Transactions with Related Parties |
6 Months Ended | |||||||||
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Jun. 30, 2025 | ||||||||||
| Transactions with Related Parties [Abstract] | ||||||||||
| Transactions with Related Parties |
Note 6. Transactions with Related Parties
Star Mountain Lower Middle-Market (Offshore) Ltd. (the “Feeder Fund”) was formed as a Cayman Islands exempted company and commenced operations on August 17, 2021. The
Feeder Fund has been formed to invest all or substantially all of its investable assets in the common stock of the Company. As of June 30, 2025 and December 31, 2024, the Feeder Fund had $46,488,800 and $46,488,800 in capital committed to the Company, respectively,
and an ownership percentage in the Company of 16.38% and 17.02%, respectively.
Management Fees
The Company has entered into an investment advisory agreement with the Advisor (as amended and restated, the “Investment Advisory Agreement”), under which the Advisor,
subject to the overall supervision of the Board, provides investment advisory services to the Company. The Company pays the Advisor a fee for its services under the Investment Advisory Agreement consisting of two components – a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee are borne by the Company’s
Stockholders, unless such fees are waived by the Advisor.
The
Company pays the Advisor a base management fee of 1.25% per annum of the average of the Company’s total gross assets (excluding cash
or cash equivalents but including assets purchased with borrowed amounts) as of the end of each of the two most recently completed calendar quarters.
Management fees for the three and six months ended June 30, 2025 were $1,173,157
and $2,360,804, respectively. For the three and six months ended June 30, 2025, the Advisor elected to voluntarily waive $0 and $0, respectively, of such
management fees. Management fees for the three and six months ended June 30, 2024 were $1,076,579 and $2,228,646, respectively.
The management fees waived are not recoupable by the Advisor. There is no guarantee that the Advisor will waive management fees in the future, and the Advisor may
discontinue or modify any such waivers in the future at its discretion. As of June 30, 2025 and December 31, 2024, $1,460,804 and $1,157,509 of management fees remained payable, respectively.
Incentive Fees
The incentive fee (“Incentive Compensation”) consists of two
parts. The first component of the income incentive fee is payable quarterly in arrears. The Income Incentive Fee will be determined by comparing the Company’s pre-incentive fee net investment income for the preceding quarter. Pre-incentive fee
net investment income means interest income, dividend income, PIK interest and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from
portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee), any expenses payable under the administration agreement
(the “Administration Agreement”) between the Company and the Administrator and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income will include, in
the case of investments with a deferred interest feature such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero-coupon securities, accrued income that the Company has not yet received in cash. The Advisor is not under any obligation to reimburse the Company for any part of the incentive fee it receives that was based
on accrued interest that the Company never actually receives.
Pre-incentive fee net investment income does not include any realized capital gains or losses or unrealized capital gains or losses. If any distributions from
portfolio companies are characterized as a return of capital, such returns of capital would affect the capital gains incentive fee to the extent a gain or loss is realized. Because of the structure of the incentive fee, it is possible that the
Company may pay an incentive fee in a quarter where it incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, the Company will pay the applicable
incentive fee even if it has incurred a loss in that quarter due to realized and unrealized capital losses.
Pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before
taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 1.75% per quarter (7% annually).
Under the Investment Advisory Agreement, the Company pays the Advisor an incentive fee with respect to its pre-incentive fee net investment income in each calendar
quarter as follows:
These calculations
are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of
the incentive fee is a capital gains incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date). Under the Investment Advisory
Agreement, the Capital Gains Incentive Fee is 17.5% of cumulative realized capital gains as of the end of the fiscal year.
In determining the
capital gains incentive fee payable to the Advisor, the Company calculates the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since the Company’s inception, and the aggregate unrealized capital
depreciation as of the date of the calculation, as applicable, with respect to each of the investments in the Company’s portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the
net sales price of each investment, when sold, and the amortized cost of such investment. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the
amortized cost of such investment since the Company’s inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the
amortized cost of such investment. At the end of the applicable year, the amount of capital gains that will serve as the basis for the calculation of the capital gains incentive fee equals the cumulative aggregate realized capital gains less
cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to the Company’s portfolio of investments. If this number is positive at the end of such year, then the capital gains incentive fee for such
year equals 17.5% of such amount, less the aggregate amount of any capital gains incentive fees paid in respect of the Company’s
portfolio in all prior years.
While the Investment Advisory Agreement with the Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains
incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee
expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to the Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the
Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
Incentive fees for the three and six months ended June 30, 2025 were $1,275,636
and $2,142,038, respectively. For the three and six months ended June 30, 2025, the Advisor elected to voluntarily waive $0 and $0 of such incentive fees,
respectively. Incentive fees for the three and six months ended June 30, 2024 were $1,118,488 and $2,344,006, respectively. The incentive fees waived for the period ended June 30, 2025 are not recoupable and there is no guarantee that the Advisor will
waive incentive fees in the future. The Advisor may discontinue or modify any such waivers in the future at its discretion. As of June 30, 2025 and December 31, 2024, $4,955,762 and $2,813,724, respectively, of incentive fees remained payable as
shown in the Consolidated Statements of Assets and Liabilities.
Administration Fees
The Company has entered into the Administration Agreement with the Advisor, under which the Company reimburses the Administrator for its allocable portion of overhead
and other expenses, including the costs of furnishing the Company with office facilities and equipment and providing clerical, bookkeeping, record-keeping and other administrative services at such facilities, and the Company’s allocable portion of
the cost of the chief financial officer and chief compliance officer and their respective staffs. To the extent that the Administrator outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis,
without incremental profit, to the Administrator. For the three and six months ended June 30, 2025, the Company incurred reimbursement expenses of $156,006
and $336,381, respectively, included under General and Administrative fees on the Consolidated Statements of Operations. For the three
and six months ended June 30, 2024, the Company incurred reimbursement expenses of $84,503 and $125,809, respectively, included under General and Administrative fees on the Consolidated Statements of Operations. As of June 30, 2025 and December 31, 2024, $156,006 and $77,275, respectively, of
reimbursement expense was payable as shown in the Consolidated Statements of Assets and Liabilities as reimbursement expense payable.
The Administrator has entered into a sub-administration agreement with SS&C Technologies, Inc. (the “Sub-Administrator”), under which the Sub-Administrator
provides various accounting and administrative services to the Company. Administrative services may include maintenance of the Company’s books and records, processing of investor transactions, and calculation of the NAV. For the three and six
months ended June 30, 2025, the Company incurred expenses for services provided by the Sub-Administrator of $202,303 and $445,861, respectively, which is included in professional fees on the Consolidated Statements of Operations. For the three and six months ended June 30,
2024, the Company incurred expenses for services provided by the Sub-Administrator of $186,606 and $354,042, respectively, which is included in professional fees on the Consolidated Statements of Operations. As of June 30, 2025 and December 31, 2024,
there were $202,303 and $0
payable, respectively, for expenses incurred for services provided by the Sub-Administrator.
Directors’ Fees
The Company incurs certain fees and expenses paid to the Company’s independent directors (including expenses and costs related to meetings of the independent
directors); for the three and six months ended June 30, 2025, directors’ expenses are $35,000 and $70,000, respectively, as shown on the Consolidated Statements of Operations. For the three and six months ended June 30, 2024, directors’ expenses are $23,620 and $47,240, respectively, as
shown on the Consolidated Statements of Operations. As of June 30, 2025 and December 31, 2024, $35,000 and $35,000 of directors’ expenses remained payable, respectively, which are included in professional fees payable as shown on the Consolidated Statements of
Assets and Liabilities.
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