Great Elm Capital Corp (GECC) has made it clear they are serious about entering the world of Collateralized Loan Obligations (CLOs). In their recent Q1 2024 earnings call [Source: Seeking Alpha GECC Earnings Call Transcript](https://seekingalpha.com/symbol/GECC), they unveiled a new joint venture aimed at snatching up CLO entities and related warehouse facilities, promising "sizable distributions" starting in the latter half of 2024. Ambitious, yes, but the CLO market is already teeming with hungry capital. How does Great Elm plan to stand out from the crowd? The answer, it seems, lies partly hidden within the call transcript: a mysterious strategic partner.

This unnamed entity holds a 25% stake in the joint venture, while GECC controls a dominant 75%. While details are scant, CEO Matt Kaplan describes them as "involved in the CLO business" and hints at a "strategic relationship" that has been nurtured over time. This partner's identity remains shrouded in secrecy, leaving analysts and investors alike to speculate on their potential role and the competitive advantage they bring to the table.

The key question is: does this partner hold the key to unlocking lucrative CLO deals that others can't access? Let's delve into the possibilities.

One compelling hypothesis is that this partner is an established CLO manager with a strong track record and deep relationships within the broadly syndicated loan market. Such a partnership would grant GECC instant credibility and access to a deal flow that would be otherwise difficult to cultivate. Imagine a seasoned CLO veteran, armed with years of experience and a network of lenders, guiding GECC through the complex world of CLO structuring and investing.

Alternatively, this mystery partner could be a major institutional investor, perhaps a pension fund or an insurance company, seeking exposure to CLOs. Such investors often prefer to partner with experienced managers, and GECC, despite being relatively new to the CLO space, has a proven track record in managing credit investments and generating attractive returns. This scenario suggests a dynamic where the partner provides not just capital, but also valuable industry insights and risk management expertise.

The potential impact of this partnership is significant. GECC's initial CLO investment was a modest $10.8 million, representing less than 4% of their pro forma assets. However, Kaplan emphasizes the potential for growth, envisioning a future where CLOs become a much larger portion of their portfolio.

GECC's Financial Performance

The financial data reveals a compelling story: GECC's total investment income in Q4 2023 reached $9.2 million, and their full-year cash income exceeded $30 million, a record high for the company. This strong performance, coupled with the recent $24 million equity raise and the anticipated distributions from the CLO JV, suggests GECC is in a prime position to aggressively expand their CLO portfolio.

The numbers speak for themselves. If GECC successfully leverages their strategic partnership to secure attractive CLO deals, generating their projected mid-teens to low 20% returns, they could see a substantial increase in both NII and NAV. This, in turn, would solidify their ability to cover their current dividend and potentially lead to further special distributions in the future.

Projected NII Growth

The chart below illustrates GECC's projected NII growth based on information provided in the Q1 2024 Earnings Call. Note that these projections are based on assumptions and may not reflect actual results.

While the identity of GECC's partner remains a puzzle, the evidence points to a strategic move that could propel them to a leading position in the CLO market. This alliance, forged in the shadows, might just be the ace up their sleeve, allowing them to outmaneuver the competition and capitalize on the lucrative world of CLOs.

The coming quarters will be crucial. Will GECC disclose the name of their partner? Will the "sizable distributions" materialize as promised? And will this mysterious entity prove to be the catalyst for their CLO ambitions? For investors seeking a potential hidden gem in the BDC landscape, Great Elm Capital Corp is a company to watch closely.

"Fun Fact: The term "CLO" stands for Collateralized Loan Obligation. It's a type of structured credit product that pools together a large number of corporate loans and then slices them into different tranches based on their risk and return profiles."