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As filed with the Securities and Exchange Commission on January 26, 2021
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No.
(Check appropriate box or boxes)
Portman Ridge Finance Corporation
(Exact Name of Registrant as Specified in Charter)
650 Madison Avenue
23rd Floor
New York, NY 10022
(Address of Principal Executive Offices)
(212) 891-2880
(Area Code and Telephone Number)
Edward Goldthorpe
President and Chief Executive Officer
Portman Ridge Finance Corporation
650 Madison Avenue
23rd Floor
New York, NY 10022
(Name and Address of Agent for Service)
Copies to:
Rajib Chanda, Esq.
Jonathan L. Corsico, Esq.
Steven Grigoriou, Esq.
Simpson Thacher & Bartlett LLP
900 G Street, N.W.
Washington, DC 20001
Telephone: (202) 636-5500
Fax: (202) 636-5502
Thomas J. Friedmann, Esq.
Harry S. Pangas, Esq.
Bernardo L. Piereck, Esq.
Dechert LLP
1900 K Street, NW
Washington, DC 20006
Telephone: (202) 261-3300
Fax: (202) 261-3333
Approximate Date of Proposed Public Offering: As soon as practicable after this registration statement becomes effective and upon completion of the transactions described in the enclosed document.
Calculation of Registration Fee under the Securities Act of 1933
Title of Securities Being Registered
Amount Being
Registered(1)
Proposed Maximum
Offering Price
per Share of
Common Stock
Proposed Maximum
Aggregate
Offering Price(2)
Amount of
Registration Fee(3)
Common Stock, par value $0.01 per share
15,057,682 shares
N/A
$45,905,125
$5,008.25
(1)
The number of shares to be registered represents the maximum number of shares of the registrant’s common stock estimated to be issuable in connection with the merger agreement described in the enclosed document. Pursuant to Rule 416, this registration statement also covers additional securities that may be issued as a result of stock splits, stock dividends or similar transactions.
(2)
Estimated solely for the purpose of calculating the registration fee and calculated pursuant to Rule 457(c) and Rule 457(f)(1) under the Securities Act of 1933, as amended.
(3)
Based on a rate of $109.10 per $1,000,000 of the proposed maximum aggregate offering price.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the U.S. Securities and Exchange Commission. PTMN may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This document is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where such offer or sale is not permitted.
PRELIMINARY—SUBJECT TO COMPLETION—DATED JANUARY 26, 2021
HARVEST CAPITAL CREDIT CORPORATION
767 Third Avenue, 29th Floor
New York, New York 10017
MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT
[•], 2021
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders (the “HCAP Special Meeting”) of Harvest Capital Credit Corporation, a Delaware corporation (“HCAP”), to be held virtually on [•], 2021, at [•] a.m., Eastern Time, at the following website: [•].
The notice of special meeting and the proxy statement/prospectus accompanying this letter provide an outline of the business to be conducted at the HCAP Special Meeting. At the HCAP Special Meeting, you will be asked to:
(i)
adopt the Agreement and Plan of Merger, dated as of December 23, 2020 (as may be amended from time to time, the “Merger Agreement”), by and among Portman Ridge Finance Corporation, a Delaware corporation (“PTMN”), Rye Acquisition Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of PTMN (“Acquisition Sub”), HCAP, and Sierra Crest Investment Management LLC, a Delaware limited liability company and the external investment adviser to PTMN (“Sierra Crest”), and approve the transactions contemplated thereby, including the Mergers (as defined below) (such proposal collectively, the “Merger Proposal”); and
(ii)
approve the adjournment of the HCAP Special Meeting, if necessary or appropriate, to solicit additional proxies, in the event that there are insufficient votes at the time of the HCAP Special Meeting to approve the Merger Proposal (such proposal, the “HCAP Adjournment Proposal” and together with the Merger Proposal, the “HCAP Proposals”).
HCAP and PTMN are proposing a combination of both companies by a merger and related transactions pursuant to the Merger Agreement in which Acquisition Sub would merge with and into HCAP, with HCAP continuing as the surviving company (the “First Merger”). Immediately following the First Merger, HCAP, as the surviving company, will merge with and into PTMN, with PTMN continuing as the surviving company (together with the First Merger, the “Mergers”).
Under the Merger Agreement, on the date which is two days prior to the closing date of the Mergers (the closing date of the Mergers is herein referred to as the “Closing Date”) (the “Determination Date”), each of PTMN and HCAP will deliver to the other a calculation of its estimated net asset value (“NAV”) as of 5:00 p.m. New York City time as of the Determination Date, in each case, as approved by the Board of Directors of HCAP (the “HCAP Board”) or the Board of Directors of PTMN (the “PTMN Board”), as applicable, calculated in good faith and using the same assumptions and methodologies, and applying the same types of adjustments, used in preparing the NAV of HCAP as of September 30, 2020 or the NAV of PTMN as of September 30, 2020, as applicable (such calculation with respect to HCAP, the “Closing HCAP Net Asset Value,” and such calculation with respect to PTMN, the “Closing PTMN Net Asset Value”). HCAP and PTMN will update and redeliver such calculations in the event of any material changes between the Determination Date and the Closing Date or if needed to ensure that the calculation is determined within two days (excluding Sundays and holidays) prior to the date and time when the First Merger becomes effective (the “Effective Time”).
Subject to the terms and conditions of the Merger Agreement, at the closing of the First Merger (the “Closing”), PTMN will issue, in respect of all of the issued and outstanding shares of common stock, par value $0.001 per share, of HCAP (“HCAP Common Stock”) (excluding shares held by subsidiaries of HCAP or held, directly or indirectly, by PTMN or Acquisition Sub and all treasury shares (“Cancelled Shares”)), in the aggregate, a number of shares of common stock, par value $0.01 per share, of PTMN (“PTMN Common Stock”) equal to 19.9% of the number of shares of PTMN Common Stock issued and outstanding immediately prior to the Closing (the “Total Stock Consideration”). In addition, subject to the terms and conditions of the Merger Agreement, at the Closing, PTMN will pay, in respect of all the issued and outstanding shares of HCAP Common Stock (excluding Cancelled Shares) in the aggregate, an amount of cash equal to the amount by which (i) the Closing HCAP Net Asset Value exceeds (ii) the product of (A) the Total Stock Consideration multiplied by (B) the quotient of (i) the Closing PTMN Net Asset Value divided by (ii) the number of shares of PTMN Common Stock issued and outstanding as of the Determination Date (the “Aggregate Cash Consideration”).
Each person who as of the Effective Time is a record holder of shares of HCAP Common Stock will be entitled, with respect to all or any portion of such shares, to make an election (an “Election”) to receive payment for their shares of HCAP Common Stock in cash, subject to the conditions and limitations set forth in the Merger Agreement. Any record holder of shares of HCAP Common Stock at the record date who does not make an Election will be deemed to have elected to receive payment for their shares of HCAP Common Stock in the form of PTMN Common Stock. For the purpose of making Elections, a record holder of HCAP Common Stock that is a registered clearing agency and which holds legal title on behalf of multiple ultimate beneficial owners will be entitled to submit elections as if each ultimate beneficial owner were a record holder of HCAP Common Stock.
Each share of HCAP Common Stock (other than a Cancelled Share) with respect to which an Election has been made will be converted into the right to receive an amount in cash equal to the Per Share Cash Price (as defined below), subject to those adjustments described in the accompanying proxy statement/prospectus under “Questions and Answers About the HCAP Special Meeting and the Mergers—Questions and Answers About the Mergers—What will HCAP Stockholders Receive in the Mergers?” and “Description of the Merger Agreement—Allocation of Merger Consideration and Illustrative Elections and Calculations.”
The “Per Share Cash Price” means the quotient of (i) the sum of (A) the product of Total Stock Consideration multiplied by the PTMN Per Share Price (as defined below) plus (B) the Aggregate Cash Consideration, divided by (ii) the number of shares of HCAP Common Stock issued and outstanding immediately prior to the Closing. The “PTMN Per Share Price” is defined as the average of the volume weighted average price per share of PTMN Common Stock on Nasdaq on each of the ten consecutive trading days ending with the Determination Date.
Each share of HCAP Common Stock (other than a Cancelled Share) with respect to which an Election has not been made will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of PTMN Common Stock, equal to the number of shares of PTMN Common Stock with a value equal to the Per Share Cash Price based on the PTMN Per Share Price, subject to those adjustments described in the accompanying proxy statement/prospectus under “Questions and Answers About the HCAP Special Meeting and the Mergers—Questions and Answers About the Mergers—What will HCAP Stockholders Receive in the Mergers?” and “Description of the Merger Agreement—Allocation of Merger Consideration and Illustrative Elections and Calculations.”
Furthermore, as additional consideration to the holders of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time (excluding any Cancelled Shares), Sierra Crest will pay or cause to be paid to such holders an aggregate amount in cash equal to $2.15 million.
The market value of the merger consideration will fluctuate with changes in the market price of PTMN Common Stock. The HCAP Board urges you to obtain current market quotations of PTMN Common Stock. PTMN Common Stock trades on The Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “PTMN.” The following table shows the closing sale prices of PTMN Common Stock, as reported on Nasdaq on December 22, 2020, the last trading day before the execution of the Merger Agreement, and on [], 2021, the last trading day before printing this document.
 
PTMN
Common Stock
Closing Sales Price at December 22, 2020
$1.80
Closing Sales Price at [•], 2021
$[•]

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Your vote is extremely important. At the HCAP Special Meeting, you will be asked to vote on the Merger Proposal and, if necessary or appropriate, the HCAP Adjournment Proposal. The approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of HCAP Common Stock entitled to vote at the HCAP Special Meeting. You also may be asked to vote to approve the HCAP Adjournment Proposal. The approval of the HCAP Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of HCAP Common Stock present in person or represented by proxy and entitled to vote at the HCAP Special Meeting, whether or not a quorum is present.
Abstentions and broker non-votes (which occur when a beneficial owner does not instruct its broker, bank, trustee or nominee holding its shares of HCAP Common Stock how to vote such shares on its behalf) will have the same effect as votes “against” the Merger Proposal. Abstentions will have the same effect as a vote “against” approval of the HCAP Adjournment Proposal. Broker non-votes will have no effect on the voting outcome of the HCAP Adjournment Proposal.
After careful consideration, on the unanimous recommendation of a special committee (the “HCAP Special Committee”) of the HCAP Board comprised solely of the independent directors of the HCAP Board, the HCAP Board approved the Merger Agreement and the transactions contemplated thereby, including the Mergers, and recommends that HCAP Stockholders vote “FOR” the Merger Proposal and, if necessary or appropriate, “FOR” the HCAP Adjournment Proposal. You can vote for the HCAP Proposals by following the instructions on the enclosed proxy card and voting by Internet or telephone or by signing, dating and returning the proxy card in the postage-paid envelope provided.
It is important that your shares be represented at the HCAP Special Meeting. You have the right to receive notice of, and to vote at, the HCAP Special Meeting, or any adjournments and postponements of HCAP Special Meeting, if you were a stockholder of record of HCAP Common Stock at the close of business on [•], 2021. Each HCAP Stockholder is invited to attend the HCAP Special Meeting virtually. You or your proxyholder will be able to attend the HCAP Special Meeting online, vote and submit questions by visiting [•] and using a control number assigned by Broadridge Financial Solutions Inc. To receive access to the virtual HCAP Special Meeting, you will need to follow the instructions provided in the Notice of Special Meeting of Stockholders and the proxy statement/prospectus that follow. Please follow the instructions on the enclosed proxy card and authorize a proxy via the Internet, by telephone or by mail to vote your shares. HCAP encourages you to vote via the Internet as it saves HCAP significant time and processing costs. If you are the beneficial owner of your shares, you will need to follow the instructions provided by your broker, bank, trustee or nominee regarding how to instruct your broker, bank, trustee or nominee to vote your shares at the HCAP Special Meeting. Voting by proxy does not deprive you of your right to participate in the virtual HCAP Special Meeting.
This proxy statement/prospectus describes the HCAP Special Meeting, the Mergers, and the documents related to the Mergers (including the Merger Agreement) that HCAP Stockholders should review before voting on the Merger Proposal and should be retained for future reference. Please carefully read this entire document, including “Risk Factors” beginning on page 22 and as otherwise incorporated by reference herein, for a discussion of the risks relating to the Mergers, PTMN and HCAP. HCAP files annual, quarterly and current reports, proxy statements and other information about itself with the SEC. HCAP maintains a website at www.harvestcapitalcredit.com and makes all of its annual, quarterly and current reports, proxy statements and other publicly filed information available on or through its website. Information contained on HCAP’s website is not incorporated by reference into this proxy statement/prospectus, and you should not consider information contained on HCAP’s website to be part of this proxy statement/prospectus. You may also obtain such information, free of charge, and make stockholder inquiries by contacting HCAP in writing at 767 Third Avenue, 29th Floor, New York, NY 10017, Attention: Corporate Secretary, by calling collect at (212) 906-3589 or by sending an e-mail to [•]. The SEC also maintains a website at http://www.sec.gov that contains such information.
 
Sincerely yours,
 
 
 
William E. Alvarez, Jr.
 
Chief Financial Officer, Chief Compliance Officer &
Secretary of Harvest Capital Credit Corporation
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of PTMN Common Stock to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Important Notice Regarding the Availability of Proxy Materials for the HCAP Special Meeting to Be Held on [], 2021: HCAP’s proxy statement/prospectus and the proxy card are available at www.proxyvote.com.
The date of the accompanying proxy statement/prospectus is [•], 2021 and it is first being mailed or otherwise delivered to HCAP Stockholders on or about [•], 2021.
Harvest Capital Credit Corporation
Portman Ridge Finance Corporation
767 Third Avenue, 29th Floor
650 Madison Avenue, 23rd Floor
New York, New York 10017
New York, NY 10022
(212) 906-3589
(212) 891-2880

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HARVEST CAPITAL CREDIT CORPORATION
767 Third Avenue, 29th Floor
New York, New York 10017
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [•], 2021

NOTICE OF VIRTUAL 2021 SPECIAL MEETING OF STOCKHOLDERS

Online Meeting Only—No Physical Meeting Location

[Website Address]

[•], 2021, at [•] a.m., Eastern Time
Notice is hereby given to the holders of shares of common stock (“HCAP Stockholders”) of Harvest Capital Credit Corporation, a Delaware corporation (“HCAP”), that:
A Special Meeting of Stockholders of HCAP (the “HCAP Special Meeting”) will be held virtually, solely by the means of remote communication, on [•], 2021, at [•] a.m., Eastern Time, at the following website: [•], for the following purposes:
(i)
adopt the Agreement and Plan of Merger, dated as of December 23, 2020 (as may be amended from time to time, the “Merger Agreement”), by and among Portman Ridge Finance Corporation, a Delaware corporation (“PTMN”), Rye Acquisition Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of PTMN (“Acquisition Sub”), HCAP, and Sierra Crest Investment Management LLC, a Delaware limited liability company and the external investment adviser to PTMN (“Sierra Crest”), and approve the transactions contemplated thereby, including the Mergers (as defined below) (such proposal collectively, the “Merger Proposal”); and
(ii)
approve the adjournment of the HCAP Special Meeting, if necessary or appropriate, to solicit additional proxies, in the event that there are insufficient votes at the time of the HCAP Special Meeting to approve the Merger Proposal (such proposal, the “HCAP Adjournment Proposal” and together with the Merger Proposal, the “HCAP Proposals”).
HCAP and PTMN are proposing a combination of both companies by a merger and related transactions pursuant to the Merger Agreement in which Acquisition Sub would merge with and into HCAP, with HCAP continuing as the surviving company (the “First Merger”). Immediately following the First Merger, HCAP, as the surviving company, will merge with and into PTMN, with PTMN continuing as the surviving company (together with the First Merger, the “Mergers”).
ON THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF HCAP (THE “HCAP BOARD”) COMPRISED SOLELY OF THE INDEPENDENT DIRECTORS OF THE HCAP BOARD, THE HCAP BOARD APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGERS, AND RECOMMENDS THAT HCAP STOCKHOLDERS VOTE “FOR” THE MERGER PROPOSAL AND, IF NECESSARY OR APPROPRIATE, “FOR” THE HCAP ADJOURNMENT PROPOSAL.
Enclosed is a copy of the proxy statement/prospectus and proxy card. You have the right to receive notice of, and to vote at, the HCAP Special Meeting, or any adjournments and postponements of HCAP Special Meeting, if you were a stockholder of record of HCAP Common Stock at the close of business on [•], 2021 (the “HCAP Record Date”). A list of these stockholders will be open for examination by any HCAP Stockholder for any purpose germane to the HCAP Special Meeting for a period of ten days prior to the HCAP Special Meeting at HCAP’s principal executive office at 767 Third Avenue, 29th Floor, New York, NY 10017 and electronically during the HCAP Special Meeting at [•].

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Each HCAP Stockholder is invited to attend the HCAP Special Meeting virtually. You or your proxyholder will be able to attend the HCAP Special Meeting online, vote and submit questions by visiting [•] and using a control number assigned by Broadridge Financial Solutions Inc., which is included on the proxy card that you received.
If you are a beneficial owner of shares that are held in “street name,” that is they are registered in the name of your broker, bank, trustee or other nominee, you should have received a notice containing voting instructions from your nominee rather than from HCAP. You should follow the voting instructions in the notice to ensure that your vote is counted. Many brokers and banks participate in a program that offers a means to grant proxies to vote shares via the Internet or by telephone. If your shares are held in an account with a broker or bank participating in this program, you may grant a proxy to vote those shares via the Internet or telephonically by using the website or telephone number shown on the instruction form provided to you by your nominee.
In order to vote at the HCAP Special Meeting, or any adjournments and postponements of HCAP Special Meeting, you must either be a stockholder of record of HCAP Common Stock as of the HCAP Record Date, or you must be a beneficial holder as of the HCAP Record Date and obtain a legal proxy from your broker, bank, trustee, or other nominee. HCAP Stockholders of record will have the opportunity to vote electronically at the HCAP Special Meeting after they have checked into the HCAP Special Meeting as described above and in the proxy statement/prospectus. If you are a beneficial holder, you must request a legal proxy from your nominee in sufficient time so that it can be obtained, completed and submitted by you to HCAP no later than [•] p.m., Eastern Time, on [•], 2021.
The meeting webcast will begin promptly at [•] a.m., Eastern Time, on [•], 2021. We encourage you to access the meeting prior to the start time. Because the HCAP Special Meeting will be a completely virtual meeting, there will be no physical location for HCAP Stockholders to attend.
Whether or not you plan to participate in the HCAP Special Meeting, HCAP encourages you to vote your shares by following the instructions provided on the enclosed proxy card and voting by Internet or telephone or by signing, dating and returning the proxy card in the postage-paid envelope provided.
Your vote is extremely important to HCAP. In the event there are insufficient votes for a quorum or to approve the Merger Proposal at the time of the HCAP Special Meeting, the HCAP Special Meeting may be adjourned in order to permit further solicitation of proxies by HCAP.
The Mergers and the Merger Agreement are each described in more detail in this proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus.
 
By Order of the Board of Directors,
 
 
 
 
 
William E. Alvarez, Jr.
 
Chief Financial Officer, Chief Compliance Officer & Secretary of Harvest Capital Credit Corporation
New York, New York
[•], 2021
To ensure proper representation at the HCAP Special Meeting, please follow the instructions on the enclosed proxy card to authorize a proxy to vote your shares via the Internet or telephone, or by signing, dating and returning the proxy card. Even if you vote your shares prior to the HCAP Special Meeting, you still may participate in the virtual HCAP Special Meeting.

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ABOUT THIS DOCUMENT
This document, which forms part of a registration statement on Form N-14 filed with the U.S. Securities and Exchange Commission (the “SEC”) by PTMN (File No. 333- ), constitutes a prospectus of Portman Ridge Finance Corporation, a Delaware corporation (“PTMN”), under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the shares of PTMN common stock, $0.01 par value per share (“PTMN Common Stock”), to be issued to the holders (“HCAP Stockholders”) of shares of common stock, par value $0.001 per share (“HCAP Common Stock”), of Harvest Capital Credit Corporation, a Delaware corporation (“HCAP”), pursuant to the Agreement and Plan of Merger, dated as of December 23, 2020 (as may be amended from time to time, the “Merger Agreement”), by and among PTMN, Rye Acquisition Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of PTMN (“Acquisition Sub”), HCAP, and Sierra Crest Investment Management LLC, a Delaware limited liability company and the external investment adviser to PTMN (“Sierra Crest”). Pursuant to the Merger Agreement, Acquisition Sub will merge with and into HCAP (the “First Merger”), with HCAP continuing as the surviving corporation (the “Surviving Corporation”) and as a wholly-owned subsidiary of PTMN. Immediately after the effectiveness of the First Merger, HCAP, as the Surviving Corporation, will merge with and into PTMN (the “Second Merger” and, together with the First Merger, the “Mergers”), with PTMN continuing as the surviving corporation.
Effective January 1, 2021, the SEC adopted certain new disclosure rules applicable to transactions such as the Mergers under SEC release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses (the “Final Rule”), which among other things, added a new rule Regulation S-X Rule 6-11 that eliminates the requirement to provide pro forma financial information for fund acquisitions if certain supplemental information is disclosed, as described under Regulation S-X Rule 6-11(d) (“S-X Rule 6-11(d)”). Furthermore, the Final Rule amends Form N-14 to make the disclosure requirements consistent with Regulation S-X Rule 6-11. Under the Final Rule, PTMN has determined that it has met the supplemental disclosure requirements consistent with S-X Rule 6-11(d) as it has (i) included a pro forma fee table, showing (a) the pre-transaction fee structures of PTMN and HCAP and (b) the post-transaction fee structure of the combined entity, (ii) determined that the Mergers would not result in a material change in HCAP’s investment portfolio due to investment restrictions and (iii) determined that there are no material differences in accounting policies between PTMN and HCAP.
This document also constitutes a proxy statement of HCAP under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It also constitutes a notice of meeting with respect to the Special Meeting of Stockholders of HCAP (the “HCAP Special Meeting”), at which HCAP Stockholders will be asked to vote upon the Merger Proposal (as defined below) and, if necessary or appropriate, the Adjournment Proposal (as defined below).
You should rely only on the information contained in this proxy statement/prospectus, including in determining how to vote the shares of HCAP Common Stock. No one has been authorized to provide you with information that is different from that contained in this proxy statement/prospectus. This proxy statement/prospectus is dated [•], 2021. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than that date. Neither any mailing of this proxy statement/prospectus to HCAP Stockholders nor the issuance of PTMN Common Stock in connection with the Mergers will create any implication to the contrary.
This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.
Except where the context otherwise indicates, information contained in this proxy statement/prospectus regarding PTMN has been provided by PTMN and information contained in this proxy statement/prospectus regarding HCAP has been provided by HCAP.
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QUESTIONS AND ANSWERS ABOUT THE HCAP SPECIAL MEETING AND THE MERGERS
The questions and answers below highlight only selected information from this proxy statement/prospectus. They do not contain all of the information that may be important to you. You should carefully read this entire document to fully understand the Merger Agreement and the transactions contemplated thereby (including the Mergers) and the voting procedures for the HCAP Special Meeting.
Questions and Answers about the HCAP Special Meeting
Q:
Why am I receiving these materials?
A:
HCAP is furnishing these materials to HCAP Stockholders in connection with the solicitation of proxies by the board of directors of HCAP (the “HCAP Board”) for use at the HCAP Special Meeting to be held virtually at [] a.m., Eastern Time, on [], 2021 at the following [], and any adjournments or postponements thereof.
This proxy statement/prospectus and the accompanying materials are being made available on or about [•], 2021 to stockholders of record of PTMN, are being sent to stockholders of record of HCAP on or about [•], 2021, and are available at www.proxyvote.com.
Q:
What items will be considered and voted on at the HCAP Special Meeting?
A:
At the HCAP Special Meeting, HCAP Stockholders will be asked to approve: (i) the Merger Agreement and the transactions contemplated thereby, including the Mergers (such proposal collectively, the “Merger Proposal”); and (ii) the adjournment of the HCAP Special Meeting, if necessary or appropriate, to solicit additional proxies, in the event that there are insufficient votes at the time of the HCAP Special Meeting to approve the Merger Proposal (such proposal, the “HCAP Adjournment Proposal” and together with the Merger Proposal, the “HCAP Proposals”). No other matters will be acted upon at the HCAP Special Meeting without further notice.
Q:
How does the HCAP Board recommend voting on the HCAP Proposals at the HCAP Special Meeting?
A:
The HCAP Board, acting on the unanimous recommendation of the special committee of the HCAP Board (the “HCAP Special Committee”) comprised solely of the directors of the HCAP Board who are not “interested persons,” as defined in the Investment Company Act of 1940, as amended (the “1940 Act”), of HCAP (the “HCAP Independent Directors”), approved the Merger Agreement and the transactions contemplated thereby, including the Mergers, and recommends that HCAP Stockholders vote “FOR” the Merger Proposal and, if necessary or appropriate, “FOR” the HCAP Adjournment Proposal.
Q:
If I am an HCAP Stockholder, what is the “Record Date” and what does it mean?
A:
The record date for the HCAP Special Meeting is [], 2021 (the “HCAP Record Date”). The HCAP Record Date was established by the HCAP Board, and only holders of record of shares of HCAP Common Stock at the close of business on the HCAP Record Date are entitled to receive notice of, and vote at, the HCAP Special Meeting or any adjournments and postponements of HCAP Special Meeting. As of the HCAP Record Date, there were [] shares of HCAP Common Stock outstanding.
Q:
If I am an HCAP Stockholder, how many votes do I have?
A:
Each share of HCAP Common Stock held by a holder of record as of the HCAP Record Date has one vote on each matter to be considered at the HCAP Special Meeting.
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Q:
If I am an HCAP Stockholder, how do I vote?
A:
The HCAP Special Meeting will be hosted live via Internet audio webcast. Any HCAP Stockholder can attend the HCAP Special Meeting live online at []. If you were an HCAP Stockholder as of the HCAP Record Date, or you hold a valid proxy for the HCAP Special Meeting, you can vote at the HCAP Special Meeting or any adjournments and postponements of HCAP Special Meeting. A summary of the information you need to attend the HCAP Special Meeting online is provided below:
Instructions on how to attend and participate via the Internet, including how to demonstrate proof of share ownership, are posted at [•];
Assistance with questions regarding how to attend and participate via the Internet will be provided at [•] on the day of the HCAP Special Meeting;
The webcast will start at [•] a.m., Eastern Time, on [•], 2021;
HCAP Stockholders may vote and submit questions while attending the HCAP Special Meeting via the Internet; and
HCAP Stockholders will need a control number to enter the HCAP Special Meeting.
An HCAP Stockholder can also follow the instructions on the enclosed proxy card and authorize a proxy via the Internet, telephone or mail to vote in accordance with the instructions provided below. Authorizing a proxy by telephone or through the Internet requires you to input the control number located on your proxy card. After inputting the control number, you will be prompted to direct your proxy to vote on each proposal. You will have an opportunity to review your directions and make any necessary changes before submitting your directions and terminating the telephone call or Internet link. If you are the beneficial owner of your shares, you will need to follow the instructions provided by your broker, bank, trustee or nominee regarding how to instruct your broker, bank, trustee or nominee to vote your shares at the HCAP Special Meeting.
By Internet: www.proxyvote.com
By telephone: [•] to reach a toll-free, automated touchtone voting line, [•] Monday through Friday 9:00 a.m. until 10:00 p.m. Eastern Time to reach a toll-free, live operator line.
By mail: You may vote by proxy by following the directions and indicating your instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for your proxy card to be received on or prior to 11:59 p.m., Eastern Time, on [•], 2021.
Important notice regarding the availability of proxy materials for the HCAP Special Meeting. HCAP’s proxy statement/prospectus and the proxy card are available at www.proxyvote.com.
Q:
What if an HCAP Stockholder does not specify a choice for a matter when authorizing a proxy?
A:
All properly executed proxies representing shares of HCAP Common Stock at the HCAP Special Meeting will be voted in accordance with the directions given. If the enclosed proxy card is signed, dated and returned without any directions given, the shares of HCAP Common Stock will be voted “FOR” each of the HCAP Proposals.
Q:
If I am an HCAP Stockholder, how can I change my vote or revoke a proxy after submission?
A:
If you are a stockholder of record, you can change your vote or revoke your proxy by:
delivering a written revocation notice before 11:59 p.m. Eastern Time on [•], 2021 to HCAP’s corporate secretary, William E. Alvarez, Jr., at Harvest Capital Credit Corporation, 767 Third Avenue, 29th Floor, New York, NY 10017, Attention: Corporate Secretary;
voting again using the telephone or Internet before 11:59 p.m. Eastern Time on [•], 2021 (your latest telephone or Internet proxy is the one that will be counted); or
attending and voting during the HCAP Special Meeting. Simply logging into the HCAP Special Meeting will not, by itself, revoke your proxy.
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In light of shelter-in-place restrictions currently in place due to the COVID-19 pandemic, HCAP encourages HCAP Stockholders to change their vote by voting again using the telephone or Internet.
If you hold shares of HCAP Common Stock through a broker, bank, trustee or nominee, you must follow the instructions you receive from your nominee in order to revoke your voting instructions.
Q:
If my shares of HCAP Common Stock are held in a broker-controlled account or in “street name,” will my broker vote my shares for me?
A:
No. You should follow the instructions provided by your broker on your voting instruction form. It is important to note that your broker will vote your shares only if you provide instructions on how you would like your shares to be voted at the HCAP Special Meeting.
Q:
What constitutes a “quorum” for the HCAP Special Meeting?
A:
The presence at the HCAP Special Meeting, virtually or represented by proxy, of the holders of a majority of the voting power of the issued and outstanding shares of HCAP Common Stock entitled to vote thereat will constitute a quorum. Abstentions will be treated as shares present for quorum purposes. Shares held by a broker, bank, trustee or nominee for which the broker, bank, trustee or nominee has not received voting instructions from the record holder as to how to vote such shares and does not have discretionary authority to vote the shares on non-routine proposals (which are considered “broker non-votes” with respect to such proposals) will be treated as shares present for quorum purposes to the extent there are any such broker non-votes cast at the HCAP Special Meeting.
Q:
What vote is required to approve each of the proposals being considered at the HCAP Special Meeting?
A:
The affirmative vote of the holders of a majority of the outstanding shares of HCAP Common Stock entitled to vote at the HCAP Special Meeting is required to approve the Merger Proposal. Abstentions and broker non-votes will have the same effect as votes “against” the Merger Proposal.
The affirmative vote of the holders of a majority of the shares of HCAP Common Stock present in person or represented by proxy and entitled to vote at the HCAP Special Meeting is required to approve the HCAP Adjournment Proposal. Abstentions will have the same effect as a vote “against” approval of the HCAP Adjournment Proposal. Broker non-votes will have no effect on the voting outcome of the HCAP Adjournment Proposal.
Q:
Do holders of shares of PTMN Common Stock (“PTMN Stockholders”) have a right to vote?
A:
No, the transaction is not required to be approved by PTMN Stockholders.
Q:
What will happen if the Merger Proposal being considered at the HCAP Special Meeting is not approved by the required vote?
A:
If the Mergers do not close because HCAP Stockholders do not approve the Merger Proposal or any of the other conditions to the closing of the Mergers is not satisfied or, if legally permissible, waived, PTMN and HCAP will continue to operate independently under the management of their respective investment advisers, and PTMN’s and HCAP’s respective directors and officers will continue to serve in such roles until their respective successors are duly elected and qualify, or their earlier death, resignation or removal. In addition, neither PTMN nor HCAP will benefit from the expenses incurred in their pursuit of the Mergers and, under certain circumstances, HCAP will be required to pay half of PTMN’s expenses incurred in connection with the Mergers, subject to a maximum reimbursement payment of $500,000.
Q:
How will the final voting results be announced?
A:
Preliminary voting results may be announced at the HCAP Special Meeting. Final voting results will be published by HCAP in a current report on Form 8-K within four business days after the date of the HCAP Special Meeting.
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Q:
Are the proxy materials available electronically?
A:
HCAP has made the registration statement (of which this proxy statement/prospectus forms a part), the Notice of Special Meeting of Stockholders and the proxy card available to HCAP Stockholders on the Internet. Stockholders may (i) access and review the proxy materials of HCAP, (ii) authorize their proxies, as described in “The HCAP Special Meeting—Voting of Proxies” and/or (iii) elect to receive future proxy materials by electronic delivery via the Internet address provided below.
The registration statement (of which this proxy statement/prospectus forms a part), Notice of Special Meeting of Stockholders and the proxy card are available at www.proxyvote.com.
Pursuant to the rules adopted by the SEC, HCAP furnishes proxy materials by email to those stockholders who have elected to receive their proxy materials electronically. While HCAP encourages stockholders to take advantage of electronic delivery of proxy materials, which helps to reduce the environmental impact of stockholder meetings and the cost associated with the physical printing and mailing of materials, stockholders who have elected to receive proxy materials electronically by email, as well as beneficial owners of shares of HCAP Common Stock held by a broker or custodian, may request a printed set of proxy materials.
Q:
Will my vote make a difference?
A:
Yes. Your vote is needed to ensure that the proposals can be acted upon. Your vote is very important. Your immediate response will help avoid potential delays and may save significant additional expenses associated with soliciting stockholder votes.
Q:
Whom can I contact with any additional questions about the HCAP Special Meeting?
A:
HCAP Stockholders can contact HCAP by calling HCAP collect at (212) 906-3589, by sending an email to HCAP at [], or by writing to HCAP at 767 Third Avenue, 29th Floor, New York, NY 10017, Attention: Corporate Secretary, or by visiting HCAP’s website at www.harvestcapitalcredit.com.
Q:
Where can I find more information about PTMN and HCAP?
A:
You can find more information about PTMN and HCAP in the documents described under the section entitled “Where You Can Find More Information.
Q:
What do I need to do now?
A:
PTMN and HCAP urge you to carefully read this entire document, including its annexes. You should also review the documents referenced under “Where You Can Find More Information” and consult with your accounting, legal and tax advisors.
Questions and Answers about the Mergers
Q:
What will happen in the Mergers?
A:
At the Effective Time (as defined below), Acquisition Sub will be merged with and into HCAP in the First Merger. As of the Effective Time, the separate corporate existence of Acquisition Sub will cease. HCAP will be the Surviving Corporation of the First Merger and will continue its existence as a corporation under the laws of the State of Delaware until the Second Merger. Immediately after the Effective Time, HCAP, as the Surviving Corporation in the First Merger, will merge with and into PTMN, with PTMN as the surviving entity in the Second Merger.
Q:
What will HCAP Stockholders receive in the Mergers?
A:
Subject to the terms and conditions of the Merger Agreement, at the closing of the First Merger (the “Closing”), each HCAP Stockholder shall be entitled to receive Per Share Merger Consideration (as defined below) in cash or shares of PTMN Common Stock, depending on the election of such HCAP Stockholder and the elections of other HCAP Stockholders, plus any cash in lieu of fractional shares. Furthermore, as additional consideration to the holders of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time (excluding shares held by subsidiaries of HCAP or
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held, directly or indirectly, by PTMN or Acquisition Sub and all treasury shares (“Cancelled Shares”)), Sierra Crest will pay or cause to be paid to such holders an aggregate amount in cash equal to $2.15 million (the “Additional Cash Consideration”). For more information, see “Summary of the Merger Agreement—Merger Consideration” below.
Although the Merger Consideration (as defined below) (excluding the Additional Cash Consideration) paid to HCAP Stockholders will equal, in the aggregate, the Closing HCAP Net Asset Value (as defined below), the Per Share Merger Consideration to be received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share and, depending on the Elections (as defined below) made by such HCAP Stockholder and Elections made by other HCAP Stockholders, may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value (as defined below). However, as a result of certain limitations and adjustments pursuant to the terms of the Merger Agreement, including the adjustment mechanisms with respect to Non-Electing Shares (as defined below) described in “Description of the Merger Agreement—Merger Consideration” and “Description of the Merger AgreementAllocation of Merger Consideration and Illustrative Elections and Calculations,” each holder of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time will receive Per Share Merger Consideration approximately equal to the implied market value of the Per Share Merger Consideration received by other HCAP Stockholders at the Effective Time calculated on the basis of the market value of shares of PTMN Common Stock as of the Determination Date (as defined below). See “Risk Factors—Risks Relating to the Mergers—The Per Share Merger Consideration received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share, and, depending on the Elections made by an HCAP Stockholder and Elections made by other HCAP Stockholders, the Per Share Merger Consideration received may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value.
Q:
How do HCAP Stockholders select the type of Merger Consideration that such stockholder prefers to receive?
A:
A form of election (each, a “Form of Election”) has been provided to record holders of HCAP Common Stock as of the record date for the HCAP Special Meeting. HCAP Stockholders who wish to elect to receive cash for any or all shares of HCAP Common Stock held by such holder may indicate so on the Form of Election. In addition, HCAP will use its best efforts to make the Form of Election and this proxy statement/prospectus available to all persons who become HCAP Stockholders during the period between such record date and the HCAP Special Meeting. Any such holder’s election to receive cash will be properly made only if the exchange agent (the “Exchange Agent”) has received at its designated office, by 5:00 p.m., New York City time, no later than the business day that is five business days preceding the closing date of the Mergers (the closing date of the Mergers is herein referred to as the “Closing Date”) (the date upon which the Exchange Agent receives any such election from a holder is herein referred to as an “Election Date”) (such deadline, the “Election Deadline”), a Form of Election properly completed and signed and accompanied by (if such shares are not book-entry shares) the stock certificate or certificates (“Certificates”) to which such Form of Election relates, duly endorsed in blank or otherwise in form acceptable for transfer on the books of HCAP (or by an appropriate guarantee of delivery of such Certificate or Certificates as set forth in such Form of Election from a firm which is a member of a registered national securities exchange or of the Financial Industry Regulatory Authority, Inc. or a commercial bank of trust company having an office or correspondent in the United States, provided such Certificates are in fact delivered to the Exchange Agent within three trading days after the date of execution of such guarantee of delivery).
Q:
Can HCAP Stockholders change their election after the Form of Election has been submitted?
A:
Yes. Any Form of Election may be revoked by the HCAP Stockholder submitting such Form of Election to the Exchange Agent only by written notice received by the Exchange Agent (i) prior to 5:00 p.m., New York City time, on the Election Date or (ii) after the date of the HCAP Special Meeting, if the Exchange Agent is legally required to permit such revocations and the Effective Time has not occurred prior to such revocation. In addition, all Forms of Election will automatically be revoked if the Exchange Agent
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is notified in writing by PTMN and HCAP that the First Merger has been abandoned. If a Form of Election is so revoked, the Certificate or Certificates (or guarantee of delivery, as appropriate) for the shares of HCAP Common Stock to which such Form of Election relates will be promptly returned to the HCAP Stockholder submitting such Form of Election to the Exchange Agent. Any HCAP Stockholder who has revoked their Form of Election and has not submitted a separate Form of Election by the proper time on the Election Date will be deemed not to have made an Election, the shares held by such holder will be treated by the Exchange Agent as Non-Electing Shares.
The Exchange Agent will have discretion to determine whether or not an election to receive cash has been properly made or revoked with respect to shares of HCAP Common Stock and when elections and revocations were received by it. If the Exchange Agent determines that any election to receive cash was not properly made with respect to shares of HCAP Common Stock, such shares will be treated by the Exchange Agent as shares that were Non-Electing Shares. The Exchange Agent will also make all computations as to the allocation and the proration contemplated by the provisions of the Merger Agreement and any such computation will be conclusive and binding on the HCAP Stockholders. The Exchange Agent may, with the mutual agreement of PTMN and HCAP, make such rules as are consistent with the provisions of the Merger Agreement for the implementation of the Elections provided for therein as will be necessary or desirable fully to effect such Elections.
Q:
How will the Closing Net Asset Values of PTMN and HCAP be determined?
A:
Under the Merger Agreement, on the date which is two days prior to the Closing Date (the “Determination Date”), each of PTMN and HCAP will deliver to the other a calculation of its estimated net asset value (“NAV”) as of 5:00 p.m. New York City time as of the Determination Date (such calculation with respect to HCAP, the “Closing HCAP Net Asset Value,” and such calculation with respect to PTMN, the “Closing PTMN Net Asset Value”), in each case, as approved by the HCAP Board or PTMN Board, as applicable, calculated in good faith and using the same assumptions and methodologies, and applying the same types of adjustments, used in preparing the NAV of HCAP as of September 30, 2020 or the NAV of PTMN as of September 30, 2020, as applicable. HCAP and PTMN will update and redeliver the Closing HCAP Net Asset Value or the Closing PTMN Net Asset Value, respectively, and as reapproved by the HCAP Board or PTMN Board, as applicable, in the event of a material change to such calculation between the Determination Date and the Closing Date or if needed to ensure that the calculation is determined within two days (excluding Sundays and holidays) prior to the Effective Time. Based on such calculations, the parties will calculate the “PTMN Per Share NAV,” which will be equal to (i) the Closing PTMN Net Asset Value divided by (ii) the number of shares of PTMN Common Stock issued and outstanding as of the Determination Date.
Q:
Who is responsible for paying the expenses relating to completing the Mergers?
A:
In general, all fees and expenses incurred in connection with the Mergers will be paid by the party incurring such fees and expenses, whether or not the Mergers or any of the transactions contemplated in the Merger Agreement are consummated. However, HCAP will be required to pay half of PTMN’s expenses incurred in connection with the Mergers, subject to a maximum reimbursement payment of $500,000, if the Merger Proposal is not approved by HCAP Stockholders at the HCAP Special Meeting in circumstances where HCAP has no obligation to pay to PTMN a termination fee. It is expected that PTMN will incur approximately $1,600,000, or $0.02 per share, and HCAP will incur approximately $2,510,000, or $0.42 per share, of fees and expenses in connection with completing the Mergers.
Q:
Will I receive distributions after the Mergers?
A:
Each HCAP Stockholder who holds Non-Electing Shares at the Effective Time will become a stockholder of PTMN and will receive any future distributions paid to PTMN Stockholders with respect to shares of PTMN Common Stock received in the Mergers.
Following the Mergers, PTMN intends to continue to make distributions on a quarterly basis to PTMN Stockholders out of assets legally available for distribution. All distributions will be paid at the discretion of the PTMN Board and will depend on PTMN’s earnings, financial condition, maintenance of its status as a “regulated investment company” (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as
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amended (the “Code”), compliance with applicable business development company (“BDC”) regulations and such other factors as the PTMN Board may deem relevant from time to time. PTMN cannot guarantee that it will pay distributions to stockholders in the future. For a history of the dividends and distributions paid by PTMN since January 1, 2019, see “Market Price, Dividend and Distribution Information—PTMN.” For a history of the dividends and distributions paid by HCAP since January 1, 2019, see “Market Price, Dividend and Distribution Information—HCAP.
PTMN has adopted a dividend reinvestment plan that provides for reinvestment of PTMN’s distributions on behalf of PTMN’s stockholders, unless a stockholder elects to receive cash as provided below. As a result, if the PTMN Board authorizes, and PTMN declares, a cash distribution, then PTMN Stockholders who have not “opted out” of PTMN’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of PTMN Common Stock, rather than receiving the cash. See “PTMN Dividend Reinvestment Plan” for additional information regarding PTMN’s dividend reinvestment plan.
HCAP has also adopted a dividend reinvestment plan that provides for reinvestment of its dividends and other distributions on behalf of HCAP Stockholders, unless a stockholder elects to receive cash. HCAP Stockholders that have opted to receive cash dividends will not be required to make a new election post-closing of the Mergers. See “HCAP Dividend Reinvestment Plan” for additional information regarding PTMN’s dividend reinvestment plan.
Q:
Are the Mergers subject to any third-party consents?
A:
Under the Merger Agreement, HCAP and PTMN have agreed to cooperate with each other and use their respective reasonable best efforts to obtain all necessary actions or non-actions, consents and approvals from third parties to consummate the transactions contemplated by the Merger Agreement, including the First Merger, and to make all necessary and to take all reasonable steps as may be necessary to obtain third party approvals to consummate the transactions contemplated by the Merger Agreement, including the First Merger. There can be no assurance that any permits, consents, approvals, confirmations or authorizations will be obtained or that such permits, consents, approvals, confirmations or authorizations will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following the Mergers.
Q:
How does PTMN’s investment objective, strategy and risks differ from HCAP’s?
A:
PTMN’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle-market companies. PTMN defines the middle-market as comprising companies with earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $10 million to $50 million and/or total debt of $25 million to $150 million. PTMN primarily invests in first and second lien term loans which, because of their priority in a company’s capital structure, it expects will have lower default rates and higher rates of recovery of principal if there is a default and which it expects will create a stable stream of interest income. The investments in PTMN’s debt securities portfolio are all or predominantly below investment grade (i.e., “junk bonds”), and have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.
HCAP’s investment objective is to generate both current income and capital appreciation primarily by making direct investments in the form of senior debt, subordinated debt and, to a lesser extent, minority equity investments. HCAP targets investments in small to mid-sized U.S. private companies with annual revenues of less than $100 million and annual EBITDA of less than $15 million.
PTMN generally invests in middle-market companies through first lien securities and seeks to generate higher asset yields through an illiquidity premium. Although HCAP has a similar investment strategy, a significant portion of HCAP’s assets are smaller U.S. private companies.
PTMN and HCAP have substantially similar risks as each focuses on making investments in privately-held middle-market companies.
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Q:
How will the combined company be managed following the Mergers?
A:
The directors of PTMN immediately prior to the Mergers will remain the directors of PTMN and will hold office until their respective successors are duly elected and qualify, or their earlier death, resignation or removal. The officers of PTMN immediately prior to the Mergers will remain the officers of PTMN and will hold office until their respective successors are duly appointed and qualify, or their earlier death, resignation or removal. Following the Mergers, PTMN will continue to be managed by Sierra Crest, and there are not expected to be any material changes in PTMN’s investment objective or strategy. Over time, it is anticipated that PTMN will transition the investments acquired through the Mergers into investments in smaller middle-market companies, consistent with PTMN’s current investment strategy. See The Mergers—Interests of Certain Persons Related to HCAP in the Mergers” for information regarding the ongoing negotiations between Sierra Crest and HCAP Advisors regarding a transition services agreement pursuant to which HCAP Advisors would provide certain consulting services to Sierra Crest relating to HCAP’s existing investment portfolio subsequent to the Closing.
Q:
Are HCAP Stockholders able to exercise appraisal rights in connection with the Mergers?
A:
Yes. HCAP Stockholders will be entitled to exercise appraisal rights with respect to the Mergers in accordance with Section 262 of the Delaware General Corporation Law (the “DGCL”). For more information, see “Appraisal Rights of HCAP Stockholders” and “Description of the Merger Agreement—Appraisal Rights.
Q:
When do the parties expect to complete the Mergers?
A:
While there can be no assurance as to the exact timing, or that the Mergers will be completed at all, PTMN and HCAP are working to complete the Mergers in the second quarter of 2021. It is currently expected that the Mergers will be completed promptly following receipt of the HCAP Stockholder Approval (as defined below) at the HCAP Special Meeting, along with the satisfaction or (to the extent legally permissible) waiver of the other closing conditions set forth in the Merger Agreement.
Q:
Are the Mergers expected to be taxable to HCAP Stockholders?
A:
Subject to the discussion below, the Mergers, taken together, may qualify as a “reorganization,” within the meaning of Section 368(a) of the Code. If the Mergers qualify as a reorganization for U.S. federal income tax purposes, U.S. holders (as defined in the section entitled “Certain Material U.S. Federal Income Tax Consequences of the Mergers”) of HCAP Common Stock who receive a combination of shares of PTMN Common Stock and cash, other than cash in lieu of a fractional share of PTMN Common Stock, in exchange for their HCAP Common Stock, will recognize gain (but not loss) in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of the shares of PTMN Common Stock and cash (other than cash received in lieu of a fractional share of PTMN Common Stock) received by such holder in exchange for its shares of HCAP Common Stock (such cash including the holder’s share of the Aggregate Cash Consideration (as defined below) and possibly, as discussed below, the holder’s share of the Additional Cash Consideration) exceeds such holder’s adjusted basis in its shares of HCAP Common Stock, and (ii) the amount of cash (other than cash received in lieu of fractional shares of PTMN Common Stock) received by such holder in exchange for its shares of HCAP Common Stock (such cash including the holder’s share of the Aggregate Cash Consideration and possibly, as discussed below, the holder’s share of the Additional Cash Consideration). Generally, any gain recognized upon the exchange will be capital gain, and any such capital gain will be long-term capital gain if the holding period for such shares of HCAP Common Stock is more than one year. Depending on certain facts specific to you, gain could instead be characterized as ordinary dividend income.
With respect to the Additional Cash Consideration, there is limited authority addressing the tax consequences of the receipt of merger consideration from a party other than the acquiror and, as a result, the tax consequences of the receipt of the Additional Cash Consideration are not entirely clear. PTMN and Sierra Crest intend to take the position that the Additional Cash Consideration received by a U.S. holder is treated as additional merger consideration. It is possible, however, that the Additional Cash Consideration may be treated as ordinary income and not as cash received in exchange for a such holder’s HCAP Common Stock.
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In addition, the Mergers will not qualify as a reorganization if the fair market value of the PTMN Common Stock received by HCAP Stockholders in the Mergers does not equal or exceed 40% of the aggregate consideration. As noted below under “Description of the Merger AgreementMerger Consideration,” the amount of PTMN Common Stock and cash to be transferred in the Mergers is subject to adjustments.
If the Mergers do not qualify as a reorganization, U.S. holders of HCAP Common Stock will be treated as having sold their HCAP Common Stock in a taxable sale and will generally recognize gain or loss equal to the difference between the fair market value of the PTMN Common Stock and cash received (including such holder’s share of the Aggregate Cash Consideration and possibly, as discussed above, the Additional Cash Consideration) and the basis in his or her HCAP Common Stock. This gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the Mergers, the holding period for such shares of HCAP Common Stock is greater than one year. The deductibility of capital losses is subject to limitations.
On the Closing Date, PTMN and HCAP will use commercially reasonably efforts to make a determination, in consultation with tax counsel, as to whether or not the Mergers qualify as a reorganization for U.S. federal income tax purposes, and, to the extent any such determination is made, PTMN will inform the HCAP Stockholders of such determination as soon as practicable after the Closing Date. The determination will be based on the then-existing law, will assume the absence of changes in existing facts, may rely on certain customary assumptions and may rely on representations contained in certificates executed by officers of PTMN and HCAP.
The obligations of PTMN and HCAP to complete the Mergers are not conditioned on the receipt of, and PTMN and HCAP will not receive, opinions from Simpson Thacher & Bartlett LLP (“Simpson Thacher”), counsel to PTMN, or Dechert LLP (“Dechert”), counsel to HCAP, to the effect that the Mergers will qualify as a reorganization for U.S. federal income tax purposes. For more information, see “Certain Material U.S. Federal Income Tax Consequences of the Mergers.” HCAP Stockholders should consult with their own tax advisors to determine the tax consequences of the Mergers to them.
Q:
What happens if the Mergers are not consummated?
A:
If the Mergers are not approved by the requisite vote of HCAP Stockholders, or if the Mergers are not completed for any other reason, HCAP Stockholders will not receive any payment for their shares of HCAP Common Stock in connection with the Mergers. Instead, HCAP will remain an independent company. In addition, under circumstances specified in the Merger Agreement, upon notice by PTMN, HCAP may be required to pay PTMN a termination fee of approximately $2.122 million or reimburse PTMN for half of its out-of-pocket fees and expenses incurred in connection with the transactions, subject to a maximum reimbursement amount of $500,000. Similarly, under circumstances specified in the Merger Agreement, upon notice by HCAP, PTMN may be required to pay HCAP a termination fee of approximately $2.122 million. See “Description of the Merger Agreement—Termination of the Merger Agreement” and Description of the Merger Agreement—Termination Fee; Expense Reimbursement—Reimbursement of PTMN Expenses.”
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SUMMARY OF THE MERGERS
This summary highlights selected information contained elsewhere in this proxy statement/prospectus and may not contain all of the information that is important to you. You should read this entire proxy statement/prospectus carefully, including “Risk Factors” and other information incorporated by reference for a more complete understanding of the Mergers. In particular, you should read the annexes attached to this proxy statement/prospectus, including the Merger Agreement, which is attached as Annex A hereto, as it is the legal document that governs the Mergers. The discussion in this proxy statement/prospectus, which includes the material terms of the Mergers and the principal terms of the Merger Agreement, is subject to, and is qualified in its entirety by reference to, the Merger Agreement. See “Where You Can Find More Information,” “Incorporation by Reference for PTMN” and “Incorporation by Reference for HCAP.” For a discussion of the risk factors you should carefully consider, see the section entitled “Risk Factors” beginning on page 22 for risks related to the Mergers and “Risk Factors” in Part I, Item 1A of both PTMN’s and HCAP’s Annual Reports on Form 10-K for the fiscal year ended December 31, 2020, for general risks related to PTMN and HCAP.
The Parties to the Mergers
Portman Ridge Finance Corporation
650 Madison Avenue, 23rd Floor
New York, New York 10022
(212) 891-2880
PTMN was formed in August 2006 under the former name, Kohlberg Capital Corporation, and completed an initial public offering in December 2006. Until March 31, 2019, PTMN operated as an internally managed BDC. On April 1, 2019, PTMN converted to an external management structure and changed its name to Portman Ridge Finance Corporation. See “—The Externalization” below. PTMN is an externally managed, non-diversified closed-end investment company that is regulated as a BDC under the 1940 Act.
PTMN originates, structures, and invests in secured term loans, bonds or notes and mezzanine debt primarily in privately-held middle market companies but may also invest in other investments such as loans to publicly-traded companies, high-yield bonds, and distressed debt securities (collectively the “Debt Securities Portfolio”). PTMN also invests in joint ventures and debt and subordinated securities issued by collateralized loan obligation funds (“CLO Fund Securities”). In addition, from time to time PTMN may invest in the equity securities of privately held middle market companies and may also receive warrants or options to purchase common stock in connection with its debt investments.
PTMN’s investments in CLO Fund Securities are primarily managed by its formerly wholly-owned asset management subsidiaries Trimaran Advisors and Trimaran Advisors Management. From time-to-time PTMN has also made investments in CLO Fund Securities managed by other asset managers. PTMN’s CLO Funds typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.
PTMN’s Debt Securities Portfolio investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. PTMN defines the middle market as comprising companies with EBITDA of $10 million to $50 million and/or total debt of $25 million to $150 million. PTMN primarily invests in first and second lien term loans which, because of their priority in a company’s capital structure, PTMN expects will have lower default rates and higher rates of recovery of principal if there is a default and which PTMN expects will create a stable stream of interest income. PTMN also primarily invests in loans to smaller private companies, publicly-traded companies, high-yield bonds, joint ventures, managed funds, partnerships, and distressed debt securities. The investments in PTMN’s Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.
PTMN has elected to be treated for U.S. federal income tax purposes as a RIC under the Code and intends to operate in a manner to maintain its RIC status.
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The Externalization
On April 1, 2019 (the “Externalization Closing”), PTMN became externally managed by Sierra Crest, an affiliate of BC Partners LLP (“BC Partners”), pursuant to a stock purchase and transaction agreement (the “Externalization Agreement”) between PTMN and BC Partners Advisors L.P. (“BCP”), an affiliate of BC Partners. In connection with the Externalization, PTMN Stockholders approved the investment advisory agreement (the “PTMN Investment Advisory Agreement”) between PTMN and Sierra Crest.
Pursuant to the Externalization Agreement, Sierra Crest became PTMN’s investment adviser in exchange for a cash payment from BCP, or its affiliate, of $25 million, or $0.669672 per share of PTMN Common stock, directly to PTMN’s stockholders. In addition, Sierra Crest and BCP (or their affiliates) committed to use up to $10 million of the incentive fee actually paid to Sierra Crest prior to the second anniversary of the Externalization Closing to buy newly issued shares of PTMN Common Stock at the most recently determined NAV per share of PTMN Common Stock at the time of such purchase. Thus, BCP’s and Sierra Crest’s total financial commitment to the transactions contemplated by the Externalization Agreement was $35.0 million.
On December 12, 2018, PTMN and BCP entered into a letter agreement (the “Asset Purchase Letter Agreement”) pursuant to which PTMN and BCP each agreed to use commercially reasonable efforts to effect the sale by BCP (or its affiliates or advisory clients of its affiliates), in one or more transactions, of certain assets held by BCP (or its affiliates or advisory clients thereof) that, taken together, have an aggregate principal amount of approximately $75 million, less $25 million (representing the aggregate amount of capital contributions made by PTMN to the BCP Great Lakes Fund). In the second quarter of 2019 BCP’s obligations under the Asset Purchase Letter Agreement were satisfied.
On the date of the Externalization Closing, PTMN changed its name from KCAP Financial, Inc. (“KCAP”) to Portman Ridge Finance Corporation and on April 2, 2019, began trading on Nasdaq under the symbol “PTMN.”
Subsequent Mergers
On December 18, 2019, PTMN completed its acquisition of OHA Investment Corporation (“OHAI”). In accordance with the terms of the merger agreement, each share of common stock, par value $0.001 per share, of OHAI (the “OHAI Common Stock”) issued and outstanding was converted into the right to receive (i) an amount in cash, without interest, equal to approximately $0.42, and (ii) 0.3688 shares of PTMN Common Stock (plus any applicable cash in lieu of fractional shares). Each share of OHAI Common Stock issued and outstanding received, as additional consideration funded by Sierra Crest, an amount in cash, without interest, equal to approximately $0.15.Pursuant to the merger agreement, if at any time within one year after the closing date of the transaction shares of PTMN Common Stock are trading at a price below 75% of PTMN’s NAV per share, PTMN will initiate an open-market stock repurchase program of up to $10 million to support the trading price of the combined entity for up to one year from the date such program is announced. The PTMN Board approved a stock repurchase program in March 2020.
On October 28, 2020, PTMN completed its acquisition of Garrison Capital Inc. (“GARS”). Under the terms of the merger agreement, each share of common stock, par value $0.001 per share, of GARS (the “GARS Common Stock”) issued and outstanding was converted into the right to receive (i) an amount in cash, without interest, equal to approximately $1.19 and (ii) approximately 1.917 shares of PTMN Common Stock (plus any applicable cash in lieu of fractional shares). Each share of GARS Common Stock issued and outstanding received, as additional consideration funded by Sierra Crest, an amount in cash, without interest, equal to approximately $0.31.
Harvest Capital Credit Corporation
767 Third Avenue, 29th Floor
New York, NY 10017
(212) 906-3589
HCAP is an externally managed, closed-end, non-diversified management investment company that has filed an election to be regulated as a BDC under the 1940 Act. In addition, for tax purposes, HCAP has elected to be treated as a RIC. HCAP Common Stock is currently listed on Nasdaq Global Market (“Nasdaq GM”) under the symbol “HCAP” and HCAP’s 6.125% Notes due 2022 (the “2022 HCAP Notes") are listed on Nasdaq GM under the symbol “HCAPZ.”
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HCAP formed as a Delaware corporation on November 14, 2012. HCAP completed its initial public offering on May 7, 2013. Immediately prior to the initial public offering, HCAP acquired Harvest Capital Credit LLC in a merger whereby the outstanding limited liability company membership interests of Harvest Capital Credit LLC were converted into shares of HCAP Common Stock and HCAP assumed and succeeded to all of Harvest Capital Credit LLC’s assets and liabilities, including its entire portfolio of investments. Harvest Capital Credit LLC, which was formed in February 2011 and commenced operations in September 2011, was founded by certain members of HCAP Advisors LLC (“HCAP Advisors”), HCAP’s investment adviser and administrator, and JMP Group, Inc. (now JMP Group LLC) (“JMP Group”).
HCAP’s investment objective is to generate both current income and capital appreciation primarily by making direct investments in the form of senior debt, subordinated debt and, to a lesser extent, minority equity investments. HCAP seeks to accomplish its investment objective by targeting investments in small to mid-sized U.S. private companies with annual revenues of less than $100 million and annual EBITDA of less than $15 million. HCAP believes that transactions involving companies of this size offer higher yielding investment opportunities, lower leverage levels and other terms more favorable than transactions involving larger companies.
Rye Acquisition Sub Inc.
650 Madison Avenue, 23rd Floor
New York, New York 10022
(212) 891-2880
Acquisition Sub is a Delaware corporation and a newly formed wholly-owned direct consolidated subsidiary of PTMN. Acquisition Sub was formed in connection with and for the sole purpose of the Mergers and has no prior operating history.
Sierra Crest Investment Management LLC
650 Madison Avenue, 23rd Floor
New York, New York 10022
(212) 891-2880
Sierra Crest is a Delaware limited liability company, located at 650 Madison Avenue, 23rd Floor, New York, NY 10022, registered as an investment adviser with the SEC under the Investment Advisers Act of 1940, as amended. Sierra Crest is an affiliate of BCP. BC Partners Holdings Limited is the ultimate control person of Sierra Crest. BC Partners is a leading buyout firm with a 30-year history investing across Europe and North America which had assets under management of approximately $35 billion as of December 31, 2020. The assets under management for BC Partners are based on actively managed commitments of its managed funds and relevant vehicles formed for the purpose of co-investing alongside such funds. BC Partners operates a private equity investment platform, BC Partners Private Equity (“BCP PE”), and a credit investment platform, BCP Credit, as fully integrated businesses. The investment activity of PTMN falls primarily within the BCP Credit platform. Integration with the broader BC Partners platform allows BCP Credit to leverage a team of over 64 investment professionals across its private equity platform including a seven-member operations team. The BCP Credit Investment team is led by Ted Goldthorpe who sits on both the BCP Credit and BCP PE investment committees. An affiliate of Sierra Crest currently manages a private BDC, BC Partners Lending Corporation, and several private funds in the BCP Credit platform.
Structure of the Mergers
Pursuant to the terms of the Merger Agreement, at the Effective Time, Acquisition Sub will be merged with and into HCAP. HCAP will be the Surviving Corporation and will continue its existence as a corporation under the laws of the State of Delaware. As of the Effective Time, the separate corporate existence of Acquisition Sub will cease. Immediately after the effectiveness of the First Merger, HCAP will merge with and into PTMN, with PTMN as the surviving entity in the Second Merger.
Based on the number of shares of PTMN Common Stock issued and outstanding as of December 31, 2020, it is expected that, following consummation of the Mergers, current PTMN Stockholders will own approximately 83.4% of the outstanding PTMN Common Stock and former HCAP Stockholders will own approximately 16.6% of the outstanding PTMN Common Stock.
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Merger Consideration
Under the Merger Agreement, on the Determination Date, each of PTMN and HCAP will deliver to the other a calculation of its estimated NAV as of 5:00 p.m. New York City time as of the Determination Date, in each case, as approved by the HCAP Board or PTMN Board, as applicable, calculated in good faith and using the same assumptions and methodologies, and applying the same types of adjustments, used in preparing the NAV of HCAP as of September 30, 2020 or the NAV of PTMN as of September 30, 2020, as applicable. HCAP and PTMN will update and redeliver the Closing HCAP Net Asset Value or the Closing PTMN Net Asset Value, respectively, and as reapproved by the HCAP Board or PTMN Board, as applicable, in the event of a material change to such calculation between the Determination Date and the Closing Date or if needed to ensure that the calculation is determined within 48 hours (excluding Sundays and holidays) prior to the Effective Time.
Subject to the terms and conditions of the Merger Agreement, at the Closing, PTMN will issue, in respect of all of the issued and outstanding shares of HCAP Common Stock (excluding HCAP treasury shares and all shares of HCAP Common Stock issued and outstanding immediately prior to the Effective Time that are owned by PTMN, Acquisition Sub, HCAP or any wholly-owned subsidiary thereof) in the aggregate, a number of shares of PTMN Common Stock equal to 19.9% of the number of shares of PTMN Common Stock issued and outstanding immediately prior to the Closing (the “Total Stock Consideration”). In addition, subject to the terms and conditions of the Merger Agreement, at the Closing, PTMN will pay, in respect of all the issued and outstanding shares of HCAP Common Stock (excluding Cancelled Shares) in the aggregate, an amount of cash equal to the amount by which (i) the Closing HCAP Net Asset Value exceeds (ii) the product of (A) the Total Stock Consideration multiplied by (B) the PTMN Per Share NAV (the “Aggregate Cash Consideration”).
Each person who as of the Effective Time is a record holder of shares of HCAP Common Stock will be entitled, with respect to all or any portion of such shares, to make an election (an “Election”) to receive payment for their shares of HCAP Common Stock in cash (the “Cash Consideration”), subject to the conditions and limitations set forth in the Merger Agreement. Any record holder of shares of HCAP Common Stock at the record date who does not make an Election will be deemed to have elected to receive payment for their shares of HCAP Common Stock in the form of PTMN Common Stock (the “Stock Consideration” and, together with the Cash Consideration, the “Merger Consideration”). For the purpose of making Elections, a record holder of HCAP Common Stock that is a registered clearing agency and which holds legal title on behalf of multiple ultimate beneficial owners will be entitled to submit elections as if each ultimate beneficial owner were a record holder of HCAP Common Stock.
Each share of HCAP Common Stock (other than a Cancelled Share) with respect to which an Election has been made (an “Electing Share”) will be converted into the right to receive an amount in cash equal to the Per Share Cash Price, subject to certain adjustments as described below. The “Per Share Cash Price” means the quotient of (i) the sum of (A) the product of Total Stock Consideration multiplied by the PTMN Per Share Price (as defined below) plus (B) the Aggregate Cash Consideration, divided by (ii) the number of shares of HCAP Common Stock issued and outstanding immediately prior to the Closing. The “PTMN Per Share Price” is defined as the average of the volume weighted average price per share of PTMN Common Stock on Nasdaq on each of the ten consecutive trading days ending with the Determination Date.
Each share of HCAP Common Stock (other than a Cancelled Share) with respect to which an election has not been made (a “Non-Electing Share”) will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of PTMN Common Stock, equal to the Per Share Stock Amount (as defined below) (the “Proposed Stock Issuance Amount”), subject to certain adjustments as described below. The amount of PTMN Common Stock to be issued for each Non-Electing Share as ultimately determined is referred to the as the “Per Share Stock Consideration” (and, together with the Per Share Cash Price, the “Per Share Merger Consideration”). The “Per Share Stock Amount” is defined as the number of shares of PTMN Common Stock with a value equal to the Per Share Cash Price based on the PTMN Per Share Price.
If the product of the Proposed Aggregate Stock Issuance Amount is greater than the Total Stock Consideration, then the number of Non-Electing Shares will be reduced by converting Non-Electing Shares into Electing Shares, until the Total Stock Consideration is equal to the Proposed Aggregate Stock Issuance Amount (determined on a whole-share basis). Any such reduction in the number of Non-Electing Shares will be applied among all stockholders who hold Non-Electing Shares, pro rata based on the aggregate number of Non-Electing Shares held by each such stockholder.
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If the product of (i) the number of Electing Shares and (ii) the Per Share Cash Price (the “Proposed Cash Consideration”) is an amount greater than the Aggregate Cash Consideration, then the number of Electing Shares will be reduced by converting Electing Shares into Non-Electing Shares, until the Aggregate Cash Consideration is equal to the Proposed Cash Consideration (determined on a whole-share basis). Any such reduction in the number of Electing Shares will be applied among all stockholders who hold Electing Shares, pro rata based on the aggregate number of Electing Shares held by each such stockholder.
Although the Merger Consideration (excluding the Additional Cash Consideration) paid to HCAP Stockholders will equal, in the aggregate, the Closing HCAP Net Asset Value, the Per Share Merger Consideration to be received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share and, depending on the Elections made by such HCAP Stockholder and Elections made by other HCAP Stockholders, may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value. However, as a result of certain limitations and adjustments pursuant to the terms of the Merger Agreement, including the adjustment mechanisms with respect to Non-Electing Shares described in “Description of the Merger Agreement—Merger Consideration” and “Description of the Merger AgreementAllocation of Merger Consideration and Illustrative Elections and Calculations,” each holder of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time will receive Per Share Merger Consideration approximately equal to the implied market value of the Per Share Merger Consideration received by other HCAP Stockholders at the Effective Time calculated on the basis of the market value of shares of PTMN Common Stock as of the Determination Date. See “Risk Factors—Risks Relating to the Mergers—The Per Share Merger Consideration received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share, and, depending on the Elections made by an HCAP Stockholder and Elections made by other HCAP Stockholders, the Per Share Merger Consideration received may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value.
A Form of Election has been provided to record holders of HCAP Common Stock as of the record date for the HCAP Special Meeting. HCAP Stockholders who wish to elect to receive the Per Share Cash Price for any or all shares of HCAP Common Stock held by such holder may indicate so on the Form of Election. In addition, HCAP will use its best efforts to make the Form of Election and this proxy statement/prospectus available to all persons who become HCAP Stockholders during the period between such record date and the HCAP Special Meeting. Any such holder’s election to receive the Per Share Cash Price will be properly made only if the Exchange Agent has received at its designated office, by the Election Deadline, a Form of Election properly completed and signed and accompanied by (if such shares are not book-entry shares) the stock certificate or Certificates to which such Form of Election relates, duly endorsed in blank or otherwise in form acceptable for transfer on the books of HCAP (or by an appropriate guarantee of delivery of such Certificate or Certificates as set forth in such Form of Election from a firm which is a member of a registered national securities exchange or of the Financial Industry Regulatory Authority, Inc. or a commercial bank of trust company having an office or correspondent in the United States, provided such Certificates are in fact delivered to the Exchange Agent within three trading days after the date of execution of such guarantee of delivery).
Any Form of Election may be revoked by the HCAP Stockholder submitting such Form of Election to the Exchange Agent only by written notice received by the Exchange Agent (i) prior to 5:00 p.m., New York City time, on the Election Date or (ii) after the date of the HCAP Special Meeting, if the Exchange Agent is legally required to permit such revocations and the Effective Time has not occurred prior to such revocation. In addition, all Forms of Election will automatically be revoked if the Exchange Agent is notified in writing by PTMN and HCAP that the First Merger has been abandoned. If a Form of Election is so revoked, the Certificate or Certificates (or guarantee of delivery, as appropriate) for the shares of HCAP Common Stock to which such Form of Election relates will be promptly returned to the HCAP Stockholder submitting such Form of Election to the Exchange Agent. Any HCAP Stockholder who has revoked their Form of Election and has not submitted a separate Form of Election by the proper time on the Election Date will be deemed not to have made an Election, the shares held by such holder will be treated by the Exchange Agent as Non-Electing Shares.
The Exchange Agent will have discretion to determine whether or not an election to receive the Per Share Cash Price has been properly made or revoked with respect to shares of HCAP Common Stock and when elections and revocations were received by it. If the Exchange Agent determines that any election to receive the
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Per Share Cash Price was not properly made with respect to shares of HCAP Common Stock, such shares will be treated by the Exchange Agent as shares that were Non-Electing Shares. The Exchange Agent will also make all computations as to the allocation and the proration contemplated by the provisions of the Merger Agreement and any such computation will be conclusive and binding on the HCAP Stockholders. The Exchange Agent may, with the mutual agreement of PTMN and HCAP, make such rules as are consistent with the provisions of the Merger Agreement for the implementation of the Elections provided for therein as will be necessary or desirable fully to effect such Elections.
Additional Cash Consideration
In connection with the transactions contemplated by the Merger Agreement, as additional consideration to the holders of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time (excluding any Cancelled Shares), Sierra Crest will pay or cause to be paid to such holders an aggregate amount in cash equal to $2.15 million.
Market Price of Securities
Shares of PTMN Common Stock trade on Nasdaq under the symbol “PTMN.” Shares of HCAP Common Stock trade on Nasdaq GM under the symbol “HCAP.”
The following table presents the closing sales prices as of the last trading day before the execution of the Merger Agreement and the last trading day before the date of this proxy statement/prospectus, and the most recently determined NAV per share of each of PTMN Common Stock and HCAP Common Stock.
 
PTMN
Common Stock
HCAP
Common Stock
NAV per Share at December 31, 2020
$[•]
$[•]
Closing Sales Price at December 22, 2020
$1.80
$5.91
Closing Sales Price at [•], 2021
$[•]
$[•]
Risks Relating to the Proposed Mergers
The Mergers and the other transactions contemplated by the Merger Agreement are subject to, among others, the following risks. HCAP Stockholders should carefully consider these risks before deciding how to vote on the proposals to be voted on at the HCAP Special Meeting.
Because the market price of PTMN Common Stock and the NAV per share of PTMN and HCAP will fluctuate, HCAP Stockholders cannot be sure of the market value or exact composition of the Merger Consideration they will receive until the Closing Date.
The Per Share Merger Consideration received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share, and, depending on the Elections made by an HCAP Stockholder and Elections made by other HCAP Stockholders, the Per Share Merger Consideration received may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value.
Sales of shares of PTMN Common Stock after the completion of the Mergers may cause the market price of PTMN Common Stock to decline.
HCAP Stockholders and PTMN Stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Mergers.
HCAP Stockholders may receive a form or combination of consideration different from what they elect.
PTMN may be unable to realize the benefits anticipated by the Mergers, including estimated cost savings, or it may take longer than anticipated to realize such benefits.
The announcement and pendency of the proposed Mergers could adversely affect HCAP’s business, financial results and operations.
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If the Mergers do not close, neither PTMN nor HCAP will benefit from the expenses incurred in their pursuit of the Mergers and, under certain circumstances, HCAP will be required to pay half of PTMN’s expenses incurred in connection with the Mergers, subject to a maximum reimbursement payment of $500,000.
Litigation which may be filed against HCAP or PTMN in connection with the Mergers, regardless of its merits, could result in substantial costs and could delay or prevent the Mergers from being completed.
The termination of the Merger Agreement could negatively impact HCAP and PTMN.
Under certain circumstances, PTMN and HCAP are obligated to pay each other a termination fee upon termination of the Merger Agreement.
The Mergers are subject to closing conditions, including the HCAP Stockholder Approval, that, if not satisfied or waived, will result in the Mergers not being completed, which may result in material adverse consequences to HCAP’s and PTMN’s business and operations.
PTMN and HCAP will be subject to operational uncertainties and contractual restrictions while the Mergers are pending, including restrictions on pursuing alternatives to the Mergers.
The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire HCAP prior to the completion of the proposed Mergers.
The opinion delivered to the HCAP Special Committee from its financial advisor prior to signing the Merger Agreement will not reflect changes in circumstances since the date of such opinion.
If the Mergers are not completed or HCAP is not otherwise acquired, HCAP may consider other strategic alternatives, which are subject to risks and uncertainties.
Subject to applicable law, each party may waive one or more conditions to the Mergers without soliciting (or resoliciting, in the case of HCAP) approval from its respective stockholders.
The shares of PTMN Common Stock to be received by HCAP Stockholders as a result of the Mergers will have different rights associated with them than shares of HCAP Common Stock currently held by them.
The market price of PTMN Common Stock after the Mergers may be affected by factors different from those affecting PTMN Common Stock currently.
The U.S. federal income tax treatment of the Mergers will not be known as of the date of the HCAP Special Meeting, and the position that the Mergers qualify as a “reorganization” might be challenged by the Internal Revenue Service (“IRS”).
The U.S. federal income tax treatment of the Additional Cash Consideration is not entirely clear, and the position taken that the Additional Cash Consideration is part of the total cash consideration received by HCAP Stockholders pursuant to the Mergers might be challenged by the IRS.
Following the closing of the Mergers, PTMN may be limited in the use of certain capital loss carryforwards and the use of certain unrealized capital losses.
If PTMN sells investments acquired as a result of the Mergers, it may result in capital gains and increase the incentive fees payable to Sierra Crest.
See the section captioned “Risk Factors—Risks Relating to the Mergers” below for a more detailed discussion of these factors.
Tax Consequences of the Mergers
Subject to the discussion below, the Mergers, taken together, may qualify as a “reorganization,” within the meaning of Section 368(a) of the Code. If the Mergers qualify as a reorganization for U.S. federal income tax purposes, U.S. holders (as defined in the section entitled “Certain Material U.S. Federal Income Tax Consequences of the Mergers”) of HCAP Common Stock who receive a combination of shares of PTMN Common Stock and cash, other than cash in lieu of a fractional share of PTMN Common Stock, in exchange for
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their HCAP Common Stock, will recognize gain (but not loss) in an amount equal to the lesser of (i) the amount by which the sum of the fair market value of the shares of PTMN Common Stock and cash (other than cash received in lieu of a fractional share of PTMN Common Stock) received by such holder in exchange for its shares of HCAP Common Stock (such cash including the holder’s share of the Aggregate Cash Consideration and possibly, as discussed below, the holder’s share of the Additional Cash Consideration) exceeds such holder’s adjusted basis in its shares of HCAP Common Stock, and (ii) the amount of cash (other than cash received in lieu of fractional shares of PTMN Common Stock) received by such holder in exchange for its shares of HCAP Common Stock (such cash including the holder’s share of the Aggregate Cash Consideration and possibly, as discussed below, the holder’s share of the Additional Cash Consideration). Generally, any gain recognized upon the exchange will be capital gain, and any such capital gain will be long-term capital gain if the holding period for such shares of HCAP Common Stock is more than one year. Depending on certain facts specific to you, gain could instead be characterized as ordinary dividend income.
With respect to the Additional Cash Consideration, there is limited authority addressing the tax consequences of the receipt of merger consideration from a party other than the acquiror and, as a result, the tax consequences of the receipt of the Additional Cash Consideration are not entirely clear. PTMN and Sierra Crest intend to take the position that the Additional Cash Consideration received by a U.S. holder is treated as additional merger consideration. It is possible, however, that the Additional Cash Consideration may be treated as ordinary income and not as cash received in exchange for such holder’s HCAP Common Stock.
In addition, the Mergers will not qualify as a reorganization if the fair market value of the PTMN Common Stock received by HCAP shareholders in the Mergers does not equal or exceed 40% of the aggregate consideration. As noted below under “Description of the Merger AgreementMerger Consideration,” the amount of PTMN Common Stock and cash to be transferred in the Mergers is subject to adjustments.
If the Mergers do not qualify as a reorganization, U.S. holders of HCAP Common Stock will be treated as having sold their HCAP Common Stock in a taxable sale and will generally recognize gain or loss equal to the difference between the fair market value of the PTMN Common Stock and cash received (including such holder’s share of the Aggregate Cash Consideration and possibly, as discussed above, the Additional Cash Consideration) and the basis in his or her HCAP Common Stock. This gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the Mergers, the holding period for such shares of HCAP Common Stock is greater than one year. The deductibility of capital losses is subject to limitations.
On the Closing Date, PTMN and HCAP will use commercially reasonable efforts to make a determination, in consultation with tax counsel, as to whether or not the Mergers qualify as reorganization for U.S. federal income tax purposes, and, to the extent any such determination is made, PTMN will inform the HCAP Stockholders of such determination as soon as practicable after the Closing Date. The determination will be based on the then-existing law, will assume the absence of changes in existing facts, may rely on certain customary assumptions and may rely on representations contained in certificates executed by officers of PTMN and HCAP.
The obligations of PTMN and HCAP to complete the Mergers are not conditioned on the receipt of, and PTMN and HCAP will not receive, opinions from Simpson Thacher, counsel to PTMN, or Dechert, counsel to HCAP, to the effect that the Mergers will qualify as a reorganization for U.S. federal income tax purposes. HCAP Stockholders should read the section captioned “Certain Material U.S. Federal Income Tax Consequences of the Mergers” for a more complete discussion of the U.S. federal income tax consequences of the Mergers. Tax matters can be complicated and the tax consequences of the Mergers to HCAP Stockholders will depend on their particular tax situation. HCAP Stockholders should consult with their own tax advisors to determine the tax consequences of the Mergers to them.
Special Meeting of HCAP Stockholders
HCAP plans to hold the HCAP Special Meeting on [•], 2021, at [•] a.m., Eastern Time, at the following website: [•]. At the HCAP Special Meeting, holders of HCAP Common Stock will be asked to approve the Merger Proposal and, if necessary or appropriate, the HCAP Adjournment Proposal.
An HCAP Stockholder can vote at the HCAP Special Meeting, or any adjournments and postponements thereof, if such stockholder owned shares of HCAP Common Stock at the close of business on the HCAP Record
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Date. As of that date, there were [•] shares of HCAP Common Stock outstanding and entitled to vote. [•] of such total outstanding shares, or approximately [•]%, were owned beneficially or of record by directors and executive officers of HCAP.
HCAP Board Recommendation
The HCAP Board, acting on the unanimous recommendation of the HCAP Special Committee, approved the Merger Agreement and the transactions contemplated thereby, including the Mergers, and recommends that HCAP Stockholders vote “FOR” the Merger Proposal and, if necessary or appropriate, “FOR” the HCAP Adjournment Proposal.
Vote Required
Each share of HCAP Common Stock held by a holder of record as of the HCAP Record Date has one vote on each matter to be considered at the HCAP Special Meeting.
The Merger Proposal
The approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of HCAP Common Stock entitled to vote at the HCAP Special Meeting (“HCAP Stockholder Approval”). Abstentions and broker non-votes will have the same effect as votes “against” the Merger Proposal.
The HCAP Adjournment Proposal
The approval of the HCAP Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of HCAP Common Stock present in person or represented by proxy and entitled to vote at the HCAP Special Meeting, whether or not a quorum is present. Abstentions will have the same effect as a vote “against” approval of the HCAP Adjournment Proposal. Broker non-votes will have no effect on the voting outcome of the HCAP Adjournment Proposal.
Completion of the Mergers
As more fully described in this proxy statement/prospectus and in the Merger Agreement, the completion of the Mergers depends on a number of conditions being satisfied or, where legally permissible, waived. For information on the conditions that must be satisfied or waived for the Mergers to occur, see “Description of the Merger Agreement—Conditions to Closing the Mergers.” While there can be no assurances as to the exact timing, or that the Mergers will be completed at all, PTMN and HCAP are working to complete the Mergers in the second quarter of 2021. It is currently expected that the Mergers will be completed promptly following receipt of the HCAP Stockholder Approval at the HCAP Special Meeting and satisfaction (or to the extent legally permitted, waiver) of the other closing conditions set forth in the Merger Agreement.
Termination of the Mergers and Termination Fee
The Merger Agreement contains certain termination rights for PTMN and HCAP, each of which is discussed below in “Description of the Mergers—Termination of the Merger Agreement.” The Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances, HCAP may be required to pay PTMN, or PTMN may be required to pay HCAP, a termination fee of approximately $2.122 million. See “Description of the Merger Agreement—Termination of the Merger Agreement” for a discussion of the circumstances that could result in the payment of the termination fees.
HCAP Reasons for the Mergers
After a thorough review of a variety of strategic alternatives, the HCAP Board, upon the recommendation of the HCAP Special Committee, determined that entering into the Merger Agreement and consummating the transactions contemplated thereby, including the Mergers, is in the best interests of HCAP and HCAP Stockholders. Certain material factors considered by the HCAP Special Committee and the HCAP Board in evaluating the Mergers include, among others:
the financial terms of the Merger Agreement, including that:
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on a market value basis, the transaction, including the Additional Cash Consideration from Sierra Crest, represents an implied market value for HCAP Common Stock of approximately $7.71 per share, which represents approximately 79% of HCAP’s September 30, 2020 NAV per share (adjusted for expected transaction expenses) and a 30.4% premium to the closing price of HCAP Common Stock on December 22, 2020. This implied market value is based on (i) HCAP’s adjusted September 30, 2020 NAV ($60.6 million, or $10.17 per share of HCAP Common Stock based on the outstanding shares of HCAP Common Stock as of December 23, 2020 (the date of the Merger Agreement), as adjusted for expected transaction expenses), (ii) PTMN’s estimated October 31, 2020 NAV ($208.6 million, or $2.78 per share of PTMN Common Stock, accounting for PTMN’s merger with GARS, which was completed on October 28, 2020 (the “PTMN/GARS Transaction”), as adjusted for expected transaction expenses), and (iii) the closing price of PTMN Common Stock on December 22, 2020 (which was the last trading day before entering into the Merger Agreement) of $1.80;
on an NAV basis, HCAP Stockholders will collectively receive value per share of approximately 103.7% of the NAV per share of HCAP Common Stock, calculated based on (i) HCAP’s adjusted September 30, 2020 NAV and the outstanding shares of HCAP Common Stock as of December 23, 2020 (the date of the Merger Agreement), (ii) the estimated NAV per share of PTMN Common Stock as of October 31, 2020 (as adjusted for the PTMN/GARS Transaction and expected transaction expenses), and (iii) taking into account the value of the Additional Cash Consideration. The additional 3.7% premium above NAV per share of HCAP Common Stock is a result of the Additional Cash Consideration;
PTMN will issue to HCAP Stockholders shares of PTMN Common Stock equal to 19.9% of the number of shares of PTMN Common Stock issued and outstanding immediately prior to the Closing, and pay the remainder of the Merger Consideration in cash; and
HCAP Stockholders will have the option to elect to receive the Merger Consideration in cash, which provides immediate liquidity and certainty of value to HCAP Stockholders, or in shares of PTMN Common Stock, subject to adjustment based on the elections of other HCAP Stockholders, and that the Jolson Letter Agreement (as defined in the section entitled “The Mergers—Background of the Mergers”) to which Mr. Jolson and HCAP are party will enhance the ability of minority HCAP Stockholders to receive cash based on their elections.
the thorough review of strategic alternatives undertaken by the HCAP Special Committee and the HCAP Board;
certain considerations relating to the opportunities for the combined company to provide strategic and business opportunities for its stockholders and to generate additional stockholder value, including that:
based on the outstanding shares and relative NAV of HCAP Common Stock and PTMN Common Stock outstanding (each as adjusted for expected transaction expenses), as of September 30, 2020 with respect to HCAP, and as of October 31, 2020 with respect to PTMN and as estimated for pro forma adjustments to account for the PTMN/GARS Transaction, current HCAP Stockholders would own approximately 16.6% of the combined company immediately following the completion of the Mergers;
the combined company will be externally managed by Sierra Crest and is expected to have total assets in excess of $658 million total investments of approximately $582 million and NAV in excess of $250.0 million (based on HCAP’s September 30, 2020 balance sheet and PTMN’s estimated October 31, 2020 balance sheet (with pro forma adjustments for the PTMN/GARS Transaction), not adjusted for transaction expenses);
following the Mergers, HCAP Stockholders are expected to benefit from (i) access to the full range of resources of Sierra Crest; (ii) investment opportunities originated through the BC Partners Credit platform; and (iii) the utilization of BC Partners’ broader resources, including relationships and institutional knowledge from over 30 years of private market investing;
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the combined company’s investment portfolio following the Mergers will provide additional scale and portfolio diversification, which will position the combined company, among other things, to (i) capitalize on favorable market conditions; (ii) originate larger transactions with increased final hold positions; and (iii) enhance access to lower cost of capital from banks and capital market participants;
HCAP Stockholders of the combined company will have an ability to participate in the future growth of PTMN, including potential upside if shares of PTMN Common Stock trades higher in the future;
the Mergers are expected to deliver operational synergies for the combined company as a result of the larger scale and elimination of redundant HCAP expenses following the Mergers;
HCAP Stockholders are expected to realize net investment income per share accretion following the Closing;
the combined historical performance of HCAP and PTMN and expected ability of the combined entity to make future dividend payments to stockholders are expected to benefit HCAP Stockholders;
shares of PTMN Common Stock received in exchange for shares of HCAP Common Stock may be more liquid than HCAP Common Stock, given the increased size and diversification of the equity base of the combined company;
based on a review of PTMN, the belief that PTMN and BC Partners have shown the ability to successfully execute this type of merger transaction;
the terms of the Merger Agreement, including that the terms of the Merger Agreement are unlikely to unduly deter third parties from making unsolicited acquisition proposals; and
the risks and potential negative factors relating to the Merger Agreement.
The HCAP Special Committee also considered the opinion of the financial advisor to the HCAP Special Committee in connection with its consideration of the financial terms of the Mergers. See “—Opinion of the Financial Advisor to the HCAP Special Committee” below. For a further discussion of the factors considered by the HCAP Special Committee and the HCAP Board, see “The Mergers—HCAP Reasons for the Mergers.
Opinion of the Financial Advisor to the HCAP Special Committee
In connection with the Mergers, Keefe, Bruyette & Woods, Inc. (“KBW”) delivered a written opinion, dated December 23, 2020, as discussed in more detail in the section entitled “The Merger—Opinion of the Financial Advisor to the HCAP Special Committee'', to the HCAP Special Committee as to the fairness, from a financial point of view and as of the date of the opinion, to the holders of HCAP Common Stock, collectively as a group, of the Total Stock Consideration and the Aggregate Cash Consideration, taken together, collectively with the Additional Cash Consideration (collectively, the “Aggregate Merger Consideration”), in the First Merger. The full text of the opinion, which describes the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by KBW in preparing the opinion, is attached as Annex B to this proxy statement/prospectus. The opinion was for the information of, and was directed to, the HCAP Special Committee (in its capacity as such) in connection with its consideration of the financial terms of the Mergers. The opinion did not address the underlying business decision of HCAP to engage in the Mergers or enter into the Merger Agreement or constitute a recommendation to the HCAP Special Committee or the HCAP Board in connection with the Mergers, and it does not constitute a recommendation to any holder of HCAP Common Stock or any shareholder of any other entity as to how to vote in connection with the Mergers or any other matter (including, with respect to holders of HCAP Common Stock, whether any HCAP Stockholder should make an Election).
At the instruction of the HCAP Special Committee, a copy of KBW’s opinion was provided to the HCAP Board for informational purposes only prior to its deliberations relating to the approval of the Mergers and the Merger Agreement.
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HCAP Stockholders Have Appraisal Rights
HCAP Stockholders will be entitled to exercise appraisal rights with respect to the Merger in accordance with Section 262 of the DGCL. For more information, see “Appraisal Rights of HCAP Stockholders” and “Description of the Merger Agreement—Appraisal Rights.
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RISK FACTORS
In addition to the other information included in this document, HCAP Stockholders should carefully consider the risks described below in determining whether to approve the Merger Proposal. The information in “Risk Factors” in Part I, Item 1A of PTMN’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 is incorporated herein by reference for general risks related to PTMN. The information in “Risk Factors” in Part I, Item 1A of HCAP’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 is incorporated herein by reference for general risks related to HCAP. The risks, as set out below and incorporated by reference herein are not the only risks PTMN and HCAP and, following the Mergers, the combined company, face. Additional risks and uncertainties not currently known to PTMN or HCAP or that they currently deem to be immaterial also may materially adversely affect their or, following the Mergers, the combined company’s, business, financial condition or operating results. If any of the following events occur, PTMN or HCAP or, following the Mergers, the combined company’s, business, financial condition or results of operations could be materially adversely affected. See also “Incorporation by Reference for PTMN,” Incorporation by Reference for HCAP” and “Where You Can Find More Information” in this proxy statement/prospectus.
RISKS RELATING TO THE MERGERS
Because the market price of PTMN Common Stock and the NAV per share of PTMN and HCAP will fluctuate, HCAP Stockholders cannot be sure of the market value or exact composition of the Merger Consideration they will receive until the Closing Date.
The market value of the aggregate Merger Consideration may vary from the closing price of PTMN Common Stock on the date the Mergers were announced, on the date that this proxy statement/prospectus was made available to stockholders or the date of the HCAP Special Meeting and on the date the Mergers are completed. Any change in the market price of PTMN Common Stock prior to completion of the Mergers will affect the market value of the aggregate Merger Consideration that HCAP Stockholders will receive upon completion of the Mergers. Additionally, the Per Share Stock Consideration and Per Share Cash Price will fluctuate as the market price of PTMN Common Stock and the NAV of HCAP change prior to the Closing Date.
In addition, because the Election Deadline is 5:00 p.m., New York City time on the fifth business day preceding Closing Date, HCAP Stockholders must decide whether to approve the Merger Proposal and make their Elections without knowing the actual market value of the shares of PTMN Common Stock they may receive when the Mergers are completed. This value will not be known at the time of the HCAP Special Meeting and may be more or less than the current market price of shares of PTMN Common Stock or the price of PTMN Common Stock at the time of HCAP Special Meeting or at the time an Election is made.
HCAP is not permitted to terminate the Merger Agreement or resolicit the vote of its stockholders solely because of changes in the market price of shares of PTMN Common Stock. There will be no adjustment to the Merger Consideration for changes in the market price of shares of PTMN Common Stock. In addition, the U.S. federal income tax treatment of the Mergers will not be known as of the date of the HCAP Special Meeting, and the position that the Mergers qualify as a “reorganization” might be challenged by the IRS.
Changes in the market price of PTMN Common Stock may result from a variety of factors, including, among other things:
changes in the business, operations or prospects of PTMN;
the financial condition of current or prospective portfolio companies of PTMN;
interest rates or general market or economic conditions;
market assessments of the likelihood that the Mergers will be completed and the timing of completion of the Mergers;
market perception of the future profitability of the combined company;
the duration and effects of the COVID-19 pandemic on PTMN’s and HCAP’s portfolio companies; and
the duration and effects of the COVID-19 pandemic on equity trading prices generally, and specifically on the trading price of PTMN Common Stock and the common stock of the Surviving Corporation following the Mergers.
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See “Special Note Regarding Forward-Looking Statements” for other factors that could cause the market price of PTMN Common Stock to change.
These factors are generally beyond the control of PTMN. The range of high and low closing sales prices of PTMN Common Stock as reported on Nasdaq for the year ended December 31, 2020, was a low of $0.75 to a high of $2.36. However, historical trading prices are not necessarily indicative of future performance. HCAP Stockholders should obtain current market quotations for shares of PTMN Common Stock prior to voting their shares of HCAP Common Stock at the HCAP Special Meeting.
Furthermore, upon completion of the Mergers, HCAP Stockholders will be entitled to receive for each share of HCAP Common Stock that they own, at the election of each stockholder, subject to certain limitations and adjustment pursuant to the terms of the Merger Agreement, consideration in the form of a combination of PTMN Common Stock and cash, only cash or only PTMN Common Stock. The aggregate proportion of PTMN Common Stock payable as Merger Consideration is fixed and will not be adjusted for changes in the stock prices of either company before the Mergers are completed. Even if an HCAP Stockholder elects to receive all cash in the Mergers, the amount of cash to which such stockholder is entitled will depend on the price of PTMN Common Stock and the terms of the Merger Agreement described under “Description of the Merger Agreement—Merger Consideration” and “Description of the Merger Agreement—Allocation of Merger Consideration and Illustrative Elections and Calculations.” As a result, any changes in the market price of PTMN Common Stock will have a corresponding effect on the market value of the Merger Consideration. Neither party, however, has a right to terminate the Merger Agreement based solely (and in and of itself) upon changes in the market price of PTMN Common Stock or HCAP Common Stock.
The Per Share Merger Consideration received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share, and, depending on the Elections made by an HCAP Stockholder and Elections made by other HCAP Stockholders, the Per Share Merger Consideration received may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value.
Under the Merger Agreement, PTMN will issue at the Effective Time, in respect of all of the issued and outstanding shares of HCAP Common Stock (excluding Cancelled Shares), in the aggregate, the Merger Consideration. In addition, as additional consideration to the holders of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time (excluding any Cancelled Shares), Sierra Crest will pay or cause to be paid to such holders the Additional Cash Consideration in an aggregate amount of $2.15 million.
Although the Merger Consideration (excluding the Additional Cash Consideration) paid to HCAP Stockholders will equal, in the aggregate, the Closing HCAP Net Asset Value, the Per Share Merger Consideration to be received by an individual HCAP Stockholder may represent an implied market value per share less than the Closing HCAP Net Asset Value per share and, depending on the Elections made by such HCAP Stockholder and Elections made by other HCAP Stockholders, may represent a value per share higher or less than the consideration received by other HCAP Stockholders calculated on the basis of the Closing PTMN Net Asset Value. However, as a result of certain limitations and adjustments pursuant to the terms of the Merger Agreement, including the adjustment mechanisms with respect to Non-Electing Shares described in “Description of the Merger Agreement—Merger Consideration” and “Description of the Merger AgreementAllocation of Merger Consideration and Illustrative Elections and Calculations,” each holder of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time will receive Per Share Merger Consideration approximately equal to the implied market value of the Per Share Merger Consideration received by other HCAP Stockholders at the Effective Time calculated on the basis of the market value of shares of PTMN Common Stock as of the Determination Date.
Because the composition of cash or shares of PTMN Common Stock will vary among individual HCAP Stockholders based on each HCAP Stockholder’s Election and the Elections of other HCAP Stockholders, tax consequences will differ between HCAP Stockholders with respect to the Per Share Merger Consideration each receives. For a summary of the different U.S. federal income tax consequences, see the section of this proxy statement/prospectus entitled “Certain Material U.S. Federal Income Tax Consequences of the Mergers.”
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Sales of shares of PTMN Common Stock after the completion of the Mergers may cause the market price of PTMN Common Stock to decline.
Based on the number of outstanding shares of PTMN Common Stock as of December 31, 2020, PTMN would issue approximately 14,957,682 shares of PTMN Common Stock pursuant to the Merger Agreement (after accounting for anticipated expenses of both parties related to the transaction). Former HCAP Stockholders may decide not to hold the shares of PTMN Common Stock that they receive pursuant to the Merger Agreement. In addition, PTMN Stockholders may decide not to hold their shares of PTMN Common Stock after completion of the Mergers. In each case, such sales of PTMN Common Stock could have the effect of depressing the market price for PTMN Common Stock and may take place promptly following the completion of the Mergers.
HCAP Stockholders and PTMN Stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Mergers.
HCAP Stockholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective percentage ownership interests in HCAP prior to the Mergers. Consequently, HCAP Stockholders should expect to exercise less influence over the management and policies of the combined company following the Mergers than they currently exercise over the management and policies of HCAP. PTMN Stockholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective ownership interests in PTMN prior to the Mergers. Consequently, PTMN Stockholders should expect to exercise less influence over the management and policies of the combined company following the Mergers than they currently exercise over the management and policies of PTMN.
If the Mergers are consummated, based on the number of shares of PTMN Common Stock issued and outstanding as of December 31, 2020, it is expected that current PTMN Stockholders will own approximately 83.4% of the outstanding PTMN Common Stock and former HCAP Stockholders will own approximately 16.6% of the outstanding PTMN Common Stock. In addition, both prior to and after completion of the Mergers, subject to certain restrictions in the Merger Agreement, PTMN may issue additional shares of PTMN Common Stock (including, subject to certain restrictions under the 1940 Act, at prices below PTMN Common Stock’s then current NAV per share), all of which would further reduce the percentage ownership of the combined company held by former HCAP Stockholders and current PTMN Stockholders. In addition, the issuance or sale by PTMN of shares of PTMN Common Stock at a discount to NAV poses a risk of economic dilution to stockholders.
HCAP Stockholders may receive a form or combination of consideration different from what they elect.
While each holder of HCAP Common Stock entitled to the Merger Consideration may elect to receive, in connection with the Mergers, the Cash Consideration, the maximum aggregate number of shares of PTMN Common Stock available for all HCAP Stockholders will be fixed to equal the Total Stock Consideration and, accordingly, the aggregate amount of cash available to HCAP Stockholders will be fixed. As a result, depending on the Elections made by other HCAP Stockholders, if a holder of HCAP Common Stock elects to receive cash in connection with the Mergers, such holder will likely receive a portion of its Merger Consideration in PTMN Common Stock, and if a holder of HCAP Common Stock elects to receive PTMN Common Stock in connection with the Mergers, such holder will likely receive a portion of the Merger Consideration in cash. See “Description of the Merger Agreement—Allocation of Merger Consideration and Illustrative Elections and Calculations” for more information. If a holder of HCAP Common Stock does not submit a properly completed and signed Form of Election to the Exchange Agent by the Election Deadline, then such stockholder will receive Stock Consideration (unless such consideration is adjusted pursuant to the terms of the Merger Agreement based on too many stockholders electing to receive Stock Consideration). No fractional shares of PTMN Common Stock will be issued in the Mergers, and HCAP stockholders will receive cash in lieu of any fractional shares of PTMN Common Stock.
PTMN may be unable to realize the benefits anticipated by the Mergers, including estimated cost savings, or it may take longer than anticipated to realize such benefits.
The realization of certain benefits anticipated as a result of the Mergers will depend in part on the integration of HCAP’s investment portfolio with PTMN’s and the integration of HCAP’s business with PTMN’s. There can be no assurance that HCAP’s investment portfolio or business can be operated profitably or integrated successfully into PTMN’s operations in a timely fashion or at all. The dedication of management resources to
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such integration may divert attention from the day-to-day business of the combined company and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including incurring unexpected costs or delays in connection with such integration and failure of HCAP’s investment portfolio to perform as expected, could have a material adverse effect on the financial results of the combined company.
PTMN also expects to achieve certain cost savings from the Mergers when the two companies have fully integrated their portfolios. It is possible that the estimates of the potential cost savings could ultimately be incorrect. The cost savings estimates also assume PTMN will be able to combine the operations of PTMN and HCAP in a manner that permits those cost savings to be fully realized. If the estimates turn out to be incorrect or if PTMN is not able to successfully combine HCAP’s investment portfolio or business with the operations of PTMN, the anticipated cost savings may not be fully realized, or realized at all, or may take longer to realize than expected.
The announcement and pendency of the proposed Mergers could adversely affect HCAP’s business, financial results and operations.
The announcement and pendency of the proposed Mergers could cause disruptions in and create uncertainty surrounding HCAP’s business, including affecting its relationships with its existing and future borrowers and lenders, which could have a significant negative impact on its future revenues and results of operations, regardless of whether the Mergers are completed. In particular, HCAP Advisors or its affiliates could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed transaction, existing borrowers may elect to refinance their loans from HCAP and its affiliates with other lenders, and existing and potential future lenders may be unable or unwilling to fund their commitments to HCAP or otherwise extend credit to HCAP. In addition, HCAP has diverted, and will continue to divert, significant management resources towards the completion of the Mergers, which could have a significant negative impact on its future revenues and results of operations.
HCAP is also subject to restrictions on the conduct of its business prior to the completion of the Mergers as provided in the Merger Agreement, generally requiring HCAP to conduct its business only in the ordinary course and subject to specific limitations, including, among other things, certain restrictions on its ability to make certain investments and acquisitions, sell, transfer or dispose of its assets, amend its organizational documents and enter into or modify certain material contracts. These restrictions could prevent HCAP from pursuing otherwise attractive business opportunities, industry developments and future opportunities and may otherwise have a significant negative impact on its future investment income and results of operations.
If the Mergers do not close, neither PTMN nor HCAP will benefit from the expenses incurred in their pursuit of the Mergers and, under certain circumstances, HCAP will be required to pay half of PTMN’s expenses incurred in connection with the Mergers, subject to a maximum reimbursement payment of $500,000.
The Mergers may not be completed. If the Mergers are not completed, HCAP and PTMN will have incurred substantial expenses for which no ultimate benefit will have been received. Both companies have incurred out-of-pocket expenses in connection with the Mergers for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Mergers are not completed. In addition, under certain circumstances, HCAP will be required to pay half of PTMN’s expenses incurred in connection with the Mergers, subject to a maximum reimbursement payment of $500,000.
Litigation which may be filed against HCAP or PTMN in connection with the Mergers, regardless of its merits, could result in substantial costs and could delay or prevent the Mergers from being completed.
From time to time, HCAP and PTMN may be subject to legal actions, including securities class action lawsuits and derivative lawsuits, as well as various regulatory, governmental and law enforcement inquiries, investigations and subpoenas in connection with the Mergers. These or any similar securities class action lawsuits and derivative lawsuits, regardless of their merits, may result in substantial costs and divert management time and resources. An adverse judgment in such cases could have a negative impact on HCAP’s or PTMN’s liquidity and financial condition or could prevent the Mergers from being completed.
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The termination of the Merger Agreement could negatively impact HCAP and PTMN.
If the Merger Agreement is terminated, there may be various consequences, including:
HCAP’s and PTMN’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Mergers, without realizing any of the anticipated benefits of completing the Mergers;
the market prices of HCAP Common Stock and PTMN Common Stock might decline to the extent that the market price prior to termination reflects a market assumption that the Mergers will be completed;
HCAP may not be able to find a party willing to pay an equivalent or more attractive price than the price PTMN agreed to pay in the Mergers; and
the payment of any termination fee or reimbursement of expenses, if required under the circumstances, could adversely affect the financial condition and liquidity of HCAP or PTMN.
Under certain circumstances, HCAP or PTMN would be obligated to pay a termination fee upon termination of the Merger Agreement.
The Mergers may not be completed. The Merger Agreement provides for the payment, subject to applicable law, by HCAP or PTMN of a termination fee under certain circumstances. See “Description of the Merger Agreement—Termination of the Merger Agreement” for a discussion of the circumstances that could result in the payment of a termination fee.
The Mergers are subject to closing conditions, including the HCAP Stockholder Approval, that, if not satisfied or waived, will result in the Mergers not being completed, which may result in material adverse consequences to HCAP’s and PTMN’s business and operations.
The Mergers are subject to closing conditions, including the HCAP Stockholder Approval that, if not satisfied, will prevent the Mergers from being completed. The closing condition that HCAP Stockholders approve the Mergers and the Merger Agreement may not be waived and must be satisfied for the Mergers to be completed. If HCAP Stockholders do not approve the Mergers and the Merger Agreement and the Mergers are not completed, the resulting failure to complete the Mergers could have a material adverse impact on HCAP’s business and operations.
PTMN and HCAP will be subject to operational uncertainties and contractual restrictions while the Mergers are pending, including restrictions on pursuing alternatives to the Mergers.
Uncertainty about the effect of the Mergers may have an adverse effect on PTMN and HCAP and, consequently, on the combined company following completion of the Mergers. These uncertainties may impair Sierra Crest’s and HCAP Advisors’ abilities to motivate key personnel until the Mergers are consummated and could cause those who deal with PTMN and HCAP to seek to change their existing business relationships with PTMN and HCAP, respectively. In addition, the Merger Agreement restricts PTMN and HCAP from taking actions that they might otherwise consider to be in their best interests. These restrictions may prevent PTMN and HCAP from pursuing certain business opportunities that may arise prior to the completion of the Mergers, including restrictions on them pursuing alternatives to the Mergers. Please see the section entitled “Description of the Merger Agreement—Interim Operations of PTMN” and “Description of the Merger Agreement—Interim Operations of HCAP” for a description of the interim operating covenants to which PTMN and HCAP are subject.
The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire HCAP prior to the completion of the proposed Mergers.
The Merger Agreement prohibits HCAP from soliciting alternatives to the Mergers and imposes limitations on HCAP’s ability to respond to and negotiate unsolicited proposals received from third parties. The Merger Agreement contains customary non-solicitation and other provisions that, subject to limited exceptions, limit HCAP’s ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of HCAP. HCAP can consider and participate in discussions and negotiations with respect to an alternative proposal only in limited circumstances so long as certain notice and other procedural requirements are satisfied. In addition, subject to certain procedural requirements (including the ability of PTMN to revise its offer) and the
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payment of an approximately $2.122 million termination fee, HCAP may terminate the Merger Agreement and enter into an agreement with a third party that makes a superior proposal. These provisions may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of HCAP from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in connection with the Mergers.
The opinion delivered to the HCAP Special Committee from its financial advisor prior to signing the Merger Agreement will not reflect changes in circumstances since the date of such opinion.
The opinion of the HCAP Special Committee’s financial advisor was delivered to the HCAP Special Committee on, and was dated, December 23, 2020. Changes in the operations and prospects of HCAP or PTMN, general market and economic conditions and other factors that may be beyond the control of HCAP or PTMN may significantly alter the value of HCAP or the price of shares of PTMN Common Stock by the time the Mergers are completed. The opinion does not speak as of the time the Mergers will be completed or as of any date other than the date of such opinion. For a description of the opinion that the HCAP Special Committee received from its financial advisor, see “The Mergers—Opinion of the Financial Advisor to the HCAP Special Committee.”
If the Mergers are not completed or HCAP is not otherwise acquired, HCAP may consider other strategic alternatives, which are subject to risks and uncertainties.
If the Mergers are not completed, the HCAP Special Committee and the HCAP Board may review and consider various alternatives available to HCAP, including, among others, continuing as a standalone public company with no material changes to its business or seeking an alternate transaction. These strategic or other alternatives available to HCAP may involve various additional risks to its business, including, among others, distraction of its management team and associated expenses as described above in connection with the proposed Mergers, and risks and uncertainties related to its ability to complete any such alternatives and other variables which may adversely affect its operations.
Subject to applicable law, each party may waive one or more conditions to the Mergers without soliciting (or resoliciting, in the case of HCAP) approval from its respective stockholders.
Certain conditions to PTMN’s and HCAP’s obligations to complete the Mergers may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of PTMN and HCAP. In the event that any such waiver does not require solicitation of stockholders, the parties to the Merger Agreement will have the discretion to complete the Mergers without seeking further stockholder approval. Accordingly, the terms and conditions as set forth in the Merger Agreement and described herein, including certain protections to PTMN and HCAP, may be waived. The conditions requiring approval of HCAP Stockholders, however, cannot be waived.
The shares of PTMN Common Stock to be received by HCAP Stockholders as a result of the Mergers will have different rights associated with them than shares of HCAP Common Stock currently held by them.
The rights associated with HCAP Common Stock are different from the rights associated with PTMN Common Stock. See “Comparison of PTMN and HCAP Stockholder Rights.
The market price of PTMN Common Stock after the Mergers may be affected by factors different from those affecting PTMN Common Stock currently.
The businesses of PTMN and HCAP differ in some respects and, accordingly, the results of operations of the combined company and the market price of PTMN Common Stock after the Mergers may be affected by factors different from those currently affecting the independent results of operations of each of PTMN and HCAP. These factors include:
a larger stockholder base;
a different portfolio composition; and
a different capital structure.
Accordingly, the historical trading prices and financial results of PTMN may not be indicative of these matters for the combined company following the Mergers.
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The U.S. federal income tax treatment of the Mergers will not be known as of the date of the HCAP Special Meeting, and the position that the Mergers qualify as a “reorganization” might be challenged by the IRS.
The U.S. federal income tax consequences of the Mergers depend on whether the Mergers qualify as a reorganization within the meaning of Section 368(a) of the Code. The Mergers will not qualify as a reorganization if the fair market value of PTMN Common Stock received by HCAP Stockholders in the Mergers does not equal or exceed 40% of the aggregate consideration. As noted below under “Description of the Merger AgreementMerger Consideration,” the amount of PTMN Common Stock and cash to be transferred in the Mergers is subject to adjustments. Therefore, it will not be known at the time of the HCAP Special Meeting whether the Mergers will qualify as a reorganization.
On the Closing Date, PTMN and HCAP will use commercially reasonable efforts to make a determination, in consultation with tax counsel, as to whether or not the Mergers qualify as a reorganization for U.S. federal income tax purposes, and, to the extent any such determination is made, PTMN will inform the HCAP Stockholders of such determination as soon as practicable after the Closing Date. The determination will be based on the then-existing law, will assume the absence of changes in existing facts, may rely on certain customary assumptions and may rely on representations contained in certificates executed by officers of PTMN and HCAP. The obligations of PTMN and HCAP to complete the Mergers are not conditioned on the receipt of, and PTMN and HCAP will not receive, opinions from Simpson Thacher, counsel to PTMN, or Dechert, counsel to HCAP, to the effect that the Mergers will qualify as a reorganization for U.S. federal income tax purposes. HCAP Stockholder votes will not be resolicited in the event that the Mergers do not qualify as a reorganization for U.S. federal income tax purposes. Furthermore, even if PTMN and HCAP determine that the Mergers qualify as a reorganization for U.S. federal income tax purposes, the IRS may assert a contrary position.
The U.S. federal income tax treatment of the Additional Cash Consideration is not entirely clear, and the position taken that the Additional Cash Consideration is part of the total cash consideration received by HCAP Stockholders pursuant to the Mergers might be challenged by the IRS.
With respect to the Additional Cash Consideration, there is limited authority addressing the tax consequences of the receipt of merger consideration from a party other than the acquiror and, as a result, the tax consequences of the receipt of the Additional Cash Consideration are not entirely clear. PTMN and Sierra Crest intend to take the position that the Additional Cash Consideration received by a U.S. holder (as defined in the section entitled “Certain Material U.S. Federal Income Tax Consequences of the Mergers”) is treated as additional merger consideration. It is possible, however, that the IRS would assert a contrary position that the Additional Cash Consideration be treated as taxable ordinary income and not as cash received in exchange for such holder’s HCAP Common Stock.
Following the closing of the Mergers, PTMN may be limited in the use of certain capital loss carryforwards and the use of certain unrealized capital losses.
In general, it is expected that limitations under the Code will apply to loss carryforwards and unrealized losses of HCAP as HCAP Stockholders before the Mergers are expected to hold less than 50% of the outstanding shares of PTMN immediately following the Mergers. As such, the Mergers are expected to result in potential limitations on the ability of PTMN to use HCAP’s loss carryforwards and potentially to use unrealized capital losses inherent in the tax basis of the assets acquired, once realized, and on the ability of HCAP’s taxable subsidiaries to use their net operating loss carryforwards.
To seek to minimize limits on the use of HCAP’s capital loss carryforwards and recognition of tax basis built in gains, HCAP assets may be sold prior to the Closing Date of the Mergers. To the extent any such sales result in recognized capital gains, the amount of HCAP’s capital loss carryforwards will decrease prior to the Closing Date. Any such sales, if made outside the ordinary course of business, would increase trading costs.
If PTMN sells investments acquired as a result of the Mergers, it may result in capital gains and increase the incentive fees payable to Sierra Crest.
Investments that PTMN acquires as a result of the Mergers will be booked at a discount under ASC 805-50, Business Combinations–Related Issues. To the extent PTMN sells one of these acquired investments at a price that is higher than its then-amortized cost, such sale would result in realized capital gain that would be factored into the amount of the incentive fee on capital gains, if any, that is paid by the combined company to Sierra Crest. If PTMN sells a significant portion of the investments acquired as a result of the Mergers, it may materially increase the incentive fee on capital gains paid by the combined company to Sierra Crest. The effect on the incentive fee on capital gains would be greater for acquired investments sold closer to the Closing Date.
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COMPARATIVE FEES AND EXPENSES

Comparative Fees and Expenses Relating to the Mergers
The following tables are intended to assist you in understanding the costs and expenses that an investor in the common stock of PTMN or HCAP bears directly or indirectly, and, based on the assumptions set forth below, the pro forma costs and expenses estimated to be incurred by the combined company in the first year following the Mergers. PTMN and HCAP caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this document contains a reference to fees or expenses paid or to be paid by “you,” “PTMN” or “HCAP,” stockholders will indirectly bear such fees or expenses as investors in PTMN or HCAP, as applicable. The table below is based on information as of December 31, 2020 (except as noted below).
 
Actual
Pro
Forma
Stockholder transaction expenses
PTMN
(acquiring
fund)
HCAP
(target
fund)
 
Sales load (as a percentage of offering price)
None(1)
None(1)
None(1)
Offering expenses (as a percentage of offering price)
None(1)
None(1)
None(1)
Dividend reinvestment plan expenses
None(2)
None(2)
None(1)
Total stockholder transaction expenses (as a percentage of offering price)
None
None
None
 
Actual
Pro
Forma
Estimated annual expenses (as a percentage of net assets attributable to common stock):(3)
PTMN
(acquiring
fund)
HCAP
(target
fund)
 
Base management fees(4)
[•]%
[•]%
[•]%
Incentive fees(5)
[•]%
[•]%
[•]%
Interest payments on borrowed funds(6)
[•]%
[•]%
[•]%(9)
Other expenses(7)
[•]%
[•]%
[•]%
Acquired fund fees and expenses
[]%
[]%
[]%
Total annual expenses(8)
[]%
[]%
[]%
*
Represents an amount less than 0.1%.
(1)
Purchases of shares of PTMN Common Stock or HCAP Common Stock on the secondary market are not subject to sales charges, but may be subject to brokerage commissions or other charges. The table does not include any sales load (underwriting discount or commission) that stockholders may have paid in connection with their purchase of shares of PTMN Common Stock or HCAP Common Stock in a prior underwritten offering or otherwise.
(2)
The estimated expenses associated with the respective distribution reinvestment plans are included in “Other expenses.”
(3)
“Consolidated net assets attributable to common stock” equals net assets at December 31, 2020. For the pro forma columns, the combined net assets of PTMN and HCAP on a pro forma basis as of December 31, 2020 were used.
(4)
For PTMN, the base management fee is 1.50% of PTMN’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters; provided, however, that the base management fee is 1.00% of PTMN’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, that exceed the product of (i) 200% and (ii) the value of PTMN’s NAV at the end of the most recently completed calendar quarter.
HCAP’s base management fee is calculated based on HCAP’s gross assets (which includes assets acquired with the use of leverage and excludes cash and cash equivalents) at an annual rate of (i) 2.0% of gross assets up to and including $350 million, (ii) 1.75% of gross assets above $350 million and up to and including $1 billion, and (iii) 1.5% of gross assets above $1 billion. The percentage presented in the table reflects actual amounts incurred during the year ended December 31, 2020.
(5)
PTMN’s incentive fee consists of two parts: (i) a portion based on PTMN’s pre-incentive fee net investment income (the “Income-Based Fee”) and (ii) a portion based on the net capital gains received on PTMN’s portfolio of securities on a cumulative basis for each calendar year, net of all realized capital losses and all unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains Incentive Fee (the “Capital Gains Fee”). The Income-Based Fee is 17.50% of pre-incentive fee net investment income with a 7.00% hurdle rate. The Capital Gains Fee is 17.50%. Pursuant to an incentive fee letter agreement, Sierra Crest permanently waived incentive fees earned without recourse against or reimbursement by PTMN, to the extent necessary in order to achieve aggregate net investment income of PTMN for a one-year period to be at least equal to $0.40 per share, subject to certain adjustments. Pursuant to such agreement, for the six months ended June 30, 2020, approximately $557,000 in incentive fees were waived by Sierra Crest. As of July 1, 2020, all fee waivers from Sierra Crest expired.
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HCAP’s incentive fee also consists of two components. The first part (the “HCAP Income-Based Fee”) is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter and is 20% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter, expressed as a rate of return on the value of HCAP’s net assets (defined as total assets less senior securities constituting indebtedness and preferred stock) at the end of the calendar quarter for which such fees are being calculated, exceeds a 2.0% (which is 8.0% annualized) hurdle rate, subject to a “catch-up” provision, pursuant to which HCAP Advisors receives 100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5% (10.0% annualized); provided, however, that no such HCAP Income-Based Fee will be payable except to the extent 20.0% of HCAP’s cumulative net increase in net assets resulting from operations over the calendar quarter for which such fees are being calculated and the 11 preceding quarters exceeds HCAP’s cumulative incentive fees accrued and/or paid pursuant for such 11 preceding quarters.
The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement between HCAP and HCAP Advisors (the “HCAP Investment Advisory Agreement”), as of the termination date) and equals 20% of HCAP’s aggregate realized capital gains on a cumulative basis from inception through the end of each calendar year, computed net of aggregate realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees.
See “Business—Investment Advisory Agreement” in Part I, Item I of HCAP’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional detail regarding the calculation of HCAP’s incentive fee. The percentage presented in the table reflects actual amounts incurred during the year ended December 31, 2020.
(6)
PTMN’s interest and other debt expenses are based on borrowing levels and interest rates consistent with the levels during the quarter ended December 31, 2020. As of December 31, 2020, PTMN had $[•] available and $[•] in borrowings outstanding under its $[•] senior secured credit facility and $[•] of total debt outstanding.
HCAP’s interest and other debt expenses are based on borrowing levels and interest rates consistent with the levels during the quarter ended December 31, 2020. As of December 31, 2020, HCAP had $[•] available and $[•] in borrowings outstanding under HCAP’s senior secured revolving credit facility (as modified, amended and restated from time to time, the “HCAP Credit Facility”) and $[•] of total debt outstanding.
(7)
In the case of PTMN, other expenses include insurance, accounting, legal and auditing fees and state franchise taxes, as well as the reimbursement of the compensation of administrative personnel and fees payable to PTMN’s directors who do not also serve in an executive officer capacity for PTMN or Sierra Crest. The percentage presented in the table reflects actual amounts incurred during the year ended December 31, 2020.
In the case of HCAP, other expenses include insurance, accounting, legal and auditing fees and state franchise taxes, as well as certain expenses allocated to HCAP under the HCAP Investment Advisory Agreement and under the HCAP Administration Agreement, without giving effect to any cap on such amounts that may have been agreed to with HCAP Advisors and may reduce such amounts. The percentage presented in the table reflects actual amounts incurred during the year ended December 31, 2020.
In the case of Pro Forma line item, other expenses reflect anticipated decreases in duplicative costs such as professional fees for legal, audit and tax fees, directors’ fees, and other redundant administrative and operating expenses.
(8)
“Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. PTMN and HCAP borrow money to leverage and increase total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies. The percentage presented in the table reflects actual amounts incurred during the year ended December 31, 2020.
(9)
This is based on the assumption that the HCAP Credit Facility (approximately $[•] of borrowings outstanding as of December 31, 2020) will be repaid and the costs of borrowings under each respective borrowing facility after the Mergers will remain the same as those costs prior to the Mergers. PTMN expects over time that as a result of additional investment purchases, and in turn, additional borrowings on the financing facilities after the Mergers, the combined company’s interest payments on borrowed funds may be more than the principal amounts reflected in the section entitled “Capitalization” below and, accordingly, that estimated total expenses may be different than as reflected in the table above. However, the actual amount of leverage employed at any given time cannot be predicted.
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Example
The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in PTMN, HCAP or the combined company’s common stock following the Mergers on a pro forma basis. In calculating the following expense amounts, each of PTMN and HCAP has assumed that it would have no additional leverage and that its annual operating expenses would remain at the levels set forth in the tables above. Calculations for the pro forma combined company following the Mergers assume that the Mergers closed on December 31, 2020 and that the leverage and operating expenses of PTMN and HCAP remain at the levels set forth in the tables above. Transaction expenses related to the Mergers are not included in the following examples.
 
1
year
3
years
5
years
10
years
You would pay the following expenses on a $1,000 investment:
 
 
 
 
PTMN, assuming a 5% annual return (assumes no return from net realized capital gains or net unrealized capital appreciation)
$[•]
$[•]
$[•]
$[•]
HCAP, assuming a 5% annual return (assumes no return from net realized capital gains or net unrealized capital appreciation)
$[•]
$[•]
$[•]
$[•]
 
 
 
 
 
PTMN, assuming a 5% annual return (assumes return entirely from realized capital gains and thus subject to the capital gain incentive fee)
$[•]
$[•]
$[•]
$[•]
HCAP, assuming a 5% annual return (assumes return entirely from realized capital gains and thus subject to the capital gain incentive fee)
$[•]
$[•]
$[•]
$[•]
 
 
 
 
 
Pro forma combined company following the Mergers
 
 
 
 
You would pay the following expenses on a $1,000 investment:
 
 
 
 
Assuming a 5% annual return (assumes no return from net realized capital gains or net unrealized capital appreciation)
$[•]
$[•]
$[•]
$[•]
Assuming a 5% annual return (assumes return entirely from realized capital gains and thus subject to the capital gain incentive fee)
$[•]
$[•]
$[•]
$[•]
The foregoing tables are to assist you in understanding the various costs and expenses that an investor in PTMN, HCAP or, following the Mergers, the combined company’s common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, performance of PTMN, HCAP and the combined company will vary and may result in a return greater or less than 5%. The incentive fee under each of the PTMN Investment Advisory Agreement and the HCAP Investment Advisory Agreement, which, assuming a 5% annual return, would either not be payable or have an immaterial impact on the expense amounts shown above in the example where there is no return from net realized capital gains, and thus are not included in those examples. Under each of the PTMN Investment Advisory Agreement and the HCAP Investment Advisory Agreement, no incentive fee would be payable if PTMN, HCAP or the combined company, as applicable, has a 5% annual return with no capital gains, however, there would be incentive fees payable in the examples where the entire return is derived from realized capital gains. If sufficient returns are achieved on investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, expenses, and returns to investors, would be higher. The example assumes that all dividends and other distributions are reinvested at NAV. Under certain circumstances, reinvestment of dividends and other distributions under the relevant dividend reinvestment plan may occur at a price per share that differs from NAV. See “PTMN Dividend Reinvestment Plan” and “HCAP Dividend Reinvestment Plan” for additional information regarding PTMN’s and HCAP’s dividend reinvestment plan, respectively.
The example and the expenses in the table above should not be considered a representation of PTMN’s, HCAP’s, or, following the Mergers, the combined company’s, future expenses, and actual expenses may be greater or less than those shown.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including the documents incorporated by reference herein, contains statements that constitute forward-looking statements, which relate to PTMN, HCAP or, following the Mergers, the combined company, regarding future events or the future performance or future financial condition of PTMN, HCAP or, following the Mergers, the combined company. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about PTMN, HCAP or, following the Mergers, the combined company, their industry and their respective beliefs and assumptions. The forward-looking statements contained in this proxy statement/prospectus involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including:
the ability of the parties to consummate the Mergers on the expected timeline, or at all;
the failure of HCAP Stockholders to approve the Merger Proposal;
the ability to realize the anticipated benefits of the Mergers;
the effects of disruption on the business of PTMN and HCAP from the Mergers;
the effect that the announcement or consummation of the Mergers may have on the trading price of PTMN Common Stock;
the effect that the announcement or consummation of the Mergers may have on the trading price of HCAP Common Stock;
the combined company’s plans, expectations, objectives and intentions, as a result of the Mergers;
any potential termination of the Merger Agreement or action of HCAP Stockholders with respect to any proposed transaction;
changes in PTMN’s and/or HCAP’s NAV;
changes in the market price of PTMN Common Stock;
PTMN’s and HCAP’s future operating results;
PTMN’s and HCAP’s business prospects and the prospects of their respective portfolio companies;
the effect of investments that PTMN and HCAP expect to make and the competition for those investments;
PTMN’s and HCAP’s contractual arrangements and relationships with third parties, including with respect to portfolio companies and lenders;
actual and potential conflicts of interest with PTMN and HCAP, and their respective affiliates;
the dependence of PTMN’s and HCAP’s future success on the general economy and its effect on the industries in which they invest;
the ability of PTMN’s and HCAP’s portfolio companies to achieve their objectives;
the use of borrowed money to finance a portion of PTMN’s and HCAP’s investments;
the adequacy of financing sources and working capital;
the timing of cash flows, if any, from the operations of PTMN’s and HCAP’s portfolio companies;
general economic and political trends and other external factors;
changes in interest rates, including the decommissioning of London Interbank Offered Rate (“LIBOR”);
the ability of Sierra Crest and HCAP Advisors to locate suitable investments for PTMN and HCAP and to monitor and administer their respective investments;
the ability of Sierra Crest and HCAP Advisors or their affiliates to attract and retain highly talented professionals;
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PTMN’s and HCAP’s ability to qualify and maintain their respective qualifications as a RIC and as a BDC;
general price and volume fluctuations in the stock markets;
the effect of changes to tax legislation and PTMN’s and HCAP’s respective tax position;
the duration and effects of the COVID-19 pandemic on PTMN’s and HCAP’s portfolio companies; and
an economic downturn, including as a result of the impact of the COVID-19 pandemic, that could have a material adverse effect on PTMN’s and HCAP’s portfolio companies’ results of operations and financial condition, which could lead to a loss on some or all of PTMN’s and HCAP’s investments in such portfolio companies and have a material adverse effect on PTMN’s and HCAP’s results of operations and financial condition.
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar words. The forward-looking statements contained in this proxy statement/prospectus involve risks and uncertainties. Actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in both PTMN’s and HCAP’s Annual Reports on Form 10-K for the fiscal year ended December 31, 2020, as such factors may be updated from time to time in their periodic filings with the SEC, and elsewhere contained or incorporated by reference in this proxy statement/prospectus.
The forward-looking statements included in this proxy statement/prospectus and documents incorporated by reference into this proxy statement/prospectus have been based on information available to PTMN and/or HCAP on the applicable date of the relevant document. Actual results could differ materially from those anticipated in PTMN’s and HCAP’s forward-looking statements and future results could differ materially from historical performance. You are advised to consult any additional disclosures that PTMN or HCAP may make directly to you or through reports that they have filed or in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. This proxy statement/prospectus and documents incorporated by reference into this proxy statement/prospectus contains or may contain statistics and other data that have been obtained from or compiled from information made available by third-party service providers. Neither PTMN nor HCAP has independently verified such statistics or data.
You should understand that, under Sections 27A(b)(2)(B) of the Securities Act, and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with any offering of securities pursuant to this proxy statement/prospectus, any prospectus supplement or in periodic reports PTMN or HCAP file under the Exchange Act.
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THE HCAP SPECIAL MEETING

Date, Time and Place of the HCAP Special Meeting
The HCAP Special Meeting will be held virtually at [•] a.m., Eastern Time, on [•], 2021 at the following website: [•]. This proxy statement/prospectus will be sent to HCAP Stockholders of record as of [•], 2021 on or about [•], 2021.
Purpose of the HCAP Special Meeting
At the HCAP Special Meeting, HCAP Stockholders will be asked to approve the Merger Proposal and, if necessary or appropriate, the HCAP Adjournment Proposal.
The HCAP Board, acting on the unanimous recommendation of the HCAP Special Committee, approved the Merger Agreement and the transactions contemplated thereby, including the Mergers, and recommends that HCAP Stockholders vote “FOR” the Merger Proposal and, if necessary or appropriate, “FOR” the HCAP Adjournment Proposal.
Record Date
HCAP Stockholders may vote their shares at the HCAP Special Meeting, or any adjournments and postponements thereof, only if they were a stockholder of record at the close of business on [•], 2021. There were [•] shares of HCAP Common Stock outstanding on the HCAP Record Date. Each share of HCAP Common Stock is entitled to one vote.
Quorum
The presence at the HCAP Special Meeting, virtually or represented by proxy, of the holders of a majority of the voting power of the issued and outstanding shares of HCAP Common Stock entitled to vote thereat will constitute a quorum. Abstentions will be treated as shares present for quorum purposes. Broker non-votes (as described below) will be treated as shares present for quorum purposes to the extent there are any such broker non-votes cast at the HCAP Special Meeting.
Broker Non-Votes
Broker non-votes are described as votes cast by a broker, bank, trustee or nominee on behalf of a beneficial holder who does not provide explicit voting instructions as to how to vote such beneficial holder’s shares to such broker, bank, trustee or nominee and who does not attend the meeting. The Merger Proposal is a non-routine matter for HCAP. As a result, if an HCAP Stockholder holds shares in “street name” through a broker, bank, trustee or nominee, the broker, bank, trustee or nominee will not be permitted to exercise voting discretion with respect to the Merger Proposal. Broker non-votes will have the same effect as votes “against” the Merger Proposal. Broker non-votes will have no effect on the voting outcome of the HCAP Adjournment Proposal.
Vote Required
Each share of HCAP Common Stock held by a holder of record as of the HCAP Record Date has one vote on each matter to be considered at the HCAP Special Meeting.
The Merger Proposal
The affirmative vote of the holders of a majority of the outstanding shares of HCAP Common Stock entitled to vote at the HCAP Special Meeting is required to approve the Merger Proposal.
Abstentions and broker non-votes will have the same effect as votes “against” the Merger Proposal.
The HCAP Adjournment Proposal
The approval of the HCAP Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of HCAP Common Stock present in person or represented by proxy and entitled to vote at the HCAP Special Meeting, whether or not a quorum is present.
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Abstentions will have the same effect as a vote “against” approval of the HCAP Adjournment Proposal. Broker non-votes will have no effect on the voting outcome of the HCAP Adjournment Proposal.
Voting of Proxies
HCAP encourages HCAP Stockholders to vote by proxy, which means that HCAP Stockholders authorize someone else to vote their shares. Shares represented by duly executed proxies will be voted in accordance with HCAP Stockholders’ instructions. If an HCAP Stockholder properly executes and returns a proxy without specifying their voting instructions, such HCAP Stockholder’s shares will be voted in accordance with the HCAP Board’s recommendation, “FOR” each of the HCAP Proposals. If any other business is brought before the HCAP Special Meeting, HCAP Stockholders’ shares will be voted at the HCAP Board’s discretion unless HCAP Stockholders specifically state otherwise on their proxy.
An HCAP Stockholder may vote by proxy in accordance with the instructions provided below or by voting by internet during the HCAP Special Meeting at the following website: [•]. An HCAP Stockholder may also authorize a proxy by telephone or through the Internet using the toll-free telephone numbers or web address printed on the proxy card. Authorizing a proxy by telephone or through the Internet requires you to input the control number located on your proxy card. After inputting the control number, you will be prompted to direct your proxy to vote on each proposal. You will have an opportunity to review your directions and make any necessary changes before submitting your directions and terminating the telephone call or Internet link.
By Internet: www.proxyvote.com
By telephone: [•] to reach a toll-free, automated touchtone voting line, [•] Monday through Friday 9:00 a.m. until 10:00 p.m. Eastern Time to reach a toll-free, live operator line.
By mail: You may vote by proxy by following the directions and indicating your instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for your proxy card to be received on or prior to 11:59 p.m., Eastern Time, on [•], 2021.
If you are the beneficial owner of your shares, you will need to follow the instructions provided by your broker, bank, trustee or nominee regarding how to instruct your broker, bank, trustee or nominee to vote your shares at the HCAP Special Meeting.
Important notice regarding the availability of proxy materials for the HCAP Special Meeting. HCAP’ proxy statement/prospectus and the proxy card are available at [www.proxyvote.com].
Revocability of Proxies
Any proxy authorized pursuant to this solicitation may be revoked by notice from the person giving the proxy at any time before it is exercised. If you are a stockholder of record, you can change your vote or revoke your proxy by:
delivering a written revocation notice before 11:59 p.m. Eastern Time on [•], 2021 to HCAP’s corporate secretary, William E. Alvarez, Jr., at Harvest Capital Credit Corporation, 767 Third Avenue, 29th Floor, New York, NY 10017, Attention: Corporate Secretary;
voting again using the telephone or Internet before 11:59 p.m. Eastern Time on [•], 2021 (your latest telephone or Internet proxy is the one that will be counted); or
attending and voting during the HCAP Special Meeting. Simply logging into the HCAP Special Meeting will not, by itself, revoke your proxy.
In light of shelter-in-place restrictions currently in place due to the COVID-19 pandemic, HCAP encourages HCAP Stockholders to change their vote by voting again using the telephone or Internet.
If you hold shares of HCAP Common Stock through a broker, bank, trustee or nominee, you must follow the instructions you receive from your nominee in order to revoke your voting instructions.
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Solicitation of Proxies
HCAP will bear its own costs of preparing, printing and mailing this proxy statement/prospectus and the applicable accompanying Notice of Special Meeting of Stockholders and proxy card. HCAP intends to use the services of Broadridge Financial Solutions Inc. to aid in the distribution and collection of proxy votes. HCAP expects to pay market rates of approximately $[•] for such services. No additional compensation will be paid to directors, officers or regular employees for such services.
Appraisal Rights
HCAP Stockholders will be entitled to exercise appraisal rights with respect to the Merger in accordance with Section 262 of the DGCL. For more information, see “Appraisal Rights of HCAP Stockholders” and “Description of the Merger Agreement—Appraisal Rights.
CAPITALIZATION
The following table sets forth (1) PTMN’s and HCAP’s actual capitalization as of December 31, 2020 and (2) PTMN’s capitalization as adjusted to reflect the effects of the Mergers. You should read this table together with PTMN’s and HCAP’s condensed consolidated financial data incorporated by reference herein.
 
As of December 31, 2020
(unaudited, dollar amounts in thousands, except share and per share
data)
 
Actual
Actual
Pro forma
Adjustments
Pro Forma
 
PTMN
HCAP
PTMN(3)
Cash, cash equivalents and restricted cash
$[•]
$[•]
$[•](1)
$[•]
Debt less unamortized debt issuance costs
[•]
[•]
[•]
[•]
Net Assets
[•]
[•]
[•](2)
[•]
Total Capitalization
$[•]
$[•]
$[•]
$[•]
Number of common shares outstanding
[•]
[•]
[•]
[•]
NAV per common share
$[•]
$[•]
 
$[•]
(1)
Pro Forma adjustments reflect the impact of the $[•] special payment to HCAP Stockholders, combined transaction expenses of approximately $[•], net of asset sales, of approximately $[•] and the net settlement prior to closing of miscellaneous net liabilities as of December 31, 2020 of approximately $[•] million.
(2)
Includes cash payment to stockholders of approximately $[•], transaction expenses of PTMN of approximately $[•]; transaction expenses of HCAP of approximately $[•] and write-off of HCAP deferred financing costs of approximately $[•].
(3)
The $[•] pro forma NAV per common share decrease is a result of estimated PTMN transaction expenses.
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THE MERGERS
The discussion in this proxy statement/prospectus, which includes the material terms of the Mergers and the principal terms of the Merger Agreement, is subject to, and is qualified in its entirety by reference to, the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus.
General Description of the Mergers
Pursuant to the terms of the Merger Agreement, at the Effective Time, Acquisition Sub will be merged with and into HCAP. HCAP will be the Surviving Corporation and will continue its existence as a corporation under the laws of the State of Delaware as a direct, wholly owned subsidiary of PTMN. As of the Effective Time, the separate corporate existence of Acquisition Sub will cease. Immediately after the effectiveness of the First Merger, HCAP will merge with and into PTMN, with PTMN as the surviving entity in the Second Merger. Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each share of HCAP Common Stock issued and outstanding immediately prior to the Effective Time (excluding Cancelled Shares) will be converted into and exchanged for the right to receive the Per Share Merger Consideration, plus any cash in lieu of fractional shares. Furthermore, as additional consideration to the holders of shares of HCAP Common Stock that are issued and outstanding immediately prior to the Effective Time (excluding any Cancelled Shares), Sierra Crest will pay or cause to be paid to such holders the Additional Cash Consideration.
Based on the number of shares of PTMN Common Stock issued and outstanding as of December 31, 2020, it is expected that current PTMN Stockholders will own approximately 83.4% of the outstanding PTMN Common Stock and former HCAP Stockholders will own approximately 16.6% of the outstanding PTMN Common Stock.
Background of the Mergers
Since HCAP’s initial public offering (“IPO”) in 2013, competition for private debt investment opportunities in the middle and lower-middle market has significantly intensified. One of the primary drivers of increased competition has been a large influx of capital from global investors seeking yield due to persistent low interest rates that have remained at or near historic lows. This influx of capital has led to the formation of new competitive market participants with substantial amounts of capital to deploy, formidable financial, technological and marketing resources, and individualized risk tolerances that may include a broader range of tolerance in the middle and lower-middle market lending space than HCAP. In addition, structural innovations within the leveraged loan market have afforded borrowers greater financing alternatives, thereby creating pricing pressure on all loan product categories. Indeed, the combination of large inflows of capital, new competitive entrants, and expanded loan product offerings has created an imbalance between supply and demand and resulted in interest rate spread tightening and therefore the lowering of weighted-average yields associated with the investment portfolios of most BDC industry participants, including HCAP’s portfolio.
Like many publicly traded BDCs with small market capitalizations, shares of HCAP Common Stock have consistently traded at a discount to NAV per share, which has limited HCAP’s ability to raise additional equity capital given the constraints under the 1940 Act on the ability of a BDC to issue shares of its common stock at a price below NAV and the HCAP Board’s general belief that issuing new shares of HCAP Common Stock at a significant discount to then-current NAVs was not in the best interests of HCAP or its stockholders. As a consequence, HCAP’s investment portfolio has not meaningfully grown since its IPO, which has hindered its ability to be sufficiently competitive in the middle to lower-middle market lending space. These limitations provided challenges that the HCAP Board consistently considered in evaluating HCAP’s business and affairs.
In March 2020, the outbreak of COVID-19 resulted in extreme volatility and uncertainty across nearly every financial market, economic sector and industry worldwide. In the United States, federal, state and local authorities responded to the COVID-19 pandemic by enacting unprecedented restrictions, with widespread “stay at home” orders effectively shutting down much of the U.S. economy, reducing interest rates to historic lows, and by adopting economic stimulus packages of over $2 trillion. In addition, as a result of the market volatility caused by the COVID-19 pandemic, commercial banks generally became more concerned about their exposure to BDCs given the investment focus of BDCs on lending to middle and lower-middle market companies and the outsized negative impact of COVID-19 on these companies.
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In light of these conditions and to (1) prepare for any increased revolver drawdowns from existing borrowers and (2) plan for the April 30, 2020 scheduled termination of the revolving period under the HCAP Credit Facility, HCAP’s management, in consultation with the HCAP Board, initiated a plan to focus on preservation of cash and liquidity. As a result, HCAP Advisors temporarily ceased new origination activities for HCAP until it determined such new originations would be prudent, based on HCAP’s capital needs and contractual obligations, including under the HCAP Credit Facility, for HCAP to recommence doing so. During March and early April 2020, HCAP’s management engaged regularly in discussions and negotiations with the lenders under the HCAP Credit Facility to extend the revolving period under the HCAP Credit Facility from April 30, 2020 to July 31, 2020 or some other date.
On April 13, 2020, after consultation with HCAP’s management and in furtherance of HCAP management’s focus on preserving HCAP’s cash and liquidity, the HCAP Board announced its decision to defer the payment of its previously announced distributions of $0.08 per share from each of April 30, 2020 and May 28, 2020 to such later date as the HCAP Board determined was prudent to do so. The HCAP Board, in consultation with HCAP’s management, also determined to suspend the declaration of any future dividends until further notice.
On April 30, 2020, the HCAP Board held its quarterly board and committee meetings virtually, during which the HCAP Board discussed with HCAP’s management, among other things, the potential effects of the COVID-19 pandemic on HCAP’s portfolio. During these meetings, the HCAP Board also received updates from HCAP’s management regarding its negotiations with the lenders under the HCAP Credit Facility, in connection with which the HCAP Board authorized an extension of the revolving period under the HCAP Credit Facility from April 30, 2020 to July 31, 2020, as well as other amendments necessary to maintain HCAP’s continued compliance with affirmative and negative covenants under the HCAP Credit Facility, including but not limited to those relating to tangible net worth and HCAP’s required debt service coverage ratio.
On May 19, 2020, the HCAP Board held a virtual meeting with representatives of HCAP’s management, during which HCAP’s management provided the HCAP Board with an update on the negotiations relating to the extension of the revolving period under the HCAP Credit Facility, as well as the related liquidity limitations on HCAP’s investment activities. In connection with the discussion, the HCAP Board and HCAP’s management reviewed a presentation previously provided by JMP Securities LLC (“JMP Securities”), financial advisor to HCAP Advisors and wholly-owned subsidiary of JMP Group, which had been prepared at the direction of HCAP Advisors and summarized various alternatives for HCAP’s operations going forward, including maintaining the status quo while seeking a replacement credit facility and considering various strategic alternatives available to HCAP, including liquidation, internalization of HCAP Advisors’ investment advisory function, and various sale/merger transactions, including a stock sale, asset sale, merger or reverse merger, or engagement of a new investment adviser. The HCAP Board also discussed with HCAP’s management a preliminary list of market participants that could be interested in pursuing, and were capable of consummating, a strategic transaction with HCAP, as included in JMP Securities’ presentation, which included PTMN and Party C. Following the discussion, the HCAP Board agreed to receive a live presentation from the representatives of JMP Securities at a subsequent meeting regarding the potential initiation by HCAP Advisors of a targeted exploration of potential strategic transaction opportunities available to HCAP (the “Initial Strategic Evaluation Process”).
On May 20, 2020, HCAP entered into the Ninth Amendment (the “Ninth Amendment”) to the loan and security agreement governing the HCAP Credit Facility which, among other things, (i) extended the revolving period to July 31, 2020, subject to HCAP selling a certain portfolio investment and fulfilling other related conditions under the Ninth Amendment, (ii) provided that additional advances requested on and after April 30, 2020 would be made only at the discretion of the lenders, (iii) reduced aggregate commitments under the HCAP Credit Facility to $45.0 million from $55.0 million, (iv) revised HCAP’s tangible net worth covenant, and (v) implemented a prohibition on HCAP’s ability to repurchase shares of HCAP Common Stock and declare and pay distributions or dividends on HCAP Common Stock, except, in the case of distributions and dividends, to the extent necessary for HCAP to maintain its eligibility to qualify as RIC under Subchapter M of the Code. In addition, the terms of the Ninth Amendment placed limitations on HCAP’s ability to make and originate new investments.
On May 29, 2020, during a virtual meeting of the HCAP Board, at which representatives of HCAP’s management and JMP Securities were present, representatives of JMP Securities presented to the HCAP Board its proposed targeted outreach process in connection with the Initial Strategic Evaluation Process. The JMP
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Securities representatives summarized for the HCAP Board the preliminary list of parties that JMP Securities believed could potentially be interested in pursuing, and capable of successfully consummating, a strategic transaction with HCAP, as included in JMP Securities’ presentation, which included, among other parties, PTMN and Party C, and provided the HCAP Board with a description of those parties and their investment strategies as well as probability of execution of a strategic transaction with each potential partner. During the May 29, 2020 meeting, the HCAP Board also discussed with HCAP’s management HCAP’s liquidity constraints and investment activity limitations, as well as recent mergers and acquisitions activity in the BDC space, after which the HCAP Board, at the recommendation of HCAP’s management, scheduled a follow-up meeting with the representatives from JMP Securities in order to permit the HCAP Board members an opportunity to further discuss with JMP Securities the potential commencement of the Initial Strategic Evaluation Process.
On June 10, 2020, at a virtual meeting of the HCAP Board, the representatives of JMP Securities provided the HCAP Board an update on JMP Securities’ analyses with respect to various strategic alternatives previously discussed in connection with the Initial Strategic Evaluation Process. The analyses discussed during the June 10, 2020 meeting included an analysis of potential business combinations with the potential partners for a strategic transaction with HCAP that had been listed in JMP’s preliminary list of parties for potential outreach in connection with the Initial Strategic Evaluation Process, including PTMN and Party C. Following the June 10, 2020 meeting, the HCAP Board, upon the recommendation of HCAP’s management, agreed to permit HCAP Advisors to coordinate with JMP Securities to proceed with the Initial Strategic Evaluation Process, and instructed HCAP’s management to permit JMP Securities to make initial contact with the targeted list of parties discussed during the meeting, including PTMN and Party C.
On July 1, 2020, representatives from Dechert provided HCAP’s management with a form of confidentiality agreement to be sent to parties interested in participating in the Initial Strategic Evaluation Process for execution prior to receiving any non-public evaluation material about HCAP, its operations or its portfolio investments. The form of confidentiality agreement included customary “standstill” and related provisions (including the “don’t ask/don’t waive” provisions) designed to protect the strategic alternatives review process and increase the likelihood that each participant would put forth its best offer through the bid solicitation process and not through other avenues, along with a provision that would allow bidders confidentially to request a waiver of the standstill provisions once a strategic transaction had been publicly announced, which would allow the HCAP Board to receive and consider competing proposals.
On July 2, 2020, representatives of JMP Securities and HCAP’s management populated a preliminary electronic data room for review by parties who executed confidentiality agreements to participate in the Initial Strategic Evaluation Process, which included, among other things, valuation materials, supplementary financial and tax information, and a schedule of HCAP’s investment assets.
From July 6, 2020 through July 9, 2020, five parties, including Party C (July 9, 2020), executed confidentiality agreements with HCAP, each substantially in the form as provided to HCAP’s management by Dechert.
On July 9, 2020, at a meeting of the HCAP Board, the representatives of JMP Securities provided the HCAP Board with an update on the activity that had taken place during the Initial Strategic Evaluation Process since the last meeting of the HCAP Board. During the meeting, at which representatives of HCAP’s management and Dechert were also present at the invitation of the HCAP Board, JMP Securities informed the HCAP Board that, as previewed during the June 10, 2020 HCAP Board meeting, JMP Securities had engaged in discussions during the Initial Strategic Evaluation Process with seven parties, including PTMN and Party C, five of which, including Party C, had executed confidentiality agreements with HCAP. During the meeting, the HCAP Board discussed with the representatives from JMP Securities the level of interest exhibited by the various parties during the Initial Strategic Evaluation Process, including level of activity in the electronic data room, as well as the types of transactions in which the potential bidders had expressed preliminary interest. During the July 9, 2020 meeting, the HCAP Board also received an update from an outside consultant regarding potential financing alternatives available to HCAP in light of the pending scheduled termination of the revolving period under the HCAP Credit Facility on July 31, 2020.
During the July 9, 2020 meeting, following JMP Securities’ exit from the meeting, the HCAP Board discussed with Dechert the strategic alternatives review process generally, the use of confidentiality agreements in the context of the strategic alternatives review process, and the legal and fiduciary implications thereof.
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Dechert also confirmed for the HCAP Board that Dechert and HCAP’s management had prepared a form of confidentiality agreement to be sent to parties interested in participating in the Initial Strategic Evaluation Process for execution prior to receiving non-public evaluation material about HCAP, its operations and its portfolio investments and discussed with the HCAP Board the customary “standstill” and related provisions included in the confidentiality agreements. The HCAP Board and Dechert then discussed, among other things, the provision in the confidentiality agreements that would allow bidders confidentially to request a waiver of the standstill provisions once a strategic transaction had been publicly announced, which would allow the HCAP Board to receive and consider competing proposals consistent with its fiduciary obligations. Thereafter, the HCAP Board, in consultation with Dechert, ratified the use of the confidentiality agreements discussed and informed HCAP’s management that, although the form confidentiality agreements to be executed by interested parties were subject to negotiation and subsequent agreement between such parties and HCAP, any material deviations from the form confidentiality agreement would require review by the HCAP Board in order to protect the integrity of any strategic alternatives review process and to prevent any single interested party from having any advantage over others during a solicitation process.
On July 15, 2020, BC Partners executed a confidentiality agreement with HCAP on terms substantially similar to the form of confidentiality agreement ratified by the HCAP Board.
On July 20, 2020, at a meeting of the HCAP Board, the representatives of JMP Securities provided the HCAP Board with an update on the Initial Strategic Evaluation Process since the last meeting of the HCAP Board, including with respect to the activities of potential bidders. During the meeting, at which representatives of HCAP’s management and Dechert were also present at the invitation of the HCAP Board, JMP Securities informed the HCAP Board that two additional parties had executed confidentiality agreements with HCAP, including BC Partners with respect to a potential strategic transaction between PTMN and HCAP, and that all seven parties under confidentiality agreements were currently performing diligence on HCAP and its investment portfolio. During the July 20, 2020 meeting, the HCAP Board further discussed with the representatives from JMP Securities the level of activity from each potential bidder in the electronic data room, as well as any updates with respect to the types of transactions in which the potential bidders had expressed preliminary interest.
Later during the July 20, 2020 meeting, following JMP Securities’ exit from the meeting, the HCAP Board discussed with Dechert matters relating to JMP Securities’ affiliation with HCAP’s investment adviser, HCAP Advisors, potential conflicts related thereto in connection with JMP Securities’ outreach efforts in the Initial Strategic Evaluation Process, and potential benefits for HCAP therefrom, including providing the HCAP Board insight into potential strategic alternatives available to HCAP without incurring the level of expenses typically associated with running a preliminary process. Following additional discussion, Dechert recommended that, prior to proceeding with any strategic transaction with a party identified by JMP Securities in the Initial Strategic Evaluation Process, the HCAP Board should conduct a formal selection process to engage an outside, unaffiliated financial advisor to advise the HCAP Board or a special committee thereof in connection with potential strategic alternatives. Further discussion ensued regarding the process of engaging an investment bank to act as an outside, unaffiliated financial advisor, including review of potential conflicts.
On July 28, 2020, representatives of HCAP’s management met principal-to-principal, by video conference, with a representative of BC Partners and PTMN for a diligence session relating to HCAP’s investment portfolio.
On July 30, 2020, the HCAP Board held its regular quarterly meeting virtually. During the meeting, at which representatives of HCAP’s management, JMP Securities, and Dechert were present at the invitation of the HCAP Board, the HCAP Board received an update from JMP Securities regarding the status of the Initial Strategic Evaluation Process. The representatives from JMP Securities informed the HCAP Board that of the seven parties that had entered into confidentiality agreements during the Initial Strategic Evaluation Process, five parties were still actively engaged and were perceived by JMP Securities as potential candidates for a strategic transaction with HCAP. During the July 30, 2020 meeting, the HCAP Board, with the assistance of the representatives from JMP Securities, discussed the comparative levels of engagement in the process exhibited by each potential bidder, the types of transactions in which the potential bidders had expressed preliminary interest, including the strategic value of each to HCAP, and general matters regarding the process going forward. During
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the July 30, 2020 meeting, the representatives from Dechert also further discussed with the HCAP Board the material terms of the confidentiality agreements being used in connection with the strategic alternatives review process, noting that each potential bidder currently engaged in the Initial Strategic Evaluation Process was subject to the same material provisions.
On August 4, 2020, representatives of HCAP’s management held a follow-up meeting, principal-to-principal by video conference, with representatives of BC Partners and PTMN for a diligence session relating to HCAP’s investment portfolio.
On August 6, 2020, following additional negotiations with representatives from the administrative agent and lenders under the HCAP Credit Facility, HCAP entered into the Tenth Amendment (the “Tenth Amendment”) to the loan and security agreement governing the HCAP Credit Facility which, among other things, (i) extended the revolving period under the HCAP Credit Facility to October 31, 2020 and (ii) commenced the amortization period beginning August 1, 2020, which triggered the commencement of required minimum monthly amortization payments under the HCAP Credit Facility in equal installments during the relevant calendar quarter to reduce outstanding amounts under the HCAP Credit Facility by an amount equal to or greater than (a) $2.2 million for each of the first two full calendar quarters following July 31, 2020, (b) $3.3 million for each of the succeeding two full calendar quarters, and (c) $4.3 million for each succeeding calendar quarter until termination of the HCAP Credit Facility, which is scheduled to mature on October 30, 2021.
From August 13, 2020 through September 3, 2020, representatives of HCAP’s management met principal-to-principal, by video conference, with representatives of three different interested parties to discuss potential strategic transaction opportunities, including matters relating to each company’s investment strategy and portfolio, none of which ultimately submitted bids during the Formal Strategic Evaluation Process (as defined below).
On August 20, 2020, at a meeting of the HCAP Board, the representatives of JMP Securities provided the HCAP Board with an update on the Initial Strategic Evaluation Process since the last meeting of the HCAP Board. During the meeting, at which representatives of HCAP’s management and Dechert were also present at the invitation of the HCAP Board, JMP Securities provided the HCAP Board with a summary of the parties contacted in connection with the Initial Strategic Evaluation Process, noting any interest expressed by each in engagement in a strategic transaction with HCAP.
Later on August 20, 2020, Party C submitted to JMP Securities a non-binding indication of interest with respect to an NAV-for-NAV merger whereby, among other things, (i) HCAP would merge into Party C in a stock-for-stock merger transaction, with Party C as the surviving entity, (ii) Party C’s external investment adviser would provide an additional $3.0 million cash payment to HCAP Stockholders and purchase at market prices (a) 100% of the shares of HCAP Common Stock owned by JMP Group and (b) 25% of the shares of HCAP Common Stock owned by Mr. Jolson, and (iii) Party C’s external investment adviser would enter into a four-year, $6.0 million transition services agreement with HCAP Advisors (the “Party C Initial Proposal”).
On September 3, 2020, at a meeting of the HCAP Board, the representatives of JMP Securities provided the HCAP Board with an update on the Initial Strategic Evaluation Process since the last meeting of the HCAP Board. During the meeting, at which representatives of HCAP’s management and Dechert were also present at the invitation of the HCAP Board, the HCAP Board, with the assistance of the representatives from JMP Securities reviewed in detail the two indications of interest that had been received on behalf of HCAP, including the Party C Initial Proposal and a stock-for-stock, NAV-for-adjusted-NAV merger proposal from a third party. JMP Securities discussed with the HCAP Board each received indication of interest, including, among other things, the proposed transaction type, structure and consideration. General views surrounding the two indications of interest were discussed, with general consensus that the Party C Initial Proposal was superior to the other submitted proposal, primarily due to the latter’s significant downward adjustment to HCAP’s reported NAV as of June 30, 2020 to a range of between approximately $4.53 per share and $5.37 per share. Following the discussion, the representatives from JMP Securities informed the HCAP Board that they expected to receive additional proposals from the other parties participating in the Initial Strategic Evaluation Process, who were conducting ongoing diligence at varying stages of completion, and the HCAP Board determined to review any additional proposals before making a determination regarding potential next steps for any strategic alternatives review process.
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On September 22, 2020, BC Partners, on behalf of PTMN, submitted to JMP Securities a non-binding preliminary indication of interest with respect to an NAV-for-NAV merger whereby, among other things, (i) HCAP would merge into PTMN in a cash/stock merger transaction, with PTMN as the surviving entity, with consideration to HCAP Stockholders consisting of (a) cash contributed by PTMN in the higher of $21.0 million or an amount resulting in the issuance of no more than 19.9% of the outstanding shares of PTMN Common Stock at closing of any merger and (b) PTMN common shares representing $40.0 million, using the estimated NAV at closing calculation for each of PTMN (estimated post-closing of the then-pending PTMN/GARS Transaction) and HCAP (based on HCAP’s June 30, 2020 NAV) as the basis for valuation, and (ii) Sierra Crest would expect to separately enter into a transition services agreement with HCAP Advisors (the “PTMN Initial Proposal”).
On September 23, 2020, Party D submitted to HCAP an unsolicited, non-binding preliminary indication of interest with respect to an all-cash merger transaction whereby, among other things, Party D would (i) acquire 100% of the outstanding shares of HCAP’s common stock at an anticipated price of between $4.50 and $5.00 per share based on HCAP’s June 30, 2020 NAV, and (ii) expect to enter into a transition services agreement with HCAP Advisors (the “Party D Initial Proposal”).
On September 23, 2020, the HCAP Board convened a virtual meeting, at which HCAP’s management and representatives of each of JMP Securities and Dechert also participated, to discuss in detail the indications of interest that had been received by JMP Securities during the Initial Strategic Evaluation Process. JMP Securities informed the HCAP Board that, to date, it had held specific discussions with nine parties regarding the Initial Strategic Evaluation Process, including PTMN, Party C, and Party D. From those discussions, eight parties had executed an NDA, including PTMN and Party C, and six parties had submitted initial indications of interest, subject to ongoing due diligence at varying stages of completion, including the PTMN Initial Proposal, the Party C Initial Proposal, and the Party D Initial Proposal. JMP Securities reviewed with the HCAP Board each initial indication of interest, including, among other things, the transaction type, structure and consideration. General views surrounding the proposals were discussed during the September 23, 2020 meeting, with the general consensus, based on discussions between the HCAP Board and JMP Securities, that the PTMN Initial Proposal and the Party C Initial Proposal represented the highest total implied consideration to HCAP and HCAP Stockholders amongst the preliminary indications of interest received to date.
Further discussion ensued during the September 23, 2020 meeting regarding the various bidders’ diligence progress, after which, following HCAP management’s and JMP Securities’ exit from the meeting, the HCAP Independent Directors discussed with Dechert the fiduciary obligations of the HCAP directors as well as the process going forward with respect to analyzing and evaluating strategic alternatives for HCAP. The HCAP Independent Directors, in consultation with Dechert, discussed the nature of certain of the indications of interest received to date, including the fact that certain of the interested parties had proposed transactions whereby HCAP Advisors and/or its personnel may continue to provide, and receive compensation for, certain potential transition services following the closing of the applicable transaction, as well as JMP Securities’ affiliation with HCAP Advisors and the potential conflicts related thereto. Further discussion ensued between the HCAP Independent Directors and Dechert regarding the HCAP Board’s fiduciary obligations, the establishment of a special committee consisting of the HCAP Independent Directors to lead the review of inbound inquiries from third parties regarding potential corporate finance and other strategic transactions with HCAP, evaluate the merits of such transactions and any proposals received relating thereto, and, if deemed necessary, select and retain an outside, unaffiliated financial advisor to advise any such committee.
On October 2, 2020, the HCAP Board held a virtual meeting at which representatives of HCAP’s management and Dechert also participated. During the October 2, 2020 meeting, in light of the previously discussed potential conflicts related to JMP Securities’ outreach efforts in the Initial Strategic Evaluation Process, and based on the nature of certain of the indications of interest received, the HCAP Board established the HCAP Special Committee, which was comprised solely of the HCAP Independent Directors, for the purpose of running a process to evaluate strategic alternatives for HCAP and to evaluate the proposals and strategic alternatives for HCAP. The HCAP Special Committee was authorized to, among other things (i) select and retain financial and legal advisors to aid the HCAP Special Committee in fulfilling its duties; (ii) communicate with third parties with respect to and solicit from any third parties inquiries relating to potential strategic alternatives for HCAP, including with respect to the procedures by which any such parties may submit proposals to HCAP relating thereto and information required to be furnished by the parties in conjunction therewith; (iii) negotiate,
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or authorize others to negotiate, any offer made in connection with any potential strategic transaction, (iv) reject any offers relating to any potential strategic transaction which the HCAP Special Committee determined it could not favorably recommend to the HCAP Board; (v) recommend to the HCAP Board any potential strategic transaction which the HCAP Special Committee may approve, subject to final approval by the HCAP Board; and (vi) take any and all other actions with all the power and authority of the HCAP Board as the HCAP Special Committee may deem to be necessary or appropriate in order for the HCAP Special Committee to discharge its duties. The HCAP Board appointed Mr. Sebastiao to serve as the chair of the HCAP Special Committee.
On October 6, 2020, the HCAP Special Committee held a virtual meeting with Dechert, which HCAP’s Corporate Secretary attended at the invitation of the HCAP Special Committee. During the October 6, 2020 meeting, the HCAP Special Committee, in consultation with Dechert, further discussed the nature of certain of the indications of interest received. The representatives from Dechert also reviewed with the HCAP Special Committee the fiduciary obligations governing the acts of directors, applicable fiduciary duties, and the standards of judicial review with regard to a strategic alternatives review process and also discussed the selection of an outside, unaffiliated financial advisor to the HCAP Special Committee in connection with the HCAP Special Committee’s review of the existing preliminary indications of interest collected by JMP Securities during the Initial Strategic Evaluation Process and solicitation of initial indications of interest from a wider group of interested parties with a goal of maximizing value for HCAP Stockholders.
Thereafter, during the October 6, 2020 meeting, the HCAP Special Committee, with the assistance of Dechert, reviewed the experience and qualifications of three potential investment banks to serve as the HCAP Special Committee’s financial advisor, including JMP Securities and KBW, as well as the various advantages and disadvantages of engaging an investment banking firm to act as the HCAP Special Committee’s financial advisor, the experience of each candidate firm in the BDC and direct lending sectors, as well as with mergers and acquisitions and other strategic transactions generally. During the discussions, the HCAP Special Committee noted that KBW is a nationally recognized investment banking firm with substantial experience in strategic transactions in the BDC space. Following additional discussion, including with respect to any material relationships of the candidate firms with HCAP or HCAP Advisors, the HCAP Special Committee authorized the engagement of KBW as financial advisor to the HCAP Special Committee.
During the October 6, 2020, meeting, the HCAP Special Committee, in consultation with Dechert, unanimously decided not to proceed with engagement of JMP Securities as HCAP’s or the HCAP Special Committee’s financial advisor. Thereafter, the HCAP Special Committee discussed the appropriate level of compensation payable to JMP Securities for services rendered to date in connection with the Initial Strategic Evaluation Process, which had benefited HCAP, and to ensure that JMP would cooperate with KBW to ensure a smooth transition in connection with the strategic alternatives review process. The HCAP Special Committee then instructed Dechert to prepare an agreement with JMP Securities providing for the payment by HCAP to JMP Securities of a negotiated fee for work performed by JMP Securities to date at the direction of HCAP Advisors in connection with the Initial Strategic Evaluation Process, which had benefitted HCAP.
On October 9, 2020, the HCAP Special Committee held a virtual meeting with Dechert, which HCAP’s Corporate Secretary attended at the invitation of the HCAP Special Committee. During the October 9, 2020 meeting, representatives from Dechert and HCAP’s Corporate Secretary provided the HCAP Special Committee with an update on negotiations with JMP Securities regarding the agreement between HCAP and JMP Securities providing for the payment by HCAP to JMP Securities of a negotiated fee for work performed by JMP Securities to date at the direction of HCAP Advisors in connection with the Initial Strategic Evaluation Process, which had benefitted HCAP (the “JMP Securities Agreement”). Discussion ensued, during which the HCAP Special Committee noted that while JMP Securities’ previous work in connection with the Initial Strategic Evaluation Process was conducted at the direction of HCAP Advisors, such work provided substantial benefits to HCAP and ultimately led to the decision by the HCAP Board to pursue strategic alternatives for HCAP in lieu of other explored alternatives. Thereafter, during the October 9, 2020 meeting, the HCAP Special Committee instructed Dechert to make a proposal to JMP Securities regarding the JMP Securities Agreement based on the terms discussed during the meeting, and the HCAP Special Committee, in consultation with Dechert, discussed the proposed terms of KBW’s engagement.
On October 12, 2020, the HCAP Board held a virtual meeting with representatives from HCAP’s management and Dechert present at the invitation of the HCAP Board. During the October 12, 2020 meeting, the HCAP Special Committee, noting among other things the continued general deterioration of the market price for
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shares of HCAP Common Stock, provided the other members of the HCAP Board and HCAP’s management with an update on recent developments with respect to the HCAP Special Committee’s review of strategic alternatives for HCAP, including the potential to broaden the focus of the Initial Strategic Evaluation Process to include outreach to additional parties that may be interested in a wider range of transactions, including but not limited to any sale, merger, or similar business combination transaction involving HCAP, and to solicit initial indications of interest from a wider group of interested parties with a goal of enhancing value for HCAP Stockholders (the “Formal Strategic Evaluation Process”). During the October 12, 2020 meeting, the HCAP Special Committee, with the assistance of Dechert, discussed with the other members of the HCAP Board a summary of the proposed terms of KBW’s engagement. The HCAP Board also discussed the likelihood of parties that were in discussions with JMP Securities in connection with the Initial Strategic Evaluation Process participating in the Formal Strategic Evaluation Process. Following the discussion, the representatives from Dechert provided the HCAP Board with an update on negotiations with JMP Securities with respect to the JMP Securities Agreement and the proposed terms thereof.
Also during the October 12, 2020 HCAP Board meeting, the HCAP Board, upon recommendation of its Compensation Committee, approved the payment of a $50,000 retainer to each member of the HCAP Special Committee, payable by HCAP to the members of the HCAP Special Committee in two equal installments, no later than October 31, 2020 and January 15, 2021, respectively, except as may be agreed upon between HCAP and the respective members of the HCAP Special Committee.
On October 14, 2020, the HCAP Special Committee formally engaged KBW as financial advisor to provide certain financial advisory and investment banking services to the HCAP Special Committee.
On October 15, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW attended at the invitation of the HCAP Special Committee. During the October 15, 2020 meeting, KBW reviewed with the HCAP Special Committee a preliminary group of parties potentially interested in exploring a strategic transaction with HCAP, and the HCAP Special Committee, in consultation with KBW, discussed the execution risk of a potential transaction with certain of such parties and related matters. Thereafter, prior to conclusion of the October 15, 2020 meeting, the HCAP Special Committee authorized KBW to initiate outreach to certain parties potentially interested in participating in the Formal Strategic Evaluation Process, including certain parties contacted by JMP Securities during the Initial Strategic Evaluation Process. The HCAP Special Committee noted that any party participating in the Formal Strategic Evaluation Process would, prior to receiving confidential information regarding HCAP, be required to enter into a confidentiality agreement containing terms substantially similar to the confidentiality agreements entered into by interested parties during the Initial Strategic Evaluation Process.
From October 15, 2020 to October 21, 2020, in accordance with the HCAP Special Committee’s directives, KBW contacted seven parties, or their respective financial advisors, to solicit their interest in a potential strategic transaction with HCAP and participating in the Formal Strategic Evaluation Process, including PTMN (October 20, 2020), Party A (October 20, 2020), Party B (October 15, 2020), and Party C (October 20, 2020). Shortly after KBW’s initial contact, those parties that had not previously entered into a confidentiality agreement with HCAP during the Initial Strategic Evaluation Process entered into a confidentiality agreement with HCAP and were provided access to HCAP’s electronic data room, including Party A on October 21, 2020 and Party B on October 16, 2020.
On October 16, 2020, the HCAP Special Committee, on behalf of HCAP, entered into the JMP Securities Agreement with JMP Securities. Under the terms of the JMP Securities Agreement, JMP Securities agreed to (i) provide to HCAP and KBW relevant information and materials regarding HCAP and/or a potential strategic transaction delivered by JMP Securities to third parties, or by third parties to JMP Securities, on behalf of HCAP in connection with a potential strategic transaction, (ii) participate in communications with representatives of HCAP, its counsel, and KBW regarding any financial advice provided to HCAP in connection with the Initial Strategic Evaluation Process, and (iii) promptly transition to KBW in its capacity as the HCAP Special Committee’s financial advisor the control of the electronic data room maintained by JMP Securities in connection with the Initial Strategic Evaluation Process. In consideration for the services covered by the JMP Securities Agreement, HCAP agreed to pay JMP Securities a one-time $100,000 cash fee plus, upon the consummation of a strategic transaction by HCAP during the term of the JMP Securities Agreement or within twelve months
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thereafter, a cash amount equal to either (i) $250,000 if the strategic transaction involved any party, or its subsidiaries and/or affiliates, that had been introduced to HCAP by JMP Securities in connection with the Initial Strategic Evaluation Process, or (ii) $150,000, if the strategic transaction involved any other party (collectively, the “JMP Fee”).
On October 26, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the October 26, 2020 meeting, KBW provided an update regarding the Formal Strategic Evaluation Process, indicating that, as directed by the HCAP Special Committee, KBW had contacted seven parties potentially interested in a strategic transaction with HCAP, and had received indications that an additional party (Party D) remained interested, each of which had entered into a confidentiality agreement with HCAP, and three of which had submitted non-binding indications of interest earlier during the Initial Strategic Evaluation Process, including the PTMN Initial Proposal, the Party C Initial Proposal, and the Party D Initial Proposal. The HCAP Special Committee, with the assistance of KBW, reviewed the three indications of interest received in the Initial Strategic Evaluation Process, including, among other things, the transaction type, structure and consideration represented by each. Thereafter, the HCAP Special Committee instructed KBW to continue to coordinate communications with the five parties initially contacted by KBW that had not participated in the Initial Strategic Evaluation Process but were currently conducting diligence with respect to HCAP in the Formal Strategic Evaluation Process and to confirm with PTMN, Party C, and Party D whether they intended to make any revisions to, or otherwise re-affirm, their respective proposals submitted during the Initial Strategic Evaluation Process.
On October 26, 2020, representatives of HCAP’s management met principal-to-principal, by video conference, with representatives of Party C to discuss detailed matters relating to each company’s investment strategy and HCAP’s portfolio.
On October 30, 2020, Party D submitted a non-binding preliminary indication of interest with respect to an all-cash merger transaction with HCAP whereby, among other things, Party D would (i) acquire 100% of the outstanding shares of HCAP’s common stock at an anticipated price of $4.50 per share for aggregate consideration of approximately $26.8 million, and (ii) expect to enter into a transition services agreement with HCAP Advisors (the “Party D Revised Business Combination Proposal”).
On October 30, 2020, Party A submitted a non-binding preliminary indication of interest with respect to an NAV-for-adjusted-NAV reverse merger whereby, among other things, (i) Party A would merge into HCAP in stock-for-stock merger transaction, with HCAP as the surviving entity managed by Party A’s investment adviser, (ii) an affiliate of Party A would provide an additional $5.25 million cash payment to HCAP Stockholders, and (iii) Party A’s external investment adviser would expect to enter into a three- to six-month transition services agreement with HCAP Advisors (the “Party A Business Combination Proposal”). The Party A Business Combination Proposal assigned a 25% to 40% discount to HCAP’s June 30, 2020 NAV and included a post-closing secondary market trading support plan in connection with which an affiliate of Party A would undertake to purchase up to 3% of the combined company’s outstanding common stock on the open market at market prices below the combined company’s then-current NAV per share.
On October 30, 2020, following additional negotiations with the lenders under the HCAP Credit Facility, HCAP entered into the Eleventh Amendment (the “Eleventh Amendment”) to the loan and security agreement governing the HCAP Credit Facility which, among other things, extended the revolving period to January 31, 2021 and revised the calculation of the debt service coverage ratio under the HCAP Credit Facility.
On November 4, 2020, Party B submitted a non-binding preliminary indication of interest with respect to an NAV-based merger transaction whereby, among other things, (i) HCAP would merge into Party B in stock/cash merger transaction, with Party B as the surviving entity and in connection with which HCAP Stockholders would have the ability to elect to receive merger consideration in (a) shares of Party B common stock or (b) cash, subject to a maximum aggregate cash payment of $20 million, and (ii) Party B’s external investment adviser would expect to enter into a transition services agreement with HCAP Advisors (the “Party B Business Combination Proposal”).
On November 5, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the November 5, 2020 meeting, KBW provided an update regarding the Formal Strategic Evaluation
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Process, indicating that eight parties had entered into a confidentiality agreement with HCAP, five of which had submitted non-binding indications of interest in either the Initial Strategic Evaluation Process or the Formal Strategic Evaluation Process, including the PTMN Initial Proposal, the Party A Business Combination Proposal, the Party B Business Combination Proposal, the Party C Initial Proposal, and the Party D Revised Business Combination Proposal. The HCAP Special Committee, with the assistance of KBW, reviewed the five indications of interest, including, among other things, the transaction type, structure and consideration represented by each. The HCAP Special Committee, with the assistance of KBW, noted that the implied consideration represented by each of the PTMN Initial Proposal ($6.77 per share of HCAP Common Stock, based on the market price of PTMN Common Stock as of November 2, 2020 and adjusted for the PTMN/GARS Transaction), the Party A Business Combination Proposal (ranging from $7.02 to $8.56 per share of HCAP Common Stock, assuming for illustrative purposes a market price for Party A’s common stock equal to 1.0x its June 30, 2020 net asset value and an implied NAV-for-adjusted-NAV exchange ratio to account for the range of discounts assigned by Party A to HCAP’s June 30, 2020 NAV), and the Party B Business Combination Proposal (ranging from $6.15 to $6.89 per share of HCAP Common Stock based on the market price of Party B’s common stock as of November 2, 2020 and representing a low assuming that HCAP Stockholder elections trigger the $20 million maximum aggregate cash payment and a high assuming that HCAP Stockholder elections result in an all-stock transaction) significantly exceeded the implied consideration represented by each of the Party C Initial Proposal ($4.54 per share of HCAP Common Stock, based on the market price of Party C’s common stock as of November 2, 2020) and the Party D Revised Business Combination Proposal ($4.50 per share of HCAP Common Stock in cash). The HCAP Special Committee, with the assistance of KBW, also compared the implied consideration included in the Party A Business Combination Proposal against the respective implied consideration of each of the other proposals, assuming for comparative purposes that Party A’s non-listed common stock, if listed, traded at various potential premiums and discounts to net asset value. Thereafter, following discussion of the various investment strategies and portfolio compositions of PTMN (pro forma for the PTMN/GARS Transaction), Party A, Party B, and Party C, and noting that the implied value of the merger consideration proposed by each of Party C and Party D was not competitive with the implied value of the merger consideration proposed by each of PTMN, Party A, and Party B, the HCAP Special Committee instructed KBW to focus on working with PTMN, Party A, and Party B to improve the value of their bids for HCAP Stockholders and to coordinate principal-to-principal meetings between HCAP’s management and each of the three parties to discuss portfolio updates for the quarter ended September 30, 2020.
During the week following the November 5, 2020 HCAP Special Committee meeting, KBW coordinated portfolio review sessions and other diligence meetings between HCAP’s management and PTMN (November 11, 2020), Party A (November 9, 2020), and Party B (November 10, 2020 and November 11, 2020).
Following the portfolio review sessions and diligence meetings, on November 12, 2020, PTMN re-affirmed the terms of the PTMN Initial Proposal and each of Party A and Party B submitted revised bids.
Party A’s revised business combination proposal (the “November 12 Revised Party A Proposal”) was identical to the Party A Business Combination Proposal, except that Party A had revised its assigned discount to HCAP’s September 30, 2020 NAV to come in at the high-end of Party A’s valuation of HCAP’s investment portfolio, accounting for a 25% discount to HCAP’s September 30, 2020 NAV in the November 12 Revised Party A Proposal.
Party B’s revised business combination proposal (the “November 12 Revised Party B Proposal”) was substantially similar to the Party B Business Combination Proposal, updated for Party B’s and HCAP’s September 30, 2020 NAVs. The November 12 Revised Party B Proposal also noted that any Party B stockholder approval requirements in connection with a strategic transaction between HCAP and Party B would likely benefit from the support of over a majority of the outstanding shares of Party B’s common stock held by one or more affiliates of Party B and noted the potential for post-closing support for shares of the combined company’s common stock by means of a secondary market trading support plan and open-market purchases effectuated by certain affiliates of Party B.
On November 13, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee, in order to discuss and analyze the proposals submitted by the three remaining active bidders: the PTMN Initial Proposal, the November 12 Revised Party A Proposal, and the November 12 Revised Party B Proposal. During the meeting, the HCAP Special Committee, with the assistance of KBW and Dechert, reviewed the process that
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had been undertaken with respect to analyzing potential strategic transactions to date, reviewed in detail the three remaining interested parties’ proposed acquisition prices and the components thereof, and execution risks relating to a transaction with each party, among other items, noting that the implied consideration represented by the November 12 Revised Party B Proposal (ranging from $6.24 to $6.55 per share of HCAP Common Stock based on the market price of Party B’s common stock as of November 12, 2020 and assuming the full range of potential HCAP Stockholder elections with respect to receipt of the merger consideration in shares of Party B common stock or cash) provided less consideration to HCAP Stockholders (on an average per share basis) when compared to either of the PTMN Initial Proposal ($6.66 per share of HCAP Common Stock, based on the market price of PTMN Common Stock as of November 12, 2020 and adjusted for the PTMN/GARS Transaction) or the November 12 Revised Party A Proposal ($8.51 per share of HCAP Common Stock, assuming for illustrative purposes a market price for Party A’s common stock equal to 1.0x its September 30, 2020 NAV and an implied NAV-for-adjusted-NAV exchange ratio to account for the discount assigned by Party A to HCAP’s September 30, 2020 NAV). The HCAP Special Committee, with the assistance of KBW, discussed in particular the fair value adjustments assigned to HCAP’s investment portfolio in Party A’s bid and the accompanying affiliate-paid cash consideration proposed in the November 12 Revised Party A Proposal and compared the implied consideration included in the November 12 Revised Party A Proposal against the respective implied consideration of each of the other proposals, assuming for comparative purposes that Party A’s non-listed common stock, if listed, traded at various potential premiums and discounts to NAV. The HCAP Special Committee also reviewed with KBW certain supplementary information compiled by KBW regarding the trading levels of various listed BDCs with market capitalizations similar to the combined company contemplated in the November 12 Revised Party A Proposal. Following additional discussion in consultation with KBW, the HCAP Special Committee decided to remove Party B from further consideration in the Formal Strategic Evaluation Process, barring receipt of any enhanced proposal from Party B.
Thereafter, during the November 13, 2020 meeting, the HCAP Special Committee discussed with the representatives of KBW, among other things, the potential volatility post-closing of the trading prices of the combined companies following a transaction with each of PTMN and Party A, respectively, including the potential discounts and premiums to NAV at which each such company might trade, the post-closing secondary market trading support plan included in the November 12 Revised Party A Proposal, the potential benefits to Party A of the proposed reverse merger, including with respect to the listing of Party A’s common stock, which was currently not listed, and the potential liquidity of any combined entity’s common stock post-closing. The HCAP Special Committee then further compared the relative execution risks associated with each of the PTMN Initial Proposal and the November 12 Revised Party A Proposal, noting that PTMN had recently completed two BDC business combinations and that, under the terms of the PTMN Initial Proposal, PTMN stated that the proposed merger transaction would not require the approval of PTMN Stockholders. The representatives from Dechert then further reviewed with the HCAP Special Committee the fiduciary obligations governing the acts of directors, applicable fiduciary duties and the standards of judicial review with regard to a strategic alternatives review process. Prior to the conclusion of the November 13, 2020 meeting, the HCAP Special Committee instructed KBW to contact PTMN and Party A to inform them of certain recent developments with respect to HCAP’s investment portfolio and to encourage each party to improve its proposal. The HCAP Special Committee also instructed Dechert to prepare auction draft merger agreements to circulate to PTMN and Party A.
On November 15, 2020, the HCAP Special Committee received supplemental information from KBW summarizing and comparing the PTMN Initial Proposal and the November 12 Revised Party A Proposal, assuming for comparative purposes that Party A’s non-listed common stock, if listed, traded at specific discounts to NAV.
On November 18, 2020, the HCAP Special Committee held a virtual meeting with Dechert, which HCAP’s Corporate Secretary attended at the invitation of the HCAP Special Committee. During the November 18, 2020 meeting, the HCAP Special Committee, with the assistance of Dechert, discussed and reviewed the auction draft merger agreement to be circulated to the remaining interested parties in the Formal Strategic Evaluation Process, including, among other items, the proposed cash-stock consideration mix, exchange ratio mechanics, director and officer indemnification provisions, termination and termination fee provisions, closing conditions, and related matters.
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On November 19, 2020, Party B submitted a revised business combination proposal that included updates to the November 12 Revised Party B Proposal (the “November 19 Revised Party B Proposal”). The November 19 Revised Party B Proposal was substantially similar to the November 12 Revised Party B Proposal, but (i) removed the $20 million cap on the maximum aggregate cash payment portion of the merger consideration available to HCAP Stockholders upon their election (thereby affording each HCAP Stockholder the option to elect some or all of its merger consideration in cash) and (ii) represented an approximate 8.5% increase in value on a cash consideration per share basis as compared to the November 12 Revised Party B Proposal.
On November 20, 2020, the HCAP Board held a virtual meeting during which, upon consultation with HCAP’s management, the HCAP Board determined a record date and payment date for HCAP’s previously declared but deferred distributions of $0.08 per share, initially payable on each of April 30, 2020 and May 28, 2020, authorizing payment of both such distributions in a single distribution of $0.16 per share on December 29, 2020 to stockholders of record at the close of business on December 15, 2020. HCAP subsequently announced the updated record date and payment date on November 24, 2020.
Later on November 20, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the November 20, 2020 meeting, the HCAP Special Committee, with the assistance of KBW, reviewed an analysis prepared by HCAP’s management regarding the potential liquidation of HCAP as a strategic alternative to the proposals received from interested parties to date, including the assumptions relating thereto, during which the HCAP Special Committee noted and discussed with KBW that, based on estimates from HCAP’s management, management’s estimated implied liquidation value per share for HCAP referenced in the liquidation analysis ($6.23 per share after taking into account the sale of HCAP’s assets and the costs and expenses associated with winding down its business and operations) provided less consideration to HCAP Stockholders (on an average per share basis) than implied consideration values represented by each of the PTMN Initial Proposal, the November 12 Revised Party A Proposal, and the November 19 Revised Party B Proposal.
Following HCAP management’s exit from the November 20, 2020 meeting, the HCAP Special Committee, with the assistance of KBW and Dechert, discussed and compared the PTMN Initial Proposal, the November 12 Revised Party A Proposal, and the updates to Party B’s bid included in the November 19 Revised Party B Proposal. During the discussion, the HCAP Special Committee and KBW reviewed in detail the proposed acquisition prices cited in each of the three proposals and the components thereof, among other items, noting that the implied consideration represented by the November 19 Revised Party B Proposal (ranging from $6.85 to $7.15 per share for each share of HCAP Common Stock exchanged for cash and from $6.37 to $6.41 per share for each share of HCAP Common Stock exchanged for shares of Party B’s common stock based on the market price of Party B’s common stock as of November 19, 2020) had improved in comparison to PTMN’s and Party A’s bids, but still generally provided less consideration to HCAP Stockholders (on an average per share basis) than the PTMN Initial Proposal ($6.96 per share of HCAP Common Stock, based on the market price of PTMN Common Stock as of November 19, 2020 and adjusted for the PTMN/GARS Transaction) and the November 12 Revised Party A Proposal ($7.29 per share of HCAP Common Stock, assuming for illustrative purposes a market price for Party A’s common stock equal to 0.84x its September 30, 2020 NAV, based on the median market-price-to-NAV ratio of selected BDCs as of November 19, 2020, and an implied NAV-for-adjusted-NAV exchange ratio to account for the discount assigned by Party A to HCAP’s September 30, 2020 NAV). The HCAP Special Committee then further discussed with KBW the implied consideration included in the November 12 Revised Party A Proposal against the respective implied consideration of each of the other proposals, assuming for comparative purposes that Party A’s non-listed common stock, if listed, traded at various potential discounts to NAV and discussed generally the potential trading prices of the combined company’s common stock post-closing in connection with each proposal. Thereafter, prior to conclusion of the November 20, 2020 meeting, the HCAP Special Committee further discussed with Dechert the auction draft merger agreement, as well as potential execution risks associated with each of the three remaining proposals, including financing availability and any required stockholder approvals.
Later on November 20, 2020, pursuant to direction from the HCAP Special Committee, KBW provided the auction draft merger agreement to PTMN, Party A, and Party B.
On November 25, 2020, Simpson Thacher, counsel to PTMN, submitted a mark-up of the draft Merger Agreement to Dechert.
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On November 30, 2020 each of PTMN and Party A submitted revisions to the PTMN Initial Proposal and the November 12 Revised Party A Proposal, respectively. PTMN’s updates to the PTMN Initial Proposal (the “November 30 Revised PTMN Proposal”) reflected terms substantially similar to the PTMN Initial Proposal, but (i) included an additional $1.0 million cash payment to HCAP Stockholders from Sierra Crest and (ii) clarified that the transition services agreement which Sierra Crest would expect to separately enter into a with HCAP Advisors post-closing would provide for an aggregate of $5.0 million in consideration to be paid to HCAP Advisors.
Party A’s November 30, 2020 updates to the November 12 Revised Party A Proposal (the “November 30 Revised Party A Proposal”) reflected terms substantially similar to the November 12 Revised Party A Proposal but (i) included a proposal to pay up to 10% of the merger consideration in cash in lieu of Party A’s common stock, and (ii) included a summary document from Party A’s outside legal counsel listing certain significant open business and legal issues with respect to the auction draft merger agreement, but did not include a detailed markup of the auction draft merger agreement.
On November 30, 2020, Party B submitted a mark-up of the auction draft merger agreement.
On December 1, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the December 1, 2020 meeting, KBW provided the HCAP Special Committee with an update regarding the Formal Strategic Evaluation Process. The HCAP Special Committee, with the assistance of KBW, reviewed the November 30 Revised PTMN Proposal and the November 30 Revised Party A Proposal, as compared against each other and against the November 19 Revised Party B Proposal, and discussed each of the three proposals, including the proposed acquisition prices and the components thereof, execution risks relating to a transaction with each party, and the relative portfolio, leverage and platform resources of each party, among other items, noting that the recent updates reflected in the November 30 Revised PTMN Proposal and the November 30 Revised Party A proposal created further separation between the implied consideration represented by PTMN’s and Party A’s bids, on the one hand, and the implied consideration represented by the November 19 Revised Party B Proposal, on the other hand. The HCAP Special Committee, in consultation with Dechert and KBW, discussed the potential benefits of the flexible merger structure cited in the November 19 Revised Party B Proposal allowing HCAP Stockholder to elect to receive cash or stock consideration, and further discussion ensued regarding the potential liquidity and trading volume of any combined company’s common stock following a transaction with each party and the post-closing secondary market trading support plan referenced in the November 30 Revised Party A Proposal. During the December 1, 2020 meeting, Dechert also discussed with the HCAP Special Committee the mark-ups of the auction draft merger agreement received from PTMN and Party B and the summary issues list from Party A’s outside legal counsel regarding the auction draft merger agreement. Thereafter, the HCAP Special Committee instructed KBW to continue communications with each of PTMN, Party A, and Party B to improve the value of their bids for HCAP Stockholders.
On December 2, 2020, each of PTMN and Party B submitted revisions to the November 30 Revised PTMN Proposal and the November 19 Revised Party B Proposal, respectively. PTMN’s updates to the November 30 Revised PTMN Proposal (the “December 2 Revised PTMN Proposal”) reflected terms substantially similar to the November 30 Revised PTMN Proposal, but (i) increased the amount of the proposed cash payment to HCAP Stockholders from Sierra Crest to a range of $2.15 million to $2.75 million, and (ii) adjusted the consideration proposed to be paid by Sierra Crest to HCAP Advisors in connection with any transition services agreement to $3.25 million to $3.85 million.
Party B’s December 2, 2020 updates to the November 19 Revised Party B Proposal (the “December 2 Revised Party B Proposal”) improved the financial terms of the November 19 Revised Party B Proposal and represented an approximate 16.3% increase in value on a cash consideration per share basis as compared to the November 12 Revised Party B Proposal.
On December 2, 2020, Party A provided representatives of KBW with a verbal update to the November 30 Revised Party A Proposal, noting that Party A would provide flexibility to HCAP Stockholders to elect to receive up to 15.0% of the aggregate merger consideration in cash.
On December 3, 2020, the HCAP Special Committee held a virtual meeting, which representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. Portions of the meeting were also attended by members of HCAP’s management at the invitation of the HCAP Special Committee. During the
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December 3, 2020 meeting, the HCAP Special Committee, with the assistance of KBW, reviewed the updates to PTMN’s and Party B’s proposals received since the last meeting, during which the HCAP Special Committee noted that the implied consideration represented by the December 2 Revised Party B Proposal (representing $7.50 per share for each share of HCAP Common Stock exchanged for cash and $6.34 per share for each share of HCAP Common Stock exchanged for shares of Party B’s common stock based on the market price of Party B’s common stock as of December 2, 2020) remained less competitive from a deal value perspective than each of the December 2 Revised PTMN Proposal and the November 30 Revised Party A Proposal (as updated by verbal indication on December 2, 2020). Extensive discussion ensued regarding, among other items, the structure of the merger consideration proposed in each bid, the flexibility afforded to HCAP stockholders in electing the form of consideration in connection with each of Party A’s and Party B’s bids, the percentage of the combined company HCAP Stockholders would own following each proposed transaction, any portfolio diligence to be completed by HCAP’s management with respect to each remaining interested party, and post-combination liquidity and projected dividend coverage with respect to the combined company represented by each proposal. Thereafter, the HCAP Special Committee instructed KBW to continue communications with each of PTMN, Party A, and Party B to collect best and final proposals from each.
On December 6, 2020, PTMN submitted revisions to the December 2 Revised PTMN Proposal (the “December 6 Revised PTMN Proposal”), which reflected terms substantially similar to the December 2 Revised PTMN Proposal, but (i) provided flexibility to HCAP Stockholders to elect to receive merger consideration in (a) shares of PTMN Common Stock or (b) cash, subject to a cap on the cash consideration to ensure the issuance of no more than 19.9% of the outstanding shares of PTMN Common Stock at closing of any merger, (ii) changed the amount of the proposed cash payment to HCAP Stockholders from Sierra Crest to $1.525 million, and (iii) adjusted the consideration proposed to be paid by Sierra Crest to HCAP Advisors in connection with any transition services agreement to $4.475 million.
On December 7, 2020, the HCAP Special Committee held virtual meetings, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the December 7, 2020 meetings, the HCAP Special Committee, with the assistance of KBW, reviewed in detail the primary differences between the December 6 Revised PTMN Proposal, the November 30 Revised Party A Proposal (as updated by verbal indication on December 2, 2020) and the December 2 Revised Party B Proposal, including with respect to the proposed acquisition prices cited in each, the flexibility afforded to HCAP stockholders in electing the form of consideration in connection with each bid, the source of funds or financing cited by each bidder, and additional details communicated by Party A, including regarding the amount of consideration to be paid to HCAP Advisors in connection with any transition services agreement which Party A’s investment adviser would expect to enter into with HCAP Advisors post-closing (expected payment to HCAP Advisors of $400,000 for the first quarter post-closing and $250,000 for the second quarter post-closing, with an option to terminate transition services prior to the second quarter post-closing upon prior written notice and payment of a $75,000 termination fee). KBW then reviewed and compared the implied consideration represented by each of the respective bids, which comparison indicated that each of the December 6 Revised PTMN Proposal ($7.70 per share of HCAP Common Stock, based on the market price of PTMN Common Stock as of December 4, 2020, adjusted for the PTMN/GARS Transaction and assuming that the aggregate merger consideration paid by PTMN consists of 19.9% of the then-outstanding shares of PTMN Common Stock with the remainder in cash) and the November 30 Revised Party A Proposal (as updated by verbal indication on December 2, 2020) ($7.60 per share of HCAP Common Stock, assuming for illustrative purposes a market price for Party A’s common stock equal to 0.86x its September 30, 2020 NAV, based on the median market-price-to-NAV ratio of selected BDCs as of December 4, 2020, and an implied NAV-for-adjusted-NAV exchange ratio to account for the discount assigned by Party A to HCAP’s September 30, 2020 NAV) represented implied consideration for HCAP Stockholders that could be in excess of the implied consideration represented by the December 2 Revised Party B Proposal. The HCAP Special Committee then further discussed with KBW the implied consideration included in the November 30 Revised Party A Proposal (as updated by verbal indication on December 2, 2020) against the respective implied consideration of each of the other proposals, assuming for comparative purposes that Party A’s non-listed common stock, if listed, traded at various potential discounts to NAV and discussed generally the potential trading prices of the combined company’s common stock post-closing in connection with each proposal.
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During the December 7, 2020 meetings, in light of the merger consideration optionality proposed in each of the three remaining proposals, the HCAP Special Committee discussed with HCAP’s management and Mr. Jolson the potential for Mr. Jolson, and certain entities controlled by him, to agree to enter into a letter agreement pursuant to which he would elect to receive any merger consideration in shares of common stock rather than cash in order to provide other HCAP Stockholders with more flexibility to elect to receive cash and to enhance the potential liquidity of the combined company’s common stock post-closing. In addition, the HCAP Special Committee discussed with HCAP’s management and Mr. Jolson his willingness, in his capacity as a significant stockholder of HCAP, to consider entering into voting and support agreements with respect to any of the three remaining proposals under consideration, during which Mr. Jolson noted his support, as a significant stockholder of HCAP, for PTMN’s proposal. The HCAP Special Committee also discussed with HCAP’s management and Mr. Jolson the potential for Mr. Jolson to agree to transfer restrictions on his beneficially owned shares of HCAP Common Stock following execution of any definitive merger agreement and, following the closing of any transaction, on any shares of the combined company’s common stock in order to provide a form of additional post-closing secondary market trading support to independent stockholders.
Prior to conclusion of the December 7, 2020 meetings, following HCAP’s management’s exit from the meetings, Dechert reviewed with the HCAP Special Committee the fiduciary obligations governing the acts of directors, applicable fiduciary duties and the standards of judicial review with regard to a strategic alternatives review process, including with respect to potentially entering into an exclusivity agreement with any bidder. Thereafter, the HCAP Special Committee instructed KBW to communicate to PTMN that PTMN needed to improve its proposed consideration for HCAP Stockholders in order for the HCAP Special Committee to further consider PTMN’s proposal.
Late in the evening on December 7, 2020, PTMN submitted revisions to the December 6 Revised PTMN Proposal (the “December 7 Revised PTMN Proposal”), which reflected terms substantially similar to the December 6 Revised PTMN Proposal, but (i) changed the amount of the proposed cash payment to HCAP Stockholders from Sierra Crest to $2.15 million, and (ii) adjusted the consideration proposed to be paid by Sierra Crest to HCAP Advisors in connection with any transition services agreement to $3.85 million.
On December 8, 2020, the HCAP Special Committee held a virtual meeting, which representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee, to review and discuss the updates reflected in the December 7 Revised PTMN Proposal, as compared to each of Party A’s and Party B’s most recent proposals. The HCAP Special Committee, with the assistance of KBW, observed that the implied consideration represented by the December 7 Revised PTMN Proposal had improved to $7.80 per share of HCAP Common Stock (based on the market price of PTMN Common Stock as of December 7, 2020, adjusted for the PTMN/GARS Transaction and assuming that the aggregate merger consideration paid by PTMN consists of 19.9% of the then-outstanding shares of PTMN Common Stock with the remainder in cash), discussed with KBW and Dechert the relative execution risks presented by each proposal, noting that the December 7 Revised PTMN Proposal required no PTMN Stockholder approval, and discussed the various potential premiums and discounts to net asset value post-closing at which shares of any combined company resulting from the November 30 Revised Party A Proposal would trade. Thereafter during the December 8, 2020 meeting, the HCAP Special Committee, in consultation with Dechert, discussed the potential for entering into an exclusivity agreement with PTMN, noting, among other things, (i) the uncertainty with respect to any potential discounts to NAV at which Party A’s non-listed common stock might trade if listed, including uncertainty regarding liquidity in the market and selling pressure for the common stock of any such combined company, (ii) the lower execution risk of proceeding with PTMN and BC Partners due to the fact the terms of the December 7 Revised PTMN Proposal required no PTMN stockholder approval, (iii) Mr. Jolson’s expressed willingness, in his capacity as a significant stockholder of HCAP, to (a) support PTMN’s proposal, (b) potentially enter into a voting and support agreement with PTMN to vote in favor of any merger with PTMN based on the December 7 Revised PTMN Proposal, and (c) potentially enter into a letter agreement with HCAP to require Mr. Jolson, and certain entities controlled by him, to (1) elect to receive any merger consideration in shares of common stock rather than cash and (2) agree to transfer restrictions on his beneficially owned shares of HCAP Common Stock following execution of any definitive merger agreement and, following the closing of any transaction, on any shares of the combined company’s common stock for a period of time post-closing, and (iv) PTMN’s recent successful execution of two BDC business combinations. Following further discussion, the HCAP Special Committee approved entry into a limited exclusivity agreement with PTMN pending approval from the Chair of the HCAP Special Committee of the final form thereof after consultation with Dechert.
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Following the December 8, 2020 meeting, access to the electronic data room was terminated for all interested parties other than PTMN.
Also on December 8, 2020, Dechert provided a draft exclusivity agreement to Simpson Thacher to be entered into between PTMN and HCAP. Simpson Thacher returned a revised draft of the exclusivity agreement late in the evening on December 8, 2020.
Also on December 8, 2020, Dechert, at the direction of the HCAP Special Committee, requested from Simpson Thacher an updated mark-up of the draft Merger Agreement to reflect the terms of the December 7 Revised PTMN Proposal.
On December 9, 2020, HCAP entered into an exclusivity agreement (the “Exclusivity Agreement”) with PTMN and BC Partners granting BC Partners/PTMN the exclusive right, for a 30-day period, to negotiate a transaction with HCAP. Thereafter, all remaining interested parties were notified that HCAP had entered into an exclusivity agreement with another party.
On December 10, 2020, HCAP’s management received access to an electronic data room populated by PTMN and its advisors and subsequently began to undertake a reverse diligence review process regarding PTMN and Sierra Crest.
On December 10, 2020, the HCAP Special Committee held a virtual meeting with Dechert to discuss matters relating to the provision of retention arrangements by HCAP Advisors with certain of its employees who provide administrative services to HCAP, as the increased compensation costs would be reimbursable by HCAP pursuant to the HCAP Administration Agreement, during which the HCAP Special Committee noted the importance of retaining these essential administrative personnel pending consummation of any business combination. The HCAP Special Committee, in consultation with Dechert, also discussed the reverse due diligence process with respect to PTMN.
From December 10, 2020 through December 16, 2020, Dechert and Simpson Thacher exchanged various communications regarding proposed terms and consideration/HCAP Stockholder election mechanics to be reflected in PTMN’s revisions to the draft Merger Agreement.
In various exchanges between December 14, 2020 and December 22, 2020, the HCAP Special Committee, in consultation with Dechert, negotiated with Mr. Jolson the terms of a letter agreement (the “Jolson Letter Agreement”) between HCAP and Mr. Jolson with respect to 894,273 shares of HCAP Common Stock beneficially owned directly by Mr. Jolson and indirectly by Mr. Jolson through the Joseph A. Jolson 1991 Trust (the “Jolson Shares”), pursuant to which Mr. Jolson would agree (i) to elect to receive shares of PTMN Common Stock as consideration in connection with the Mergers for all of the Jolson Shares, (ii) to not, directly or indirectly, transfer, sell, offer, exchange, assign, pledge, convey any legal or beneficial ownership interest in or otherwise dispose of, or encumber any of the Jolson Shares or enter into any contract, option, or other agreement with respect to, or consent to, a transfer of, any of the Jolson Shares or his voting or economic interest therein other than pursuant to the Merger Agreement and in connection with the Mergers during the period commencing on the date of execution of the Jolson Letter Agreement and ending on the Closing Date and (iii) to not transfer any shares of PTMN Common Stock received in exchange for the Jolson Shares in the First Merger (the “Locked Up Securities”) or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Locked Up Securities for 90 days following the closing of the Mergers.
On December 14, 2020, HCAP’s management delivered a supplemental reverse diligence request list to PTMN.
On December 15, 2020, Dechert delivered a reverse legal due diligence request list to Simpson Thacher with respect to PTMN.
On December 16, 2020, Simpson Thacher delivered a legal due diligence request list to Dechert with respect to HCAP.
Between December 16, 2020 and December 20, 2020, Dechert and Simpson Thacher exchanged revised drafts of the Merger Agreement, as well as various correspondence relating to certain aspects of the Merger Agreement, and held various telephone calls to discuss comments to the Merger Agreement.
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On December 21, 2020, the HCAP Special Committee held a virtual meeting, at which representatives of KBW and Dechert were present at the invitation of the HCAP Special Committee, during which KBW provided the HCAP Special Committee with an update on how recent movements in the trading prices of HCAP Common Stock and PTMN Common Stock affected the implied value of the transaction with PTMN under the December 7 Revised PTMN Proposal. The HCAP Special Committee also reviewed and discussed, with the assistance of KBW, various levels of implied value to HCAP Stockholders of the proposed consideration in the December 7 Revised PTMN Proposal based on various potential discounts to net asset value at which shares of PTMN Common Stock might trade prior to signing of any definitive merger agreement and prior to closing. Thereafter, during the December 21, 2020 meeting, Dechert provided an update on legal reverse due diligence, noting that it was ongoing, and provided the HCAP Special Committee with a summary of the material terms of the draft Merger Agreement, noting, among other things, any remaining significant provisions in the draft Merger Agreement that remained open to negotiation with PTMN and Simpson Thacher.
Following the December 21, 2020 meeting, and upon authorization from the HCAP Special Committee, Dechert sent Simpson Thacher a revised draft of the Merger Agreement.
On December 21, 2020, Simpson Thacher provided draft voting and support agreements (the “Voting Agreements”) to each of Mr. Jolson and certain entities controlled or influenced by Mr. Jolson, as beneficial owners, directly or indirectly, of 5% or more of the outstanding shares of HCAP Common Stock. Under the terms of the Voting Agreements, each covered stockholder would agree to vote their respective covered shares of HCAP Common Stock (i) in favor of the approval of the Merger Agreement and any other matters necessary for consummation of the other transactions contemplated by the Merger Agreement and any other action reasonably requested by PTMN in furtherance thereof, and (ii) against (A) any action, proposal, agreement, recapitalization, reorganization, liquidation, dissolution, amalgamation, merger, sale of assets or other business combination or transaction between or involving HCAP and any other person that would reasonably be expected to impede, interfere with, delay, postpone or adversely affect the First Merger or any of the other transactions contemplated by the Merger Agreement, (B) any action or transaction that would result in a breach of any covenant, representation or warranty or other obligation or agreement of HCAP or any of its subsidiaries contained in the Merger Agreement, or of the relevant stockholder contained in the applicable Voting Agreement, (C) any amendment or other change to HCAP’s Restated Certificate of Incorporation (the “HCAP Certificate of Incorporation”) or HCAP’s Bylaws (the “HCAP Bylaws”), and (D) any other material change in HCAP’s corporate structure or business.
Between December 21, 2020 and December 22, 2020, Dechert and Simpson Thacher exchanged correspondence relating to certain aspects of the Merger Agreement and, late in the afternoon on December 22, 2020, Simpson Thacher sent Dechert a revised draft of the Merger Agreement.
Afterwards, on December 22, 2020, the HCAP Special Committee held a virtual meeting, which members of HCAP’s management and representatives of KBW and Dechert attended at the invitation of the HCAP Special Committee. During the December 22, 2020 meeting, Dechert provided an update on the draft Merger Agreement and related matters, including with respect to, among other things, the indemnification provisions, the affirmative and negative covenants, and any substantive revisions since the last meeting of the HCAP Special Committee. Mr. Jolson then discussed with the HCAP Special Committee the draft Voting Agreement he had received, versions of which PTMN had requested that he and certain entities controlled or influenced by him enter into concurrently with HCAP’s execution of any definitive merger agreement. Discussion ensued, after which the HCAP Special Committee requested that Mr. Jolson keep the HCAP Special Committee apprised of negotiations with PTMN regarding the Voting Agreements.
Following Mr. Jolson’s exit from the December 22, 2020 meeting, Dechert and KBW provided the HCAP Special Committee with a summary of recent developments in discussions with PTMN and Simpson Thacher and proposed timing, as well as an overview of the remaining provisions in the draft Merger Agreement subject to negotiation. A discussion ensued among the HCAP Special Committee and Dechert about the draft Merger Agreement, the proposed resolution of the remaining open items and the agreements reached with PTMN on certain of the items. HCAP’s management and Dechert also provided the HCAP Special Committee with an update on reverse business diligence and legal diligence, respectively.
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Throughout the evening of December 22, 2020, through the morning of December 23, 2020, Dechert and Simpson Thacher held multiple telephone calls to discuss comments to the Merger Agreement and exchanged revised drafts of the Merger Agreement and other correspondence relating certain aspects of the Merger Agreement.
On December 23, 2020, the HCAP Board and the HCAP Special Committee held a virtual meeting, which was attended by representatives of HCAP Advisors, KBW, and Dechert, in order to consider approval of the Merger Agreement, and to receive an update on the status of negotiations and the documents related thereto. The HCAP Board and the HCAP Special Committee, with assistance from the representatives of Dechert, reviewed the duties of each director under Delaware law that were applicable in considering the proposed transactions, before reviewing the Merger Agreement, including a summary of the key terms and closing conditions thereof and related matters. HCAP’s management then provided the HCAP Special Committee with a summary of the reverse diligence review of PTMN. The HCAP Special Committee and the HCAP Board, in consultation with Dechert, then discussed the draft Jolson Letter Agreement between HCAP and Mr. Jolson, during which the representatives from Dechert noted that, in addition to Mr. Jolson’s planned execution of the Jolson Letter Agreement, Mr. Jolson and certain entities controlled or influenced by Mr. Jolson had confirmed their intent to enter into the Voting Agreements with PTMN in connection with the proposed execution of the Merger Agreement. Discussion ensued among the HCAP Special Committee and the HCAP Board regarding the benefits the Jolson Letter Agreement potentially provided to other HCAP Stockholders with respect to flexibility to elect to receive cash in any transaction, if desired, and potential enhancements to post-closing liquidity and secondary market support for the combined company’s common stock. Thereafter, the HCAP Special Committee requested that representatives of HCAP Advisors leave the meeting in order for the HCAP Special Committee to convene a meeting of the HCAP Special Committee.
During the December 23, 2020 HCAP Special Committee meeting, following the HCAP Advisors representatives’ exit, the HCAP Special Committee, with the assistance of KBW, reviewed the financial aspects of the proposed transaction, and KBW rendered an opinion to the HCAP Special Committee, which opinion was initially rendered verbally and subsequently confirmed by delivery of a written opinion, dated December 23, 2020, to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW as set forth in such opinion, the aggregate consideration (including the additional consideration from Sierra Crest) to be received by holders of HCAP Common Stock in the First Merger was fair, from a financial point of view, to such holders of HCAP Common Stock, collectively as a group, as more fully described in the section entitled “—Opinion of the Financial Advisor to the HCAP Special Committee” below. Following a discussion of the foregoing matters by the HCAP Special Committee, the HCAP Special Committee unanimously (i) determined, and recommended that the HCAP Board determine, that the Merger Agreement and the transactions contemplated by the Merger Agreement, including the First Merger, are advisable and fair to and in the best interests of HCAP and HCAP Stockholders, (ii) authorized and approved the Merger Agreement and the transactions contemplated thereby, including the First Merger, (iii) recommended that the HCAP Board authorize and approve the Merger Agreement and the transactions contemplated thereby, including the First Merger, and thereafter direct that the Merger Agreement be executed and submitted to HCAP Stockholders for consideration at a special meeting, and (iv) recommended that the HCAP Board approve the Jolson Letter Agreement.
Thereafter, the HCAP Special Committee invited the representatives of HCAP Advisors to re-join the December 23, 2020 meeting and reconvene a full meeting of the HCAP Board. After discussion, based in part upon the unanimous recommendation of the HCAP Special Committee, the HCAP Board, including the HCAP Independent Directors, and excluding Messrs. Jolson and Buckanavage, who voluntarily recused themselves from the vote in light of their affiliation with HCAP Advisors, (i) authorized and approved the Merger Agreement and the transactions contemplated thereby, including the First Merger, (ii) declared that the Merger Agreement and the transactions contemplated thereby, including the First Merger, are advisable and in the best interests of, and fair to, HCAP and HCAP Stockholders, directed that the Merger Agreement be submitted for consideration at the HCAP Special Meeting, and recommended to HCAP Stockholders that they vote in favor of adoption and approval of the Merger Agreement, and (iii) approved each of the Merger Agreement and the transactions contemplated thereby, including, without limitation, the First Merger, and the Voting Agreements in all respects under Section 203 of the DGCL, to the extent any party to the Merger Agreement or a Voting Agreement would be deemed to be an “interested stockholder,” as defined in Section 203 of the DGCL, of HCAP as a result of or in connection with the transactions contemplated thereby, and related matters.
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In the late afternoon on December 23, 2020, following approval of the Merger Agreement by the HCAP Board, PTMN, HCAP, Merger Sub and Sierra Crest executed and delivered the Merger Agreement. In connection therewith, (i) Mr. Jolson and HCAP entered into the Jolson Letter Agreement and (ii) each of Mr. Jolson and certain entities controlled or influenced by Mr. Jolson entered into Voting Agreements with PTMN.
Later on December 23, 2020, following execution and delivery of the Merger Agreement, the Jolson Letter Agreement and the Voting Agreements, HCAP and PTMN issued a joint press release publicly announcing the Mergers. On the morning of December 24, 2020, HCAP and PTMN held a joint conference call to discuss the Mergers.
HCAP Reasons for the Mergers
As previously disclosed, the HCAP Special Committee and HCAP Board reviewed a variety of strategic alternatives that they believed would enhance value for HCAP Stockholders.
In evaluating the merger proposal from PTMN, the HCAP Special Committee and HCAP Board, including the HCAP Independent Directors, consulted with and received the advice of HCAP’s management and certain outside advisors. In reaching its decision, the HCAP Special Committee and HCAP Board considered a number of factors, including the factors described in this section, and, as a result, determined that entering into the Merger Agreement and consummating the transactions contemplated thereby, including the Mergers, is in the best interests of HCAP and HCAP Stockholders.
The following discussion of the information and factors considered by the HCAP Special Committee and HCAP Board is not intended to be exhaustive. However, it includes all of the material factors considered by them in evaluating the Mergers. In view of the complexity and the large number of factors considered, the HCAP Special Committee and HCAP Board did not find it practicable to, and did not attempt to, quantify or assign any relative or specific weight individually to the various factors. Rather, they based their recommendation or approval, as applicable, on the totality of the information presented to and considered by them, including the duration, robustness and outcome of the competitive processes of seeking strategic alternatives for HCAP, and concluded that, overall, the positive factors of the Mergers to HCAP Stockholders outweigh the risks and potential negative factors related to the Mergers.
Financial Terms of the Merger Agreement with PTMN. The HCAP Special Committee and HCAP Board considered the financial terms of the Merger Agreement, including that:
on a market value basis, the transaction, including the Additional Cash Consideration from Sierra Crest, represents an implied market value for HCAP Common Stock of approximately $7.71 per share, which represents approximately 79% of HCAP’s September 30, 2020 NAV per share (adjusted for expected transaction expenses) and a 30.4% premium to the closing price of HCAP Common Stock on December 22, 2020. This implied market value is based on (i) HCAP’s adjusted September 30, 2020 NAV ($60.6 million, or $10.17 per share of HCAP Common Stock based on the outstanding shares of HCAP Common Stock as of December 23, 2020 (the date of the Merger Agreement), as adjusted for expected transaction expenses), (ii) PTMN’s estimated October 31, 2020 NAV ($208.6 million, or $2.78 per share of PTMN Common Stock, accounting for the PTMN/GARS Transaction, as adjusted for expected transaction expenses), and (iii) the closing price of PTMN Common Stock on December 22, 2020 (which was the last trading day before entering into the Merger Agreement) of $1.80;
on an NAV basis, HCAP Stockholders will collectively receive value per share of approximately 103.7% of the NAV per share of HCAP Common Stock, calculated based on (i) HCAP’s adjusted September 30, 2020 NAV and the outstanding shares of HCAP Common Stock as of December 23, 2020 (the date of the Merger Agreement), (ii) the estimated NAV per share of PTMN Common Stock as of October 31, 2020 (as adjusted for the PTMN/GARS Transaction and expected transaction expenses), and (iii) taking into account the value of the Additional Cash Consideration. The additional 3.7% premium above NAV per share of HCAP Common Stock is a result of the Additional Cash Consideration;
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PTMN will issue to HCAP Stockholders shares of PTMN Common Stock equal to 19.9% of the number of shares of PTMN Common Stock issued and outstanding immediately prior to the Closing, and pay the remainder of the Merger Consideration in cash; and
HCAP Stockholders will have the option to elect to receive the Merger Consideration in cash, which provides immediate liquidity and certainty of value to HCAP Stockholders, or in shares of PTMN Common Stock, subject to adjustment based on the elections of other HCAP Stockholders, and that the Jolson Letter Agreement to which Mr. Jolson and HCAP are party will enhance the ability of minority HCAP Stockholders to receive cash based on their elections.
Thorough Review of Strategic Alternatives. The HCAP Special Committee and HCAP Board considered the results of the thorough review of strategic alternatives, including the following:
the HCAP Special Committee and HCAP Board reviewed a range of options, including continuing to operate HCAP on a standalone basis, a full liquidation of HCAP, internalization of HCAP Advisors’ investment advisory function, and various sale/merger transactions, including a stock sale, asset sale, merger or reverse merger, as well as other strategic transactions;
the HCAP Special Committee reviewed with KBW all indications of interest received during the Initial Strategic Evaluation Process coordinated by JMP Securities, directed KBW to contact, or coordinate the response to, nine potential strategic partners during the Formal Strategic Evaluation Process, all of which executed confidentiality agreements, and reviewed with KBW five indications of interest received from parties participating in the Formal Strategic Evaluation Process;
the beliefs of the HCAP Special Committee and HCAP Board (other than directors affiliated with HCAP Advisors, who abstained from voting), formed based on a review of the results of the strategic review process, which were evaluated with the assistance of HCAP’s management and certain outside advisors, that the Mergers are more favorable to HCAP Stockholders than other opportunities and alternatives reasonably available to HCAP, taking into account the potential risks, rewards and uncertainties associated with each alternative, including, among other opportunities and alternatives, the following: (i) pursuing business combinations with entities other than PTMN; (ii) pursuing a full liquidation of HCAP; and (iii) continuing to operate HCAP on a standalone basis;
the beliefs of the HCAP Special Committee and HCAP Board (other than directors affiliated with HCAP Advisors, who abstained from voting), which beliefs were formed after consultation with HCAP’s management and certain outside advisors, that prolonging the discussions with PTMN or continuing to solicit interest from additional third parties would be unlikely to lead to a better offer and could have resulted in the loss of PTMN’s proposed offer;
the fact that each of Mr. Jolson and certain entities controlled or influenced by Mr. Jolson has entered into a Voting Agreement with PTMN and intends to vote their respective covered shares of HCAP Common Stock in favor of the Mergers, contributing to the certainty of obtaining the required stockholder approval for the Merger Proposal;
the fact that HCAP entered into the Jolson Letter Agreement with Mr. Jolson, under which Mr. Jolson has agreed (i) to elect to receive shares of PTMN Common Stock as consideration in connection with the Mergers for all of the Jolson Shares, (ii) to not, directly or indirectly, transfer, sell, offer, exchange, assign, pledge, convey any legal or beneficial ownership interest in or otherwise dispose of, or encumber any of the Jolson Shares or enter into any contract, option, or other agreement with respect to, or consent to, a transfer of, any of the Jolson Shares or his voting or economic interest therein other than pursuant to the Merger Agreement and in connection with the Mergers during the period commencing on the date of the Jolson Letter Agreement and ending on the Closing Date and (iii) to not transfer any shares of the Locked Up Securities or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Locked Up Securities for 90 days following the Closing; the Jolson Letter Agreement enhances the ability of minority HCAP Stockholders to receive cash based on their elections and will provide a form of post-closing secondary market trading support to minority HCAP Stockholders for a period of time;
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PTMN’s obligation to complete the Mergers is not conditioned upon receipt of financing, and each of PTMN and Sierra Crest has represented that it will have sufficient cash or sources of cash to enable it to pay the respective amounts due at the Closing; and
PTMN Stockholder approval is not required for the Mergers, contributing to additional likelihood of closing with PTMN.
Strategic and Business Considerations. The HCAP Special Committee and HCAP Board considered the various opportunities for the combined company to provide strategic and business opportunities for its stockholders and to generate additional stockholder value, including that:
based on the outstanding shares and relative NAV of HCAP Common Stock and PTMN Common Stock outstanding (each as adjusted for expected transaction expenses), as of September 30, 2020 with respect to HCAP, and as of October 31, 2020 with respect to PTMN and as estimated for pro forma adjustments to account for the PTMN/GARS Transaction, current HCAP Stockholders would own approximately 16.6% of the combined company immediately following the completion of the Mergers;
the combined company will be externally managed by Sierra Crest and is expected to have total assets in excess of $658 million, total investments of approximately $582 million and NAV in excess of $250.0 million (based on HCAP’s September 30, 2020 balance sheet and PTMN’s estimated October 31, 2020 balance sheet (with pro forma adjustments for the PTMN/GARS Transaction), not adjusted for transaction expenses);
following the Mergers, HCAP Stockholders are expected to benefit from (i) access to the full range of resources of Sierra Crest; (ii) investment opportunities originated through the BC Partners Credit platform; and (iii) the utilization of BC Partners’ broader resources, including relationships and institutional knowledge from over 30 years of private market investing;
the combined company’s investment portfolio following the Mergers will provide additional scale and portfolio diversification, which will position the combined company, among other things, to (i) capitalize on favorable market conditions; (ii) originate larger transactions with increased final hold positions; and (iii) enhance access to lower cost of capital from banks and capital market participants;
HCAP Stockholders of the combined company will have an ability to participate in the future growth of PTMN, including potential upside if shares of PTMN Common Stock trades higher in the future;
the Mergers are expected to deliver operational synergies for the combined company as a result of the larger scale and elimination of redundant HCAP expenses following the Mergers;
HCAP Stockholders are expected to realize net investment income per share accretion following the Closing;
the combined historical performance of HCAP and PTMN and expected ability of the combined entity to make future dividend payments to stockholders are expected to benefit HCAP Stockholders;
shares of PTMN Common Stock received in exchange for shares of HCAP Common Stock may be more liquid than HCAP Common Stock, given the increased size and diversification of the equity base of the combined company;
based on a review of PTMN, the belief that PTMN and BC Partners have shown the ability to successfully execute this type of merger transaction;
Sierra Crest, which serves as the investment adviser to PTMN, will serve as investment adviser to the combined company post-closing and, as a result, HCAP Stockholders who continue to hold shares of the combined company following the Closing will:
as compared to HCAP Advisors’ current 2.0% management fee on gross assets up to and including $350 million, benefit from a reduced base management fee under the PTMN Investment Advisory Agreement calculated at an annual rate of 1.50% of the combined company’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters; provided, however, that the base management fee under the PTMN Investment Advisory Agreement will be 1.00% of the combined
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company’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, that exceed the product of (i) 200% and (ii) the value of the combined company’s NAV at the end of the most recently completed calendar quarter; and
as compared to the current 20% income-based incentive fee and 20% capital gains fee under the HCAP Investment Advisory Agreement, benefit from PTMN’s 17.50% Income-Based Fee and 17.50% Capital Gains Fee under the PTMN Investment Advisory Agreement.
HCAP’s knowledge of PTMN’s business, operations, financial condition, earnings and prospects, taking into account the results of HCAP’s and HCAP Advisors’ business and legal due diligence review of PTMN’s operations, its portfolio companies and other corporate and financial matters and the review conducted by HCAP and HCAP Advisors uncovered no significant issues.
Opinion of the Financial Advisor to the HCAP Special Committee. The HCAP Special Committee received the opinion, dated December 23, 2020, of KBW to the HCAP Special Committee as to the fairness, from a financial point of view and as of the date of such opinion, to the holders of HCAP Common Stock, collectively as a group, of the Aggregate Merger Consideration in the First Merger, as more fully described below under The Mergers—Opinion of the Financial Advisor to the HCAP Special Committee.”
Terms of the Merger Agreement. The HCAP Special Committee and HCAP Board considered the terms and conditions of the Merger Agreement and the course of negotiations thereof, including:
the fact that the Merger Agreement is unlikely to unduly deter third parties from making unsolicited acquisition proposals given that:
the Merger Agreement does not preclude HCAP from responding to and negotiating with respect to certain unsolicited acquisition proposals from third parties made prior to the time that HCAP Stockholders approve the Mergers and the Merger Agreement if any such third party makes an unsolicited acquisition proposal that the HCAP Board determines in good faith, after consultation with its financial advisors and outside legal counsel, constitutes or could reasonably be expected to lead to a “superior proposal” (as defined in the Merger Agreement) and that the failure of the HCAP Board to respond to such superior proposal would reasonably be expected to be inconsistent with the fiduciary duties of the HCAP Board under the DGCL; and
if, prior to the time that HCAP Stockholders approve the Merger Agreement, the HCAP Board determines in good faith, after consultation with its financial advisor and outside legal counsel, that an unsolicited acquisition proposal constitutes a superior proposal, then, after complying with PTMN’s customary “matching rights,” the HCAP Board can terminate the Merger Agreement in order to substantially concurrently enter into a binding definitive agreement with respect to such superior proposal if the failure to do so would reasonably be expected to be inconsistent with its fiduciary duties under the DGCL, provided that, concurrently with such termination, HCAP will, at PTMN’s option, pay PTMN a termination fee of approximately $2.122 million or, in the event that HCAP shall have materially breached its obligations under the Merger Agreement, pay PTMN for damages subject to certain caps.
the fact that the Merger Agreement includes customary terms, including customary non-solicitation, closing and termination provisions;
the fact that the consideration and negotiation of the Merger Agreement was conducted through extensive arms-length negotiations under the oversight of the HCAP Special Committee, which is composed solely of the HCAP Independent Directors; and
the fact that the Merger Agreement includes a reciprocal termination fee of approximately $2.122 million, or approximately 3.5% of HCAP’s NAV as of September 30, 2020, which the HCAP Special Committee and HCAP Board believe is reasonable and would not preclude or substantially impede a possible superior proposal from being made, especially in light of the strategic alternatives review process undertaken by HCAP.
Risks and Potential Negative Factors. The HCAP Special Committee and HCAP Board considered the risks and potential negative factors relating to the Merger Agreement, including:
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the fact that changes in the NAV of HCAP and PTMN before the completion of the Mergers may affect the amount and composition of the Aggregate Merger Consideration to be received by HCAP Stockholders, and changes in the market price of PTMN Common Stock may affect the market value of the Total Stock Consideration to be received by HCAP Stockholders;
the restrictions in the Merger Agreement on HCAP’s ability to respond to and negotiate certain unsolicited acquisition proposals from third parties, the requirement that HCAP pay PTMN an approximate $2.122 million termination fee if the Merger Agreement is terminated under certain circumstances and the risk that such restrictions and termination fee may discourage third parties that might otherwise have an interest in a business combination with, or acquisition of, HCAP from making unsolicited acquisition proposals;
the fact that there can be no assurance that the combined company will succeed or otherwise achieve its projected financial results;
the possibility that the consummation of the Mergers may be delayed or not occur at all, and the possible significant adverse impact that such event would have on HCAP and its business;
the existence of restrictions on the conduct of HCAP’s business during the period between execution of the Merger Agreement and the closing thereof, which may delay or prevent HCAP from undertaking business opportunities that may arise during such time which, absent the Merger Agreement, HCAP might otherwise have pursued;
the potential disruption to HCAP’s business that may result from the announcement of the Mergers and the resulting distraction of management’s attention from day-to-day operation of the business;
the fact that the income-based incentive fee under the PTMN Investment Advisory Agreement is subject to a 1.75% quarterly hurdle rate as opposed to 2% under the HCAP Investment Advisory Agreement and is not subject to a three-year total return requirement similar to the provision included in the HCAP Investment Advisory Agreement;
the risk that HCAP Stockholders may vote down the Merger Proposal at the HCAP Special Meeting; and
the fact that HCAP will be required to pay termination fees to PTMN if the Merger Agreement is terminated under certain circumstances.
The foregoing list does not include all the factors that the HCAP Special Committee and the HCAP Board considered in approving the Mergers and the Merger Agreement and recommending that HCAP Stockholders approve the Merger Proposal.
Interests of Certain Persons Related to HCAP in the Mergers
HCAP Advisors is an affiliate of JMP Group, a full-service investment banking and asset management firm. JMP Group currently holds an equity interest in the Company and, through its subsidiaries, owns a majority equity interest in HCAP Advisors. JMP Group conducts its primary business activities through two wholly-owned subsidiaries: (i) Harvest Capital Strategies, LLC (“HCS”), an SEC-registered investment adviser that focuses on venture capital and real estate funds, middle-market lending and private equity; and (ii) JMP Securities, a full-service investment bank that provides equity research, institutional brokerage and investment banking services to growth companies and their investors. Joseph A. Jolson, HCAP’s Chief Executive Officer and Chairman of the HCAP Board, is also the Chief Executive Officer and Chairman of the board of directors of, and has a financial interest in, JMP Group. As described above, on October 16, 2020, the HCAP Special Committee, on behalf of HCAP, entered into the JMP Securities Agreement with JMP Securities in connection with work performed by JMP Securities at the direction of HCAP Advisors in connection with the Initial Strategic Evaluation Process. In consideration for the services covered by the JMP Securities Agreement, HCAP agreed to pay JMP Securities the JMP Fee. On November 6, 2020, HCAP paid JMP Securities $100,000 under the terms of the JMP Securities Agreement and, upon the consummation of the Mergers, will be required under the JMP Securities Agreement to pay JMP Securities an additional $250,000 in fulfillment of the remainder of the JMP Fee payable under the terms of the JMP Securities Agreement.
Concurrently with the parties’ entry into the Merger Agreement, PTMN also entered into the Voting Agreements with each of Mr. Jolson and certain entities controlled or influenced by Mr. Jolson, which
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collectively owned an aggregate of approximately 32.24% of the outstanding shares of HCAP Common Stock as of December 22, 2020. Pursuant to the Voting Agreements, these stockholders have agreed to vote their respective covered shares of HCAP Common Stock (i) in favor of the approval of the Merger Agreement and any other matters necessary for consummation of the other transactions contemplated by the Merger Agreement and any other action reasonably requested by PTMN in furtherance thereof and (ii) against (A) any action, proposal, agreement, recapitalization, reorganization, liquidation, dissolution, amalgamation, merger, sale of assets or other business combination or transaction between or involving HCAP and any other person that would reasonably be expected to impede, interfere with, delay, postpone or adversely affect the First Merger or any of the other transactions contemplated by the Merger Agreement, (B) any action or transaction that would result in a breach of any covenant, representation or warranty or other obligation or agreement of HCAP or any of its subsidiaries contained in the Merger Agreement, or of the relevant stockholder contained in the applicable Voting Agreement, (C) any amendment or other change to the HCAP Certificate of Incorporation or the HCAP Bylaws, and (D) any other material change in HCAP’s corporate structure or business. Prior to entry into the Voting Agreements, the HCAP Board adopted resolutions approving the Voting Agreements under Section 203 of the DGCL such that the restrictions on business combinations contained in Section 203 will not apply to the Mergers.
Concurrently with the parties’ entry into the Merger Agreement, HCAP also entered into the Jolson Letter Agreement with Mr. Jolson. Pursuant to the Jolson Letter Agreement, Mr. Jolson has agreed (i) to elect to receive shares of PTMN Common Stock as consideration in connection with the Mergers for all of the Jolson Shares, (ii) to not, directly or indirectly, transfer, sell, offer, exchange, assign, pledge, convey any legal or beneficial ownership interest in or otherwise dispose of, or encumber any of the Jolson Shares or enter into any contract, option, or other agreement with respect to, or consent to, a transfer of, any of the Jolson Shares or his voting or economic interest therein other than pursuant to the Merger Agreement and in connection with the Mergers during the period commencing on the date of the Jolson Letter Agreement and ending on the Closing Date and (iii) to not transfer any shares of the Locked Up Securities or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Locked Up Securities for 90 days following the Closing.
As disclosed above, Sierra Crest and HCAP Advisors have engaged in discussions regarding a transition services agreement pursuant to which HCAP Advisors would provide certain consulting services to Sierra Crest relating to HCAP’s existing investment portfolio subsequent to the Closing. As of the date hereof negotiations are still ongoing, but Sierra Crest and HCAP Advisors have discussed terms pursuant to which HCAP Advisors would receive, in exchange for its transition services, a [•] fee of $[•] for approximately [•] years, or $[•] million of aggregate payments, following the Closing.
The HCAP Board Recommendation
The HCAP Board, acting on the unanimous recommendation of the HCAP Special Committee, approved the Merger Agreement and the transactions contemplated thereby, including the Mergers, and recommends that HCAP Stockholders vote “FOR” the Merger Proposal and, if necessary or appropriate, “FOR” the HCAP Adjournment Proposal.
Opinion of the Financial Advisor to the HCAP Special Committee
The HCAP Special Committee engaged KBW to render financial advisory and investment banking services to the HCAP Special Committee, including an opinion to the HCAP Special Committee as to the fairness, from a financial point of view, to the holders of HCAP Common Stock, collectively as a group, of the Aggregate Merger Consideration in the First Merger. The HCAP Special Committee selected KBW because KBW is a nationally recognized investment banking firm with substantial experience in transactions similar to the transaction. As part of its investment banking business, KBW is regularly engaged in the valuation of business development company securities in connection with mergers and acquisitions.
As part of its engagement, representatives of KBW attended the meeting of the HCAP Special Committee held on December 23, 2020 at which the HCAP Special Committee evaluated the proposed transaction. At this meeting, KBW reviewed the financial aspects of the proposed transaction and rendered an opinion to the HCAP Special Committee to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW as set forth in
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such opinion, the Aggregate Merger Consideration in the First Merger was fair, from a financial point of view, to the holders of HCAP Common Stock, collectively as a group.
The description of the opinion set forth herein is qualified in its entirety by reference to the full text of the opinion, which is attached as Appendix B to this document and is incorporated herein by reference, and describes the procedures followed, assumptions made, matters considered, and qualifications and limitations on the review undertaken by KBW in preparing the opinion.
KBW’s opinion speaks only as of the date of the opinion. The opinion was for the information of, and was directed to, the HCAP Special Committee in connection with its consideration of the financial terms of the Mergers. The opinion addressed only the fairness, from a financial point of view, to holders of HCAP Common Stock, collectively as a group, of the Aggregate Merger Consideration in the First Merger. It did not address the underlying business decision of HCAP to engage in the Mergers or enter into the Merger Agreement or constitute a recommendation to the HCAP Special Committee or the HCAP Board in connection with the Mergers, and it does not constitute a recommendation to any holder of HCAP Common Stock or any stockholder of any other entity as to how to vote in connection with the Mergers or any other matter (including, with respect to holders of HCAP Common Stock, whether any HCAP Stockholder should make an Election), nor does it constitute a recommendation regarding whether or not any such stockholder should enter into a voting, stockholders’, or affiliates’ agreement with respect to the Mergers or exercise any dissenters’ or appraisal rights that may be available to such stockholder.
KBW’s opinion was reviewed and approved by KBW’s Fairness Opinion Committee in conformity with its policies and procedures established under the requirements of Rule 5150 of the Financial Industry Regulatory Authority.
In connection with the opinion, KBW reviewed, analyzed and relied upon material bearing upon the financial and operating condition of HCAP and PTMN and bearing upon the Mergers, including, among other things:
a draft of the Merger Agreement, dated December 22, 2020 (the most recent draft then made available to KBW);
the audited financial statements and Annual Reports on Form 10-K for the three fiscal years ended December 31, 2019 of HCAP;
the unaudited quarterly financial statements and Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 of HCAP;
the audited financial statements and Annual Reports on Form 10-K for the three fiscal years ended December 31, 2019 of PTMN;
the unaudited quarterly financial statements and Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 of PTMN;
certain other interim reports and other communications of HCAP and PTMN provided to their respective stockholders; and
certain other financial information concerning the businesses and operations of HCAP and PTMN that was furnished to KBW by HCAP and PTMN or KBW was otherwise directed to use for purposes of its analysis.
KBW’s consideration of financial information and other factors that it deemed appropriate under the circumstances or relevant to its analyses included, among others, the following:
the historical and current financial position and results of operations of HCAP and PTMN;
the assets and liabilities of HCAP and PTMN;
the nature and terms of certain other merger transactions and business combinations in the BDC industry;
a comparison of certain financial and stock market information for HCAP and PTMN with similar information for certain other companies the securities of which are publicly traded;
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financial and operating forecasts and projections of HCAP that were prepared by, and provided to KBW and discussed with KBW by HCAP management and that were used and relied upon by KBW at the direction of such management and with the consent of the HCAP Special Committee; and
publicly available consensus “street estimates” of PTMN (as adjusted by PTMN management in the case of 2021 net investment income), as well as assumed long-term PTMN growth rates provided to KBW by PTMN management, all of which information was discussed with KBW by PTMN management and used and relied upon by KBW based on such discussions, at the direction of HCAP management and with the consent of the HCAP Special Committee.
KBW also performed such other studies and analyses as it considered appropriate and took into account its assessment of general economic, market and financial conditions and its experience in other transactions, as well as its experience in securities valuation and knowledge of the BDC industry generally. KBW also participated in discussions that were held with the respective managements of HCAP, PTMN and Sierra Crest regarding the respective past and current business operations, regulatory relations, financial condition and future prospects of HCAP and PTMN and such other matters as KBW deemed relevant to its inquiry. In addition, KBW considered the results of the efforts undertaken by HCAP, with KBW’s assistance, to solicit indications of interest from third parties regarding a potential transaction with HCAP.
In conducting its review and arriving at its opinion, KBW relied upon and assumed the accuracy and completeness of all of the financial and other information that was provided to it or that was publicly available and did not independently verify the accuracy or completeness of any such information or assume any responsibility or liability for such verification, accuracy or completeness. KBW relied upon the management of HCAP as to the reasonableness and achievability of the financial and operating forecasts and projections of HCAP referred to above (and the assumptions and bases therefor), and KBW assumed that such forecasts and projections were reasonably prepared and represented the best currently available estimates and judgments of such management and that such forecasts and projections would be realized in the amounts and in the time periods estimated by such management. KBW further relied, with the consent of HCAP and the HCAP Special Committee, upon PTMN management as to the reasonableness and achievability of the publicly available consensus “street estimates” of PTMN (as adjusted by PTMN management in the case of 2021 net investment income) and the assumed long-term PTMN growth rates, all as referred to above (and the assumptions and bases for all such information), and KBW assumed that all such information was reasonably prepared and represented, or in the case of PTMN consensus “street estimates” referred to above that such estimates (as adjusted) represented reasonable estimates generally consistent with, the best currently available estimates and judgments of PTMN management and that the forecasts, projections and estimates reflected in such information would be realized in the amounts and in the time periods estimated.
It is understood that the portion of the foregoing financial information of HCAP and PTMN that was provided to KBW was not prepared with the expectation of public disclosure. It is further understood that all of the foregoing financial information, including the publicly available consensus “street estimates” of PTMN, was based on numerous variables and assumptions that are inherently uncertain (including, without limitation, factors related to general economic and competitive conditions and, in particular, assumptions regarding the ongoing COVID-19 pandemic) and, accordingly, actual results could vary significantly from those set forth in such information. KBW assumed, based on discussions with the respective managements of HCAP and PTMN, and with the consent of the HCAP Special Committee, that all such information provided a reasonable basis upon which KBW could form its opinion, and KBW expressed no view as to any such information or the assumptions or bases therefor. Among other things, such information assumed that the ongoing COVID-19 pandemic could have a significant adverse impact on HCAP and PTMN. KBW relied on all such information without independent verification or analysis and did not in any respect assume any responsibility or liability for the accuracy or completeness thereof.
KBW also assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of either HCAP or PTMN since the date of the last financial statements of each such entity that were made available to KBW. In rendering its opinion, KBW did not make or obtain any evaluations or appraisals or physical inspection of the property, assets or liabilities (contingent or otherwise) of HCAP or PTMN, the collateral securing any of such assets or liabilities, or the collectability of any such assets, nor did KBW examine any individual loan or credit files, nor did it evaluate the solvency, financial capability or fair value of HCAP or PTMN under any state or federal laws, including those relating to bankruptcy, insolvency
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or other matters. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold. Such estimates are inherently subject to uncertainty and should not be taken as KBW’s view of the actual value of any companies or assets.
KBW assumed, in all respects material to its analyses:
the Mergers and any related transactions would be completed substantially in accordance with the terms set forth in the Merger Agreement (the final terms of which KBW assumed would not differ in any respect material to its analyses from the draft reviewed by KBW and referred to above), with no adjustments to the Aggregate Merger Consideration and no other consideration or payments in respect of HCAP Common Stock;
the representations and warranties of each party in the Merger Agreement and in all related documents and instruments referred to in the Merger Agreement were true and correct;
each party to the Merger Agreement and all related documents would perform all of the covenants and agreements required to be performed by such party under such documents;
there were no factors that would delay or subject to any adverse conditions, any necessary regulatory or governmental approval for the Mergers or any related transaction and all conditions to the completion of the Mergers and any related transaction would be satisfied without any waivers or modifications to the Merger Agreement or any of the related documents; and
in the course of obtaining the necessary regulatory, contractual, or other consents or approvals for the Mergers and any related transaction, no restrictions, including any divestiture requirements, termination or other payments or amendments or modifications, would be imposed that would have a material adverse effect on the future results of operations or financial condition of HCAP, PTMN or the pro forma entity, or the Mergers.
KBW assumed that the Mergers would be consummated in a manner that complies with the applicable provisions of the Securities Act, the Exchange Act and all other applicable federal and state statutes, rules and regulations. KBW was further advised by representatives of HCAP that HCAP relied upon advice from its advisors (other than KBW) or other appropriate sources as to all legal, financial reporting, tax, accounting and regulatory matters with respect to HCAP, PTMN, the Mergers and any related transaction, and the Merger Agreement. KBW did not provide advice with respect to any such matters.
KBW’s opinion addressed only the fairness, from a financial point of view, as of the date of such opinion, to holders of HCAP Common Stock, collectively as a group, of the Aggregate Merger Consideration in the First Merger, without regard to any agreements that specific holders may enter into with PTMN with respect to whether such holders would receive the Cash Consideration or the Stock Consideration or the individual circumstances of specific holders with respect to control, voting or other rights or aspects which may distinguish such holders. KBW expressed no view or opinion as to any other terms or aspects of the Mergers or any term or aspect of any related transaction, including without limitation, the form or structure of the Mergers (including the form and structure of the aggregate merger consideration or the allocation thereof between cash and stock) or any such related transaction, any consequences of the Mergers or any such related transaction to HCAP, its stockholders, creditors or otherwise, or any terms, aspects, merits or implications of any employment, consulting, voting, support, shareholder, escrow or other agreements, arrangements or understandings contemplated or entered into in connection with the Mergers, or otherwise. KBW’s opinion was necessarily based upon conditions as they existed and could be evaluated on the date of the opinion and the information made available to KBW through the date of the opinion. There has been widespread disruption, extraordinary uncertainty and unusual volatility arising from the effects of the COVID-19 pandemic, including the effect of evolving governmental interventions and non-interventions. Developments subsequent to the date of KBW’s opinion may have affected, and may affect, the conclusion reached in KBW’s opinion and KBW did not and does not have an obligation to update, revise or reaffirm its opinion. At the direction of HCAP and without independent verification, KBW relied upon and assumed for purposes of its analyses and its opinion, that the Aggregate Cash Consideration would be approximately $16.9 million, the Total Stock Consideration would be approximately 14.9 million shares of Portman Ridge common stock, and the Per Share Cash Price would be $7.35. KBW expressed no view or opinion as to any changes after the date of its opinion to the net asset values, numbers of
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shares and other amounts on which the Aggregate Cash Consideration, the Total Stock Consideration and the Per Share Cash Price that KBW was directed to assume for purposes of its analyses and its opinion were based. KBW’s opinion did not address, and KBW expressed no view or opinion with respect to:
the underlying business decision of HCAP to engage in the Mergers or enter into the Merger Agreement;
the relative merits of the Mergers as compared to any strategic alternatives that are, have been or may be available to or contemplated by HCAP, the HCAP Special Committee or the HCAP Board;
the fairness of the amount or nature of any compensation to any of HCAP’s officers, directors or employees, or any class of such persons, relative to the compensation to the holders of HCAP Common Stock;
the effect of the Mergers or any related transaction on, or the fairness of the consideration to be received by, holders of any class of securities of HCAP (other than the holders of HCAP Common Stock, collectively as a group, solely with respect to the Aggregate Merger Consideration (as described in KBW’s opinion) and not relative to the consideration to be received by holders of any other class of securities) or holders of any class of securities of PTMN or any other party to any transaction contemplated by the Merger Agreement;
whether PTMN had sufficient cash, available lines of credit or other sources of funds to enable it to pay the Aggregate Cash Consideration to the holders of HCAP Common Stock at the Closing;
whether Sierra Crest had sufficient cash, available lines of credit or other sources of funds to enable it to pay the Additional Cash Consideration to the holders of HCAP Common Stock;
any elections by holders of HCAP Common Stock to receive Cash Consideration in lieu of Stock Consideration or the actual allocation between cash and stock among such holders (including, without limitation, any reallocation thereof as a result of proration pursuant to the Merger Agreement), or the relative fairness of the Cash Consideration and the Stock Consideration;
the actual value of PTMN Common Stock to be issued in the First Merger;
the prices, trading range or volume at which PTMN Common Stock or HCAP Common Stock would trade following the public announcement of the Mergers (including the PTMN Per Share Price) or the prices, trading range or volume at which PTMN Common Stock would trade following the consummation of the Mergers;
any advice or opinions provided by any other advisor to any of the parties to the Merger Agreement or any other transaction contemplated by the Merger Agreement; or
any legal, regulatory, accounting, tax or similar matters relating to HCAP, PTMN, their respective stockholders, or relating to or arising out of or as a consequence of the Mergers or any related transaction, including whether or not the Mergers would qualify as a tax-free reorganization for United States federal income tax purposes.
In performing its analyses, KBW made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of KBW, HCAP and PTMN. Any estimates contained in the analyses performed by KBW are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, the KBW opinion was among several factors taken into consideration by the HCAP Special Committee in making its determination to recommend the approval by the HCAP Board of the Merger Agreement and the Mergers. Consequently, the analyses described below should not be viewed as determinative of the decision of Special Committee with respect to the fairness of the Aggregate Merger Consideration. The type and amount of consideration payable in the First Merger were determined through negotiation between HCAP and PTMN and the decision of HCAP to enter into the Merger Agreement was solely that of the HCAP Special Committee and the HCAP Board.
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The following is a summary of the material financial analyses presented by KBW to the HCAP Special Committee in connection with its opinion. The summary is not a complete description of the financial analyses underlying the opinion or the presentation made by KBW to the HCAP Special Committee, but summarizes the material analyses performed and presented in connection with such opinion. The financial analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex analytic process involving various determinations as to appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, KBW believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion.
Implied Transaction Value for the Mergers. KBW calculated an implied transaction value for the proposed transaction of $45.9 million in the aggregate, or $7.71 per share of HCAP Common Stock, based on an assumed Aggregate Cash Consideration of $16.9 million, the Additional Cash Consideration of $2.15 million and the implied value of an assumed Total Stock Consideration of approximately 14.9 million shares of PTMN Common Stock using the closing price of PTMN Common Stock on December 22, 2020. This implied transaction value for the proposed transaction was used to calculate implied transaction multiples and those multiples were compared to the ranges of multiples found in the financial analyses described below.
Selected Companies Analysis. Using publicly available information, KBW compared the market performance of HCAP to seven selected publicly traded, externally managed business development companies with market capitalizations less than $150 million, excluding PTMN and growth/total return business development companies.
The selected companies with market capitalizations less than $150 million were as follows:
Oxford Square Capital Corp.
First Eagle Alternative Capital BDC, Inc.
OFS Capital Corporation
Medley Capital Corporation
Investcorp Credit Management BDC Inc.
Great Elm Capital Corp.
Capitala Finance Corp.
Using publicly available information, KBW also compared the market performance of PTMN to the above seven selected companies and an additional 11 selected publicly traded, externally managed business development companies with market capitalizations greater than $150 million and less than $300 million, excluding growth/total return business development companies.
The additional 11 selected companies were as follows:
PennantPark Investment Corporation
Oaktree Strategic Income Corporation
Gladstone Capital Corporation
Stellus Capital Investment Corporation
WhiteHorse Finance, Inc.
BlackRock Capital Investment Corporation
Solar Senior Capital Ltd.
Monroe Capital Corporation
Horizon Technology Finance Corporation
MVC Capital, Inc.
Saratoga Investment Corp.
 
To perform this analysis, KBW used market price information as of December 22, 2020 and reported NAV per share data as of the end of the most recent completed quarterly period available (which in the case of HCAP was September 30, 2020), except that the NAV per share data for PTMN was as of October 31, 2020 and reflected the PTMN/GARS Transaction, which was completed on October 28, 2020. KBW also used most recent
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quarter annualized (“MRQ annualized”) net investment income per share (“NII”) for HCAP, PTMN and the selected companies and calendar years 2020 and 2021 earnings per share estimates (“EPS”) taken from consensus “street estimates” of HCAP, PTMN and the selected companies.
KBW’s analysis showed the following concerning the market performance of HCAP and the seven selected companies with market capitalizations less than $150 million (excluding the impact of the MRQ annualized NII multiple for one of the selected companies, the calendar year 2020 EPS multiples for all of the selected companies and the calendar year 2021 EPS multiple for one of the selected companies, which multiples were considered to be not meaningful (“NM”)), as well as the corresponding transaction multiples of the proposed transaction based on the implied transaction value for the proposed transaction of $7.71 per share of HCAP Common Stock and using historical financial information for HCAP as of and for the three-month period (annualized) ended September 30, 2020:
 
 
 
Selected Companies – Market Capitalization Less than $150M
 
HCAP
Proposed
Transaction
Low
25th
Percentile
Average
Median
75th
Percentile
High
Price / NAV per share
0.58x
0.76x
0.36x
0.55x
0.60x
0.58x
0.68x
0.78x
Price / MRQ annualized NII
10.3x
13.4x
5.7x
8.6x
9.4x
9.0x
10.5x
13.3x
Price / 2020 EPS
NM
 
NM
NM
NM
NM
NM
NM
Price / 2021 EPS
19.4x
 
5.7x
8.3x
9.6x
9.2x
9.5x
16.1x
KBW’s analysis also showed the following concerning the market performance of PTMN and all 18 selected companies with market capitalizations less than $300 million (excluding the impact of the MRQ annualized NII multiple for one of the selected companies, the calendar year 2020 EPS multiples for 13 of the selected companies, and the calendar year 2021 EPS multiple for one of the selected companies, which multiples were considered to be not meaningful):
 
 
All Selected Companies
 
PTMN
Low
25th
Percentile
Average
Median
75th
Percentile
High
Price / NAV per share
0.65x
0.36x
0.59x
0.75x
0.76x
0.86x
1.19x
Price / MRQ annualized NII
7.4x
5.7x
8.7x
12.2x
10.3x
11.7x
46.1x
Price / 2020 EPS
NM
9.6x
10.7x
18.0x
20.9x
24.1x
24.5x
Price / 2021 EPS
6.7x
5.7x
8.1x
10.9x
9.8x
12.0x
25.2x
KBW then applied a range of price-to-NAV per share multiples of 0.5x to 0.7x derived from the 25th percentile and 75th percentile multiples of the selected companies with market capitalizations less than $150 million to the September 30, 2020 NAV per share of HCAP and a range of price-to-MRQ annualized NII multiples of 8.6x to 10.5x derived from the 25th percentile and 75th percentile multiples of the selected companies with market capitalizations less than $150 million to the net investment income per share of HCAP for the three-month period ended September 30, 2020 annualized. This analysis indicated the following ranges of the implied value per share of HCAP Common Stock, as compared to the implied transaction value for the proposed transaction of $7.71 per outstanding share of HCAP Common Stock:
 
Implied Value Per Share Ranges
of HCAP Common Stock
Based on NAV per share of HCAP as of September 30, 2020
$5.55 to $6.95
Based on annualized NII per share of HCAP for the 3-month period ended September 30, 2020
$4.92 to $6.00
No company used as a comparison in the above selected companies analysis is identical to HCAP or PTMN. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved.
Selected Transactions Analysis – Business Development Companies. KBW reviewed publicly available information related to 20 selected acquisitions of business development companies announced since April 2009, referred to as the selected BDC transactions.
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The selected BDC transactions were as follows:
Acquirer
Acquired Company
FS KKR Capital Corp.
FS KKR Capital Corp. II
Oaktree Specialty Lending Corp
Oaktree Strategic Income Corp
Barings BDC, Inc.
MVC Capital, Inc.
PTMN
GARS
Goldman Sachs BDC, Inc.
Goldman Sachs Middle Market Lending Corp.
Crescent Capital BDC, Inc.
Alcentra Capital Corp.
PTMN
OHA Investment Corporation
East Asset Management, LLC
Rand Capital Corporation
Golub Capital BDC, Inc.
Golub Capital Investment Corporation
FS Investment Corporation
Corporate Capital Trust, Inc.
Benefit Street Partners LLC; Barings
Triangle Capital Corporation
TCG BDC, Inc.
NF Investment Corp.
CĪON Investment Corporation
Credit Suisse Park View BDC, Inc.
MAST Capital Management LLC; Great Elm Capital Group Inc.
Full Circle Capital Corporation
Ares Capital Corporation
American Capital, Ltd.
PennantPark Floating Rate Capital Ltd.
MCG Capital Corporation
Saratoga Investment Corp.
GSC Investment Corp.
Ares Capital Corporation
Allied Capital Corporation
Prospect Capital Corporation
Patriot Capital Funding, Inc.
Highland Credit Strategies Fund
Highland Distressed Opportunities, Inc.
For each selected BDC transaction, KBW derived the following implied transaction statistics, in each case based on the transaction consideration value paid for the acquired company (including contributions by external managers) and using financial data based on the acquired company’s then latest publicly available financial statements prior to the announcement of the respective transaction (adjusted to reflect announced pre-closing adjustments):
Price to NAV per share of the acquired company; and
Price to latest 12 months net investment income per share of the acquired company.
KBW also reviewed the price per common share paid for the acquired company for the 16 selected BDC transactions involving publicly traded acquired companies as a premium/(discount) to the closing price of the acquired company one day and 30 days prior to the announcement of the acquisition (expressed as percentages and referred to as the one-day market premium and the 30-day market premium). The resulting transaction multiples and premiums for the selected BDC transactions were compared with the corresponding transaction multiples and premiums of the proposed transaction based on the implied transaction value for the proposed transaction of $7.71 per share of HCAP Common Stock and using historical financial information for HCAP as of and for the 12-month period ended September 30, 2020 and the closing prices of HCAP Common Stock on December 21, 2020 and November 20, 2020.
KBW’s analysis showed the following concerning the proposed transaction and the selected BDC transactions (excluding the impact of the price-to-LTM net investment income per share of three of the selected BDC transactions, which multiples were considered to be not meaningful because they were either negative or greater than 35.0x):
 
 
Selected BDC Transactions
 
Proposed
Transaction
Low
25th
Percentile
Average
Median
75th
Percentile
High
Price / NAV Per Share
75.8%
40.0%
61.7%
80.3%
80.7%
100.0%
117.0%
Price / LTM NII Per Share
14.3x
2.4x
5.5x
8.7x
9.6x
10.7x
13.5x
One-Day Premium
37.1%
(39.9)%
0.9%
31.8%
24.4%
36.6%
222.0%
30-Day Premium
155.2%
(22.3)%
(6.0)%
32.8%
22.5%
33.3%
162.7%
67

TABLE OF CONTENTS

KBW’s analysis also showed the following concerning the proposed transaction and the 13 selected BDC transactions involving non-affiliates (excluding the impact of the price-to-LTM net investment income per share of three of the selected transactions, which multiples were considered to be not meaningful because they were either negative or greater than 35.0x), 12 of which transactions involved publicly traded acquired companies:
 
 
Selected BDC Transactions Involving Non-Affiliates
 
Proposed
Transaction
Low
25th
Percentile
Average
Median
75th
Percentile
High
Price / NAV Per Share
75.8%
40.0%
60.9%
77.3%
78.2%
99.9%
107.8%
Price / LTM NII Per Share
14.3x