 3.4 | % |
| Financial Services | | 2.7 | % |
| | |
| | |
| | |
| | 100.0 | % |
Investment Criteria
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 our investments.
•Defensive growth industries. We seek 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. We target industries and companies that have well defined industries and well established, understandable barriers to competitive entry.
•Recurring revenue. Where possible, we focus on companies that have a high degree of predictability in future revenue.
•Flexible cost structure. We seek to invest in businesses that have limited fixed costs and therefore modest operating leverage.
•Strong free cash flow and high return on assets. We focus on businesses with a demonstrated ability to produce meaningful free cash flow from operations. We typically target companies that are not asset intensive and that have minimal capital expenditure and minimal working capital growth needs.
•Sustainable business and niche market dominance. We seek 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. We seek to invest in established companies with sound historical financial performance. We do not intend to invest in start‑up companies or companies with speculative business plans.
Investment Selection and Process
The Investment Adviser believes it has developed a proven, consistent and replicable investment process to execute our 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 from the 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.
The Investment Adviser is managed by a six member Investment Committee, which is responsible for approving purchases and sales of our investments above the greater of: (i) $5.0 million or (ii) 1% of aggregate Capital Commitments in the aggregate by a single issuer. The Investment Committee currently consists of Steven B. Klinsky, Robert A. Hamwee, Adam B. Weinstein, Laura C. Holson and John R. Kline. The sixth and final member of the Investment Committee will consist of a New Mountain Capital Managing Director who will hold the position on the Investment Committee on an annual rotating basis. A. Joe Delgado served on the Investment Committee from August 2022 to July 2023. Beginning in August 2023, Andre V. Moura was appointed to the Investment Committee for a one year term. In addition, our executive officers and certain investment professionals of the Investment Adviser are invited to all Investment Committee meetings. Purchases and dispositions below $5.0 million or 1% of aggregate Capital Commitments, whichever is greater, may be approved by our chief executive officer.