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PART IV

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K




ý

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 20112012

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



Commission File Number 
Exact name of registrant as specified in their charters, addresses of principal executive offices,
telephone numbers and states or other jurisdictions of incorporation or organization
 I.R.S. Employer Identification Number
814-00839 New Mountain Finance Holdings, L.L.C.
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware
 26-3633318

814-00832

 

New Mountain Finance Corporation
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware

 

27-2978010

814-00902

 

New Mountain Finance AIV Holdings Corporation
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware

 

80-0721242



Securities registered pursuant to Section 12(b) of the Act:

Registrant
 Title of each class Name of each exchange on which registered
New Mountain Finance Holdings, L.L.C. None None
New Mountain Finance Corporation Common stock, $0.01 par value The New York Stock Exchange
New Mountain Finance AIV Holdings Corporation None None

Securities registered pursuant to Section 12(g) of the Act:

Registrant
 Title of each class
New Mountain Finance Holdings, L.L.C. Common membership units
New Mountain Finance Corporation None
New Mountain Finance AIV Holdings Corporation Common stock, $0.01 par value



             Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

New Mountain Finance Holdings, L.L.C. Yes o    No ý  
New Mountain Finance Corporation Yes o    No ý  
New Mountain Finance AIV Holdings Corporation Yes o    No ý  

             Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

New Mountain Finance Holdings, L.L.C. Yes o    No ý  
New Mountain Finance Corporation Yes o    No ý  
New Mountain Finance AIV Holdings Corporation Yes o    No ý  

             Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

New Mountain Finance Holdings, L.L.C. Yes ý    No o  
New Mountain Finance Corporation Yes ý    No o  
New Mountain Finance AIV Holdings Corporation Yes ý    No o  

             Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

New Mountain Finance Holdings, L.L.C. Yes o    No o  
New Mountain Finance Corporation Yes o    No o  
New Mountain Finance AIV Holdings Corporation Yes o    No o  

             Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

New Mountain Finance Holdings, L.L.C. ý  
New Mountain Finance Corporation ýo  
New Mountain Finance AIV Holdings Corporation ý  

             Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

New Mountain Finance Holdings, L.L.C. Large accelerated filero Accelerated fileroý
  Non-accelerated filerýSmaller reporting company o

New Mountain Finance Corporation


Large accelerated filero


Accelerated filero
Non-accelerated filerý Smaller reporting companyo

New Mountain Finance AIV Holdings Corporation

 

Large accelerated filero

 

Accelerated fileroý
  Non-accelerated fileroSmaller reporting companyo
New Mountain Finance AIV Holdings CorporationLarge accelerated fileroAccelerated filerý
Non-accelerated filero Smaller reporting companyo

             Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

New Mountain Finance Holdings, L.L.C. Yes o    No ý  
New Mountain Finance Corporation Yes o    No ý  
New Mountain Finance AIV Holdings Corporation Yes o    No ý  

             There is no established market for New Mountain Finance AIV Holdings Corporation's shares of common stock. Additionally, there is no established market for New Mountain Finance Holdings, L.L.C.'s common membership units.

             The aggregate market value of common stock held by non-affiliates of the publicallypublicly traded registrant, New Mountain Finance Corporation, on June 30, 201129, 2012 based on the closing price on that date of $12.70$14.19 on the New York Stock Exchange was $95.1$119.3 million. For the purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.

Registrant
 Description Shares / Units as of March 7, 20126, 2013 

New Mountain Finance Holdings, L.L.C.

 Common membership units  30,919,62940,578,352 

New Mountain Finance Corporation

 Common stock, $0.01 par value  10,697,69124,356,414 

New Mountain Finance AIV Holdings Corporation

 Common stock, $0.01 par value  100 

             This combined Form 10-K is filed separately by three registrants: New Mountain Finance Holdings, L.L.C., New Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation (collectively, the "New Mountain Finance Registrants"). Information contained herein relating to any New Mountain Finance Registrant is filed by such registrant solely on its own behalf. Each New Mountain Finance Registrant makes no representation as to information relating exclusively to the other registrants.

             Portions of the New Mountain Finance Registrants' Joint Proxy Statement for their joint 20122013 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on this combined Form 10-K are incorporated by reference into Part III on this combined Form 10-K.

   


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FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20112012
TABLE OF CONTENTS

 
  
 PAGE

PART I

  

Item 1.

 

Business

 1

Item 1A.

 

Risk Factors

 2624

Item 1B.

 

Unresolved Staff Comments

 5957

Item 2.

 

Properties

 5957

Item 3.

 

Legal Proceedings

 5957

Item 4.

 

Mine Safety Disclosures

 5957

PART II

  

Item 5.

 

Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 6058

Item 6.

 

Selected Financial Data

 6463

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 6667

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 8589

Item 8.

 

Financial Statements and Supplementary Data

 8690

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 148156

Item 9A.

 

Controls and Procedures

 148156

Item 9B.

 

Other Information

 148158

PART III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

 149159

Item 11.

 

Executive Compensation

 149159

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 149159

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 149159

Item 14.

 

Principal Accountant Fees and Services

 149159

PART IV

  

Item 15.

 

Exhibits and Financial Statement Schedules

 150160

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PART I

        The information in this combined Form 10-K relates to each of the three separate registrants: New Mountain Finance Holdings, L.L.C., New Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation (collectively, "we", "us", "our" or the "Companies"). Information that relates to an individual registrant will be specifically referenced to the respective company. None of the Companies make any representation as to the information related solely to the other registrants other than itself.

Item 1.    Business

New Mountain Finance Holdings, L.L.C.

        New Mountain Finance Holdings, L.L.C. ("NMF Holdings", the(the "Operating Company" or the "Master Fund") is a Delaware limited liability company. NMF HoldingsThe Operating Company is externally managed and has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). As such, NMF Holdingsthe Operating Company is obligated to comply with certain regulatory requirements. NMF HoldingsThe Operating Company intends to be treated as a partnership for federal income tax purposes for so long as it has at least two members.

        NMF HoldingsThe Operating Company is externally managed by New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser"). New Mountain Finance Administration, L.L.C. (the "Administrator") provides the administrative services necessary for operations. The Investment Adviser and Administrator are wholly-owned subsidiaries of New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates). New Mountain Capital is a firm with a track record of investing in the middle market and with assets under management (which includes amounts committed, not all of which have been drawn down and invested to date) totaling approximately $9.0 billion as of December 31, 2011.2012. New Mountain Capital focuses on investing in defensive growth companies across its private equity, public equity, and credit investment vehicles. NMF Holdings,The Operating Company, formerly known as New Mountain Guardian (Leveraged), L.L.C., was originally formed as a subsidiary of New Mountain Guardian AIV, L.P. ("Guardian AIV") by New Mountain Capital in October 2008. Guardian AIV was formed through an allocation of approximately $300.0 million of the $5.1 billion of commitments supporting New Mountain Partners III, L.P., a private equity fund managed by New Mountain Capital. In February 2009, New Mountain Capital formed a co-investment vehicle, New Mountain Guardian Partners, L.P., comprising $20.4 million of commitments. New Mountain Guardian (Leveraged), L.L.C. and New Mountain Guardian Partners, L.P., together with their respective direct and indirect wholly-owned subsidiaries, are defined as the "Predecessor Entities".

New Mountain Finance Corporation

        New Mountain Finance Corporation ("New Mountain Finance"NMFC") is a Delaware corporation that was originally incorporated on June 29, 2010. New Mountain FinanceNMFC is a closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. As such, New Mountain FinanceNMFC is obligated to comply with certain regulatory requirements. New Mountain Finance intendsNMFC has elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") commencing with its taxable year ended December 31, 2011..

        On May 19, 2011, New Mountain FinanceNMFC priced its initial public offering (the "IPO") of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the IPO and at the public offering price of $13.75 per share, New Mountain FinanceNMFC sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in a concurrent private placement (the "Concurrent Private Placement"). Additionally, 1,252,964 shares were issued to the limited partners of New Mountain Guardian Partners, L.P. at that time for their ownership interest in the Predecessor Entities.


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New Mountain Finance AIV Holdings Corporation

        New Mountain Finance AIV Holdings Corporation ("AIV Holdings") is a Delaware corporation that was originally incorporated on March 11, 2011. Guardian AIV, a Delaware limited partnership, is AIV Holdings' sole stockholder. AIV Holdings is a closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. As such, AIV Holdings is obligated to comply with certain regulatory requirements. AIV Holdings intendshas elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a RIC under the Code commencing with its taxable year ended December 31, 2011.Code.

Structure

        In connection with New Mountain Finance'sNMFC's IPO and through a series of transactions, NMF Holdingsthe Operating Company acquired all of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations. The current structure was designed to generally prevent New Mountain FinanceNMFC and its stockholders from being allocated taxable income with respect to unrecognized gains that existed at the time of the IPO in the Predecessor Entities' assets, and rather such amounts would be allocated generally to AIV Holdings.Holdings and its stockholders. The result is that any distributions made to New Mountain Finance'sNMFC's stockholders that are attributable to such gains generally will not be treated as taxable dividends but rather as return of capital.

        New Mountain Finance and AIV Holdings are holding companies with no direct operations of their own, and their sole asset is their ownership in NMF Holdings. New Mountain Finance and AIV Holdings each entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and restated, of NMF Holdings, pursuant to which New Mountain Finance and AIV Holdings were admitted as members of NMF Holdings. New Mountain Finance acquired from NMF Holdings, with the gross proceeds of the IPO and the Concurrent Private Placement, common membership units ("units") of NMF Holdings (the number of units are equal to the number of shares of New Mountain Finance's common stock sold in the IPO and the Concurrent Private Placement). Additionally, New Mountain Finance received units of NMF Holdings equal to the number of shares of common stock of New Mountain Finance issued to the limited partners of New Mountain Guardian Partners, L.P.

As a result of the transactions completed in connection with the IPO, Guardian AIV obtained units in NMF Holdings.the Operating Company. Guardian AIV contributed its units in NMF Holdingsthe Operating Company to its newly formed subsidiary, AIV Holdings, in exchange for common stock of AIV Holdings. AIV Holdings has the right to exchange all or any portion of its units in NMF Holdingsthe Operating Company for shares of New Mountain Finance'sNMFC's common stock on a one-for-one basis. As of December 31, 2011, New Mountain Financebasis at anytime.

        NMFC and AIV Holdings are holding companies with no direct operations of their own, approximately 34.6% and 65.4%, respectively,their sole asset is their ownership in the Operating Company. NMFC and AIV Holdings each entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and restated, of the Operating Company, pursuant to which NMFC and AIV Holdings were admitted as members of the Operating Company. NMFC acquired from the Operating Company, with the gross proceeds of the IPO and the Concurrent Private Placement, common membership units ("units") of the Operating Company (the number of units are equal to the number of shares of NMFC's common stock sold in the IPO and the Concurrent Private Placement). Additionally, NMFC received units of the Operating Company.Company equal to the number of shares of common stock of NMFC issued to the limited partners of New Mountain Guardian Partners, L.P.

        Since NMFC's IPO, and through December 31, 2012, NMFC raised approximately $133.4 million in net proceeds from additional offerings of common stock and issued shares valued at approximately $56.3 million to AIV Holdings for exchanged units. NMFC acquired from the Operating Company units of the Operating Company equal to the number of shares of NMFC's common stock sold in the additional offerings.


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        The currentdiagram below depicts the Companies' organizational structure as of NMF Holdings,December 31, 2012.


*
Includes partners of New Mountain Guardian Partners, L.P.

**
These common membership units are exchangeable into shares of NMFC common stock on a one-for-one basis.

        The Operating Company consolidates its wholly-owned subsidiary, New Mountain Finance SPV Funding, L.L.C. ("NMF SLF"). NMFC and AIV Holdings is depicted below.

        New Mountain Financedo not consolidate the Operating Company. NMFC and AIV Holdings apply an investment company master-feeder financial statement preparation,presentation, as described in Accounting Standards Codification 946,Financial Services—Investment Companies, ("ASC 946") to their interest in NMF Holdings. New Mountain Financethe Operating Company. NMFC and AIV Holdings observe that it is industry practice to follow the presentation prescribed for a Master Fund-Feedermaster fund-feeder fund structure in ASC 946 in instances in which a Master Fundmaster fund is owned by more than one feeder fund and that such presentation provides stockholders of New Mountain FinanceNMFC and AIV Holdings with a clearer depiction of their investment in the Master Fund.

New Mountain Finance Advisers BDC, L.L.C.

        The Investment Adviser manages the Operating Company's day-to-day operations and provides it with investment advisory and management services. In particular, the Investment Adviser is responsible for identifying attractive investment opportunities, conducting research and due diligence on prospective investments, structuring the Operating Company's investments and monitoring and servicing the Operating Company's investments. The Investment Adviser is managed by a five member investment committee, which is responsible for approving purchases and sales of NMF Holdings'the Operating Company's investments above $5.0 million in aggregate by issuer. For additional information on the investment committee, see below "Investment Committee". section.


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New Mountain Finance Administration, L.L.C.

        The Administrator provides the administrative services necessary to conduct our day-to-day operations. The Administrator also performs, or oversees the performance of, our financial records, our reports to stockholders and reports filed with the Securities and Exchange Commission. The Administrator performs the calculation and publication of our net asset values, the payment of our expenses and oversees the performance of various third-party service providers and the preparation and filing of our tax returns. The Administrator may also provide, on the Operating Company's behalf, managerial assistance to its portfolio companies.

Competition

        The Operating Company competes for investments with a number of BDCs and investment funds (including private equity and hedge funds), as well as traditional financial services companies such as commercial banks and other sources of financing. Many of these entities have greater financial and managerial resources than we do. We believe the Operating Company is able to be competitive with these entities primarily on the basis of the experience and contacts of its management team, the Operating Company's responsive and efficient investment analysis and decision-making processes, the investment terms the Operating Company offers, the leveraged model that the Operating Company employs to perform its due diligence with the broader New Mountain Capital team and the Operating Company's model of investing in companies and industries it knows well.

        We believe that some of the Operating Company's competitors may make investments with interest rates and returns that are comparable to or lower than the rates and returns that the Operating Company targets. Therefore, the Operating Company does not seek to compete solely on the interest rates and returns that it offers to potential portfolio companies. For additional information concerning the competitive risks the Operating Company faces,we face, seeItem 1A.—Risk Factors.

Investment Objectives and Portfolio

        The Operating Company's investment objective is to generate current income and capital appreciation through the sourcing and origination of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the Operating Company's investments may also include equity interests such as preferred stock, common stock, warrants or options received in connection with the Operating Company's debt investments or may include a direct investment in the equity of private companies.

        The Operating Company makes investments through both primary originations and open-market secondary purchases. The Operating Company primarily targets loans to, and invests in, the United States ("U.S.") middle market businesses, a market segment we believe continues to be underserved by other lenders. We define middle market businesses as those businesses with annual earnings before interest, taxes, depreciation, and amortization ("EBITDA") between $20.0 million and $200.0 million. The primary focus is in the debt of defensive growth companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high barriers to competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) opportunities for niche market dominance. The Operating Company's targeted investments typically have maturities of between five and ten years and generally range in size between $10.0 million and $50.0 million. This investment size may vary proportionately as the size of the Operating Company's capital base changes. At December 31, 2011,2012, the Operating Company's portfolio consisted of 5563 portfolio companies and was invested 49.8% in first lien loans, 44.6% in second lien loans, 4.6% in subordinated debt and 1.0% in equity and other, as measured at fair value versus 55 portfolio companies invested 58.3% in first lien loans, 37.3% in second lien loans, 4.0% in subordinated debt and 0.4% in equity and other as measured at fair value versus 43 portfolio companies invested 72.8% in first lien loans, 22.5% in second lien loans, 4.6% in subordinated debt and 0.1% in equity and other at December 31, 2010.2011.


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        The fair value of the Operating Company's investments was approximately $989.8 million in 63 portfolio companies at December 31, 2012, $703.5 million in 55 portfolio companies at December 31, 2011 and $441.1 million in 43 portfolio companies at December 31, 20102010.

        The following table shows the Operating Company's portfolio and $320.5 million in 24 portfolio companies at December 31, 2009. Forinvestment activity for the yearyears ended December 31, 2011, NMF Holdings made approximately $493.3 million of new investments in 37 portfolio companies. For the year ended December 31, 2010, NMF Holdings made approximately $332.7 million of new investments in 34 portfolio companies. For the year ended December 31, 2009, NMF Holdings made approximately $268.4 million of new investments in 29 portfolio companies.

        For the year ended2012, December 31, 2011 NMF Holdings had approximately $146.4 million in debt repayments in existing portfolio companies and sales of securities in 17 portfolio companies aggregating approximately $85.6 million. In addition, during the year ended December 31, 2011, NMF Holdings had a change in unrealized appreciation on 17 portfolio companies totaling approximately $6.1 million, which was offset by a change in unrealized depreciation on 48 portfolio companies totaling approximately $29.2 million. For the year ended2010:

 
 Years ended December 31, 
(in millions)
 2012 2011 2010 

New investments in 45, 37 and 34 portfolio companies, respectively

 $673.2 $493.3 $332.7 

Debt repayments in existing portfolio companies

  299.2  146.4  40.3 

Sales of securities in 22, 17 and 16 portfolio companies, respectively

  124.7  85.6  217.9 

Change in unrealized appreciation on 48, 17 and 36 portfolio companies, respectively

  27.0  6.1  13.0 

Change in unrealized depreciation on 30, 48 and 18 portfolio companies, respectively

  (17.1) (29.2) (53.0)

        At December 31, 2010, NMF Holdings had approximately $40.3 million in debt repayments in existing portfolio companies2012 and sales of securities in 16 portfolio companies aggregating approximately $217.9 million. During the year ended December 31, 2010, NMF Holdings had a change in unrealized appreciation on 36 portfolio companies totaling approximately $13.0 million, which was offset by a change in unrealized depreciation on 18 portfolio companies totaling approximately $53.0 million. For the year ended December 31, 2009, NMF Holdings had approximately $10.1 million in debt repayments in existing portfolio companies and sales of securities in 12 portfolio companies aggregating approximately $115.3 million. During the year ended December 31, 2009, NMF Holdings had a change in unrealized appreciation on 21 portfolio companies totaling approximately $69.3 million, which was offset by a change in unrealized depreciation on four portfolio companies totaling approximately $1.2 million.

        At December 31, 2011, the Operating Company's weighted average Unadjusted and Adjusted Yield to Maturity was approximately 10.7%10.1% and 13.1%10.7%, respectively. "AdjustedThis Yield to Maturity"Maturity calculation assumes that theall investments in the Operating Company's portfolionot on non-accrual are purchased at fair value on December 31, 2012 and December 31, 2011, respectively, and held until their respective maturities with no prepayments or losses and exited at par at maturity. This calculation excludes the impact of existing leverage, except for the non-recourse debt of the Operating Company's wholly-owned subsidiary, New Mountain Finance SPV Funding, L.L.C ("NMF SLF"). NMF SLF is treated as a fully levered asset of the Operating Company, with NMF SLF's net asset value being included for yield calculation purposes. The actual yield to maturity may be higher or lower due to the future selection of LIBORthe London Interbank Offered Rate ("LIBOR") contracts by the individual companies in the Operating Company's portfolio or other factors. References to "Unadjusted Yield to Maturity" have the same assumptions as Adjusted Yield to Maturity except that NMF SLF is not treated as a fully levered asset of the Operating Company, but rather the assets themselves are consolidated into the Operating Company.


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        The following summarizes the Operating Company's ten largest portfolio company investments and top ten industries in which the Operating Company was invested as of December 31, 2011,2012, calculated as a percentage of total assets as of December 31, 2011.2012.

Portfolio Company
 Percent of
Total Assets
 

Edmentum, Inc. (fka Plato, Inc.)

3.9%

Pinnacle Holdco S.à r.l. / Pinnacle (US) Acquisition Co Limited

3.3%

Global Knowledge Training LLC

3.1%

Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)

  4.53.1%

Decision Resources, LLCRocket Software, Inc. 

  4.33.0%

Lawson Software,Pharmaceutical Research Associates, Inc. (fka SoftBrands, Inc.)

  4.33.0%

Unitek Global Knowledge Training LLCServices, Inc. 

  4.22.9%

Meritas Schools Holdings, LLCKeyPoint Government Solutions, Inc. 

  4.02.9%

Managed Health Care Associates, Inc. 

  3.92.8%

Insight Pharmaceuticals LLC

3.4%

Renaissance Learning, Inc. Transtar Holding Company

  2.8%

Learning Care Group (US), Inc. 

2.7%

Transplace Texas, L.P. 

2.7%

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Industry
 Percent of
Total Assets
 

Software

  21.324.1%

Education

14.6%

Healthcare Services

  16.1%

Education

13.914.0%

Business Services

  10.514.0%

Federal Services

  9.79.3%

Consumer Services

  4.1%

Information ServicesMedia

  4.13.3%

Distribution

2.8%

Healthcare Products

  3.42.7%

Logistics

  3.4%

Industrial Services

2.42.3%

Investment Criteria

        The Investment Adviser has identified the following investment criteria and guidelines for use in evaluating prospective portfolio companies. However, not all of these criteria and guidelines were, or will be, met in connection with each of the Operating Company's investments.


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Investment Selection and Process

        The Investment Adviser believes it has developed a proven, consistent and replicable investment process to execute the Operating Company's investment strategy. The Investment Adviser seeks to identify the most attractive investment sectors from the top down and then works to become the most advantaged investor in these sectors. The steps in the Investment Adviser's process include:

Investment Committee

        The Investment Adviser's investment committee (the "Investment Committee") currently consists of Steven B. Klinsky, Robert Hamwee, Adam Collins, Douglas Londal and Alok Singh. The Investment Committee is responsible for approving all of the Operating Company's investment purchases above $5.0 million. The Investment Committee also monitors investments in the Operating Company's portfolio and approves all asset dispositions above $5.0 million. Purchases and dispositions below $5.0 million may be approved by the Operating Company's Chief Executive Officer. These approval thresholds are subject to change over time. We expect to benefit from the extensive and varied relevant experience of the investment professionals serving on the Investment Committee, which includes expertise in private equity, primary and secondary leveraged credit, private mezzanine finance and distressed debt.

        The purpose of the Investment Committee is to evaluate and approve, as deemed appropriate, all investments by the Investment Adviser, subject to certain thresholds. The Investment Committee process is intended to bring the diverse experience and perspectives of the Investment Committee's members to the analysis and consideration of every investment. The Investment Committee also serves to provide investment consistency and adherence to the Investment Adviser's investment philosophies and policies. The Investment Committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.

        In addition to reviewing investments, the Investment Committee meetings serve as a forum to discuss credit views and outlooks. Potential transactions and investment opportunities are also reviewed on a regular basis. Members of the Operating Company's investment team are encouraged to share


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information and views on credits with the committee early in their analysis. This process improves the quality of the analysis and assists the deal team members to work more efficiently.

Investment Structure

        The Operating Company targets debt investments that will yield meaningful current income and occasionally provide the opportunity for capital appreciation through equity securities. The Operating Company's debt investments are typically structured with the maximum seniority and collateral that the Operating Company can reasonably obtain while seeking to achieve its total return target.

Debt Investments

        The terms of the Operating Company's debt investments are tailored to the facts and circumstances of the transaction and prospective portfolio company and structured to protect its rights and manage its risk while creating incentives for the portfolio company to achieve its business plan. A substantial source of return is the cash interest that the Operating Company collects on its debt investments.


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        In addition, from time to time the Operating Company may also enter into bridge or other commitments which can result in providing future financing to a portfolio company.

Equity Investments

        When the Operating Company makes a debt investment, it may be granted equity in the portfolio company in the same class of security as the sponsor receives upon funding. In addition, the Operating Company may from time to time make non-control, equity co-investments in conjunction with private equity sponsors. The Operating Company generally seeks to structure its equity investments, such as direct equity co-investments, to provide it with minority rights provisions and event-driven put rights. The Operating Company also seeks to obtain limited registration rights in connection with these investments, which may include "piggyback" registration rights.


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Portfolio Company Monitoring

        The Operating Company monitors the performance and financial trends of its portfolio companies on at least a quarterly basis. The Operating Company attempts to identify any developments within the portfolio company, the industry or the macroeconomic environment that may alter any material element of its original investment strategy. The Operating Company uses several methods of evaluating and monitoring the performance of its investments, including but not limited to, the following:

        The Operating Company uses an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in the portfolio. The Operating Company uses a four-level numeric rating scale as follows:


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        The following table shows the distribution of the Operating Company's investments on the 1 to 4 investment rating scale at fair value as of December 31, 2011:2012:


 As of December 31, 2011  As of December 31, 2012 
(in millions)
 Par Value(1) Percent Fair Value Percent 
Investment Rating
 Par
Value(1)
 Percent Fair
Value
 Percent  

Investment Rating 1

 $142.4 18.0%$130.2 18.5% $85.6 8.5%$94.4 9.5%

Investment Rating 2

 642.4 81.4% 572.5 81.4% 901.3 89.4% 884.3 89.4%

Investment Rating 3

  %  % 14.7 1.5% 10.3 1.0%

Investment Rating 4

 4.5 0.6% 0.8 0.1% 6.2 0.6% 0.8 0.1%
                  

 $789.3 100.0%$703.5 100.0% $1,007.8 100.0%$989.8 100.0%

(1)
Excludes shares and warrants.

Exit Strategies/Refinancing

        The Operating Company exits its investments typically through one of four scenarios: (i) the sale of the portfolio company itself resulting in repayment of all outstanding debt, (ii) the recapitalization of the portfolio company in which the Operating Company's loan is replaced with debt or equity from a third party or parties (in some cases, the Operating Company may choose to participate in the newly issued loan(s)), (iii) the repayment of the initial or remaining principal amount of the Operating Company's loan then outstanding at maturity or (iv) the sale of the debt investment by the Operating


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Company. In some investments, there may be scheduled amortization of some portion of the Operating Company's loan which would result in a partial exit of its investment prior to the maturity of the loan.

Valuation

        The Operating Company conducts the valuation of assets, pursuant to which its net asset value, and, consequently, New Mountain Finance Holdings' and AIV Holdings' net asset value is determined, atAt all times consistent with accounting principles generally accepted in the United States of America ("GAAP") and the 1940 Act. New Mountain FinanceAct, the Operating Company conducts a valuation of assets, which impacts its net asset value, and, consequently, the net asset values of NMFC and AIV Holdings. NMFC and AIV Holdings value their ownership interest on a quarterly basis, or more frequently if required under the 1940 Act.

        The Operating Company applies fair value accounting in accordance with GAAP. The Operating Company values its assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, the Operating Company's board of directors is ultimately and solely responsible for determining the fair value of itsthe portfolio investments on a quarterly basis in good faith, including investments that are not publicly traded, those whose market prices are not readily available and any other situation where its portfolio investments require a fair value determination. Security transactions are accounted for on a trade date basis. The Operating Company's quarterly valuation procedures are set forth in more detail below:



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        Valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private securities to peer companies that are public, the nature of and the realizable value of any collateral, the portfolio company's earnings, discounted cash flows, the ability to make payments, the markets in which the portfolio company conducts business, and other relevant factors, including available market data such as relevant and applicable market trading and transaction comparables; applicable market yields and multiples; security covenants; call protection provisions; information rights; comparable merger and acquisition transactions; and the principal market and enterprise values. When an external event such as a purchase transaction, public offering or subsequent sale occurs, the Operating Company will consider the pricing indicated by the external event to corroborate the private valuation.


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        The values assigned to investments are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Operating Company's investments may fluctuate from period to period.period and the fluctuations could be material.

Operating and Regulatory Environment

        As with other companies regulated by the 1940 Act, a BDC must adhere to certain regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to investments by a BDC in another investment company as well as transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. A BDC must be organized in the U.S. for the purpose of investing in or lending to primarily private companies and making significant managerial assistance available to them. A BDC may use capital provided by public stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.

        NMF Holdings, New Mountain Finance,The Operating Company, NMFC and AIV Holdings each have a board of directors. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. As BDCs, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC.

        As a BDC, each of the Companies is required to meet a coverage ratio of the value of total assets to total senior securities, which include all of its borrowings and any preferred stock we may issue in


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the future, of at least 200.0% (i.e., the amount of debt may not exceed 50.0% of the value of the Operating Company's total assets or the Operating Company may borrow an amount equal to 100.0% of net assets). The Operating Company monitors its compliance with this coverage ratio on a regular basis, however, New Mountain FinanceNMFC and AIV Holdings have no material long-term liabilities themselves and their only business and sole asset is their ownership of NMF Holdings. New Mountain Financethe Operating Company. NMFC and AIV Holdings are relying on the provisions of Section 12(d)(1)(E) of the 1940 Act, which requires, among other things, that their respective investment in the Operating Company be their only asset and that their respective shareholdersstockholders are entitled to vote on a "pass-through" basis with the Operating Company's other voting security holders.

        New Mountain FinanceNMFC may, to the extent permitted under the 1940 Act, issue additional equity capital, which would in turn increase the equity capital available to the Operating Company. New Mountain FinanceNMFC is generally not able to issue and sell its common stock at a price below net asset value per share. New Mountain FinanceNMFC may, however, sell its common stock, or warrants, options or rights to acquire its common stock, at a price below the then-current net asset value of its common stock if its board of directors determines that such sale is in the best interests of New Mountain FinanceNMFC and the best interests of its stockholders, and its stockholders approve such sale. In addition, New Mountain FinanceNMFC may generally issue new shares of its common stock at a price below net asset value in rights offerings to existing stockholders and in certain other limited circumstances.

        As a BDC, the Operating Company is generally not permitted to invest in any portfolio company in which the Investment Adviser or any of its affiliates currently have an investment or to make any co-investments with the Investment Adviser or its affiliates without an exemptive order from the Securities and Exchange Commission.


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        We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67.0% or more of such company's voting securities present at a meeting if more than 50.0% of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50.0% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.

        In addition, as BDCs, the Companies are not permitted to issue stock or units in consideration for services. New Mountain Finance, NMF Holdings and the Investment Adviser are seeking exemptive relief to permit NMF Holdings to pay 50.0%, on an after tax basis, of the incentive fee payable to the Investment Adviser in units of NMF Holdings, which will be exchangeable into shares of New Mountain Finance's common stock and to treat the receipt of such units as an exempt purchase under Section 23(a) of the 1940 Act. As of December 31, 2011, the exemptive relief requested had not been granted. There can be no assurance when or if the exemptive relief will be granted.

New Mountain Finance'sNMFC's and AIV Holdings' Taxation as a Regulated Investment Company

        New Mountain FinanceNMFC and AIV Holdings intend to electhave elected to be treated, and intend to comply with the requirements to qualify annually, as RICs under Subchapter M of the Code, commencing with the filing of their December 31, 2011 income tax returns.Code. As RICs, New Mountain FinanceNMFC and AIV Holdings generally will not pay corporate-level federal income taxes on any income that they timely distribute to their stockholders as dividends. Rather, dividends distributed by New Mountain FinanceNMFC or AIV Holdings generally will be taxable to New Mountain Finance'sNMFC's or AIV Holdings' stockholders, but any net operating losses, foreign tax credits and other tax attributes of New Mountain FinanceNMFC or AIV Holdings generally will not pass through to New Mountain Finance'sNMFC's or AIV Holdings' stockholders, subject to special rules for certain items such as net capital gains and qualified dividend income recognized by New Mountain FinanceNMFC and AIV Holdings.

        To qualify as RICs, New Mountain FinanceNMFC and AIV Holdings must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify as RICs, New


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Mountain FinanceNMFC and AIV Holdings must distribute to their stockholders, for each taxable year, at least 90.0% of their "investment company taxable income", which is generally their net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the "Annual Distribution Requirement").

        New Mountain FinanceNMFC and AIV Holdings will be subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless they distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of their respective net ordinary income for each calendar year, (2) 98.2% of their respective capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the "Excise Tax Avoidance Requirement"). While New Mountain FinanceNMFC and AIV Holdings intend to make distributions to their stockholders in each taxable year that will be sufficient to avoid any federal excise tax on their earnings, there can be no assurance that New Mountain FinanceNMFC or AIV Holdings will be successful in entirely avoiding this tax. For the year ended December 31, 2011,2012, no federal excise tax was paid by either New Mountain FinanceNMFC or AIV Holdings.

        In order to qualify as RICs for federal income tax purposes, New Mountain FinanceNMFC and AIV Holdings must, among other things:


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Failure to Qualify as a Regulated Investment Company

        If New Mountain FinanceNMFC or AIV Holdings fail to satisfy the 90.0% Income Test or the Diversification Tests for any taxable year or quarter of such taxable year, they may nevertheless continue to qualify as a RIC for such year if certain relief provisions of the Code apply (which may, among other things, require it to pay certain corporate-level federal taxes or to dispose of certain assets). If New Mountain FinanceNMFC or AIV Holdings fail to qualify for treatment as a RIC and such relief provisions do not apply to New Mountain FinanceNMFC or AIV Holdings, New Mountain FinanceNMFC or AIV Holdings will be subject to federal income tax on all of its taxable income at regular corporate rates (and also will be subject to any applicable state and local taxes), regardless of whether New Mountain FinanceNMFC or AIV Holdings made any distributions to its stockholders. Distributions would not be required. However, if distributions were made, any such distributions would be taxable to its stockholders as ordinary dividend income and, subject to certain limitations under the Code. AnyCode, any such


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distributions made in taxable years beginning before January 1, 2013 would be eligible for the 15.0%20.0% maximum rate applicable to non-corporate taxpayers to the extent of New Mountain Finance'sNMFC's or AIV Holdings' current or accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of New Mountain Finance'sNMFC's or AIV Holdings' current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and any remaining distributions would be treated as a capital gain.

        Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that re-qualify as a RIC no later than the second year following the non-qualifying year, New Mountain FinanceNMFC and AIV Holdings could be subject to tax on any unrealized net built-in gains in the assets held by New Mountain FinanceNMFC or AIV Holdings during the period in which New Mountain FinanceNMFC or AIV Holdings failed to qualify as a RIC that are recognized during the 10-year period (or five-year period for taxable years beginning during 2013) after its requalification as a RIC, unless New Mountain FinanceNMFC or AIV Holdings made a special election to pay corporate-level federal income tax on such built-in gain at the time of New Mountain Finance'sNMFC's or AIV Holdings' requalification as a RIC. New Mountain FinanceNMFC or AIV Holdings may decide to be taxed as a regular corporation even if New Mountain FinanceNMFC or AIV Holdings would otherwise qualify as a RIC if New Mountain FinanceNMFC or AIV Holdings determines that treatment as a corporation for a particular year would be in its best interests.

Investment Management Agreement

        The Companies are closed-end, non-diversified management investment companies that have elected to be treated as BDCs under the 1940 Act. New Mountain FinanceNMFC and AIV Holdings are holding companies with no direct operations of their own, and their only business and sole asset are their ownership of units of the Operating Company. As a result, New Mountain FinanceNMFC and AIV Holdings will not pay any external investment advisory or management fees. However, the Operating Company is externally managed by the Investment Adviser and will pay the Investment Adviser a fee for its services. The following summarizes the arrangements between the Operating Company and the Investment Adviser pursuant to an investment advisory and management agreement (the "Investment Management Agreement").


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Management Services

        The Investment Adviser is registered as an Investment Adviser under the Investment Advisers Act of 1940 (the "Advisers Act"). The Investment Adviser will serveserves pursuant to the Investment Management Agreement in accordance with the 1940 Act. Subject to the overall supervision of the Operating Company's board of directors, the Investment Adviser will managemanages the Operating Company's day-to-day operations and provideprovides it with investment advisory and management services. Under the terms of the Investment Management Agreement, the Investment Adviser will:Adviser:


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        The Investment Adviser's services under the Investment Management Agreement are not exclusive, and the Investment Adviser (so long as its services to the Operating Company are not impaired) and/or other entities affiliated with New Mountain Capital are permitted to furnish similar services to other entities.

Management Fees

        Pursuant to the Investment Management Agreement, the Operating Company has agreed to pay the Investment Adviser a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The cost of both the base management fee payable to the Investment Adviser and any incentive fees paid in cash to the Investment Adviser are borne by the Operating Company's members, including New Mountain FinanceNMFC and AIV Holdings and, as a result, are indirectly borne by New Mountain Finance'sNMFC's and AIV Holdings' common stockholders.

Base Management Fees

        The base management fee is calculated at an annual rate of 1.75% of the Operating Company's gross assets less (i) the borrowings under the Operating Company's senior loan fund's Loan and Security Agreement with Wells Fargo Bank, National Association, dated October 27, 2010, as amended on December 18, 2012, (the "SLF Credit Facility") and (ii) cash and cash equivalents. The base management fee is payable quarterly in arrears, and is calculated based on the average value of the Operating Company's gross assets, borrowings under the SLF Credit Facility, and cash and cash equivalents at the end of each of the two most recently completed calendar quarters, and appropriately adjusted on a pro rata basis for any equity capital raises or repurchases during the current calendar quarter.


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Incentive Fees

        The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of the Operating Company's "Pre-Incentive Fee Adjusted Net Investment Income" for the immediately preceding quarter, subject to a "preferred return", or "hurdle", and a "catch-up" feature. "Pre-Incentive Fee Net Investment Income" means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Operating Company receives from portfolio companies) accrued during the calendar quarter, minus the Operating Company's operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, as amended and restated, with the Administrator, and any interest expense and distributions paid on any issued and outstanding preferred membership units (of which there are none as of December 31, 2011)2012), but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Operating Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

        Under GAAP, New Mountain Finance'sNMFC's IPO did not step-up the cost basis of the Operating Company's existing investments to fair market value at the IPO date. Since the total value of the Operating Company's investments at the time of the IPO was greater than the investments' cost basis, a larger amount of amortization of purchase or original issue discount, as well as different amounts in realized gain and unrealized appreciation, may be recognized under GAAP in each period than if the


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step-up had occurred. This will remain until such predecessor investments are sold or mature in the future. The Operating Company tracks the transferred (or fair market) value of each of its investments as of the time of the IPO and, for purposes of the incentive fee calculation, adjusts Pre-Incentive Fee Net Investment Income to reflect the amortization of purchase or original issue discount on the Operating Company's investments as if each investment was purchased at the date of the IPO, or stepped up to fair market value. This is defined as "Pre-Incentive Fee Adjusted Net Investment Income". The Operating Company also uses the transferred (or fair market) value of each of its investments as of the time of the IPO to adjust capital gains ("Adjusted Realized Capital Gains") or losses ("Adjusted Realized Capital Losses") and unrealized capital appreciation ("Adjusted Unrealized Capital Appreciation") and unrealized capital depreciation ("Adjusted Unrealized Capital Depreciation").

        Pre-Incentive Fee Adjusted Net Investment Income, expressed as a rate of return on the value of the Operating Company's net assets at the end of the immediately preceding calendar quarter, will be compared to a "hurdle rate" of 2.0% per quarter (8.0% annualized), subject to a "catch-up" provision measured as of the end of each calendar quarter. The hurdle rate is appropriately pro-rated for any partial periods. The calculation of the Operating Company's incentive fee with respect to the Pre-Incentive Fee Adjusted Net Investment Income for each quarter is as follows:


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        The second part will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement) and will equal 20.0% of the Operating Company's Adjusted Realized Capital Gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee.

        In accordance with GAAP, the Operating Company accrues a hypothetical capital gains incentive fee based upon the cumulative net Adjusted Realized Capital Gains and Adjusted Realized Capital Losses and the cumulative net Adjusted Unrealized Capital Appreciation and Adjusted Unrealized Capital Depreciation on investments held at the end of each period. Actual amounts paid to the Investment Adviser are consistent with the Investment Management Agreement and are based only on actual Adjusted Realized Capital Gains computed net of all Adjusted Realized Capital Losses and Adjusted Unrealized Capital Depreciation on a cumulative basis from inception through the end of each calendar year.


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        New Mountain Finance, the Operating Company and the Investment Adviser are seeking exemptive relief from the Securities and Exchange Commission to permit the Operating Company to pay 50.0%, on an after tax basis, of the incentive fee in units of the Operating Company, which will be exchangeable into shares of New Mountain Finance's common stock on a one-for-one basis. If such exemptive relief is granted, the number of the Operating Company's units payable to the Investment Adviser will be calculated based on the greater of (i) the net asset value (as of the last publicly available annual or quarterly report filed with the Securities and Exchange Commission) on the last day of each calendar quarter in which the Investment Adviser is entitled to receive an incentive fee (the "Incentive Fee Date"), or (ii) the market price of New Mountain Finance's common stock on the Incentive Fee Date, and in accordance with such restrictions and conditionsyear as may be required by the exemptive relief. There can be no assurance that this exemptive relief will be granted. In addition, if New Mountain Finance, the Operating Company and the Investment Adviser receive exemptive relief from the Securities and Exchange Commission, any units so received by the Investment Adviser will be subject to a three-year lock-up agreement, pursuant to which one-third of the common membership units received by the Investment Adviser will be released from the lock-up on an annual basis until the expiration of each three-year lock-up period. If exemptive relief is not granted, the Operating Company will continue to pay the entire incentive fee in cash. If the Investment Management Agreement is terminated by the Operating Company, then the lock-up provisions with respect to any units or shares of the Operating Company or New Mountain Finance received by the Investment Adviser or its transferees pursuant to the Investment Management Agreement immediately expire.portfolio was sold at fair value.

Example 1: Income Related Portion of Incentive Fee for Each Calendar Quarter*:

        Pre-Incentive Fee Adjusted Net Investment Income does not exceed the hurdle rate, therefore there is no income-related incentive fee.


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        Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, but does not fully satisfy the "catch-up" provision, therefore the income related portion of the incentive fee is 0.26%.

        Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, and fully satisfies the "catch-up" provision, therefore the income related portion of the incentive fee is 0.57%.


*
The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets and assumes, for the Operating Company's investments held prior to the IPO, interest income has been adjusted to reflect the amortization of purchase or original issue discount as if each investment was purchased at the date of the IPO, or stepped up to fair market value.

(1)
Represents 8.00% annualized hurdle rate.

(2)
Assumes 1.75% annualized base management fee.

(3)
Excludes organizational and offering expenses.

(4)
The "catch-up" provision is intended to provide the Investment Adviser with an incentive fee of 20.00% on all Pre-Incentive Fee Adjusted Net Investment Income as if a hurdle rate did not apply when the Operating Company's net investment income exceeds 2.50% in any calendar quarter.

Example 2: Capital Gains Portion of Incentive Fee*:


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        The capital gains portion of the incentive fee would be:

        The capital gains incentive fee, if any, would be:



*
The hypothetical amounts of returns shown are based on a percentage of the Operating Company's total net assets and assume no leverage. There is no guarantee that positive returns will

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