As an internally managed business development company ("BDC"), our activities include our middle market investment business which we conduct under the KCAP Financial name and the asset management business of Katonah Debt Advisors and Trimaran, our wholly owned portfolio company.
Our investment objective is to generate current income and capital appreciation primarily from the investments made by our middle market business in senior secured term loans, mezzanine debt and selected equity investments in middle market companies. We may invest up to 30% of our capital in other investments such as loans to larger, publicly-traded companies, high-yield bonds, distressed debt securities and debt and equity securities issued by CLO Funds.
We also expect to receive distributions of recurring fee income and to generate capital appreciation from our investment in the asset management business of Katonah Debt Advisors.
Middle Market Business
The middle market offers substantial opportunities for investment in debt securities with excellent risk adjusted returns. We define the middle market as companies with between $7.5 and $50 million of EBITDA. At the lower end of the middle market ($7.5 to 25 million of EBITDA), most transactions are done on a relationship basis. Larger middle market transactions often can be purchased in the syndicated loan market, but are also purchased from some of the same relationship lenders. The overall middle market is characterized by: $200 billion in annual M&A volume with more than 3,000 transactions per year of less than $250 million, more than 100 new middle market LBO's per annum, annual senior debt volume in excess of $40 billion, and attractive interest rate spreads and pricing. Our strategy is to focus primarily on term loans with a limited number of participants in the lower end of the middle market, as they have better risk adjusted returns and more conservative debt structures. As a result, we have a rigorous credit underwriting process and a thorough credit monitoring program which includes: analyzing company performance under stress case assumptions to assess covenant compliance and liquidity, assessing both enterprise and asset values to understand loan recovery options, requiring monthly financial reporting from portfolio companies, and maintaining frequent dialogue with managements and equity sponsors. Our investment activities target the following: companies with EBITDA of $7.5-$50 million, companies with a history of generating consistent flows, management teams with demonstrated track records and aligned incentives, companies with identifiable and defendable market positions in industries with positive dynamics, and loans with appropriate structural protection in credit documentation.
Katonah Debt Advisors/ Trimaran Advisors
Our 100% owned portfolio companies, Katonah Debt Advisors (KDA) and Trimaran Advisors, are asset managers that manage CLO Funds investing in broadly syndicated senior loans, second lien loans, high-yield bonds, credit default swaps and other credit instruments and has over $3.4 billion in assets currently under management.
KDA structures and sponsors CLO Funds for which it serves as the asset manager and invests in syndicated term loans, high-yield bonds (rated lower than Baa3 by Moody's or lower than BBB- by Standard & Poor's) and credit default swaps.
See also: Katonah Debt Advisors
Kohlberg & Co. has also granted us a royalty-free license to use the "Kohlberg" name, which we believe is one of the most widely recognized names in middle market investing.