[Federal Register Volume 79, Number 117 (Wednesday, June 18, 2014)]
[Notices]
[Pages 34799-34803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14204]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-31080; File No. 812-14120]
WhiteHorse Finance, Inc., et al.; Notice of Application
June 12, 2014.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 57(i) of the
Investment Company Act of 1940 (the ``Act'') and rule 17d-1 under the
Act to permit certain joint transactions otherwise prohibited by
section 57(a)(4) of the Act and rule 17d-1 under the Act.
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SUMMARY: Summary of Application: Applicants request an order to permit
a business development company (``BDC'') to co-invest with certain
affiliated investment funds in portfolio companies.
Applicants: WhiteHorse Finance, Inc. (the ``Company''), WhiteHorse
Finance Warehouse, LLC (``WhiteHorse Warehouse''), H.I.G. Bayside Debt
& LBO Fund II, L.P., H.I.G. Bayside Loan Opportunity Fund II, L.P.,
H.I.G. Bayside Loan Opportunity Fund III (Europe-Euro), L.P., H.I.G.
Bayside Loan Opportunity Fund III (Europe-US$), L.P., WhiteHorse VI,
Ltd., WhiteHorse VII, Ltd. and WhiteHorse VIII, Ltd. (collectively with
H.I.G. Bayside Debt & LBO Fund II, L.P., H.I.G. Bayside Loan
Opportunity Fund II, L.P., H.I.G. Bayside Loan Opportunity Fund III
(Europe-Euro), L.P. and H.I.G. Bayside Loan Opportunity Fund III
(Europe-US$), L.P., the ``Existing Private Funds''), H.I.G. WhiteHorse
Advisers, LLC (the ``Company Adviser''), Bayside Capital, Inc. and
H.I.G. WhiteHorse Capital, LLC (each, a ``Current Adviser to Private
Funds'' and, collectively, the ``Current Advisers to Private Funds''
and, together with the Company Adviser, each, an ``Adviser'' and,
together, the ``Advisers'') and H.I.G. Capital, L.L.C. (collectively,
the ``Applicants'').
DATES: Filing Dates: The application was filed on February 5, 2013 and
amended on July 3, 2013, October 15, 2013 and May 21, 2014.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on July 7, 2014, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
St. NE., Washington, DC 20549-1090. Applicants: c/o Richard Siegel,
Esq., H.I.G. WhiteHorse Advisers, LLC, 1450 Brickell Avenue, 31st
Floor, Miami, FL 33131.
FOR FURTHER INFORMATION CONTACT: Emerson S. Davis, Senior Counsel, at
(202) 551-6868, or Daniele Marchesani, Branch Chief, at (202) 551-6821
(Division of Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations
1. The Company is an externally managed, non-diversified, closed-
end management investment company that has elected to be regulated as a
BDC under the Act.\1\ The Company's
[[Page 34800]]
objectives is to generate current income and capital appreciation by
primarily investing in private, small-capitalization companies
(generally in the range of $10 million to $50 million) through first
liens loans, second liens loans, senior debt securities, mezzanine
loans or equity interests. The Company's board of directors currently
consists of five members (the ``Board''), three of whom are not
``interested persons'' of the Company within the meaning of section
2(a)(19) of the Act (the ``Independent Directors'').
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\1\ Section 2(a)(48) defines a BDC to be any closed-end
investment company that operates for the purpose of making
investments in securities described in sections 55(a)(1) through
55(a)(3) of the Act and makes available significant managerial
assistance with respect to the issuers of such securities.
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2. The Company Adviser, a Delaware limited liability company, is
registered under the Investment Advisers Act of 1940 (``Advisers Act'')
and is the Company's investment adviser. H.I.G Capital, L.L.C. is an
alternative investment and asset management firm and is registered
under the Advisers Act. WhiteHorse Capital, LLC serves as the
investment adviser for WhiteHorse VI, Ltd., WhiteHorse VII, Ltd. and
WhiteHorse VIII. Ltd in its capacity as the collateral manager to each
of those three entities.
3. The Existing Private Funds are entities formed under the laws of
Delaware or under the laws of the Cayman Islands. In reliance on the
exclusion from the definition of ``Investment Company'' provided by
section 3(c)(7) of the Act, none of the Existing Private Funds will be
registered under the Act. Each Existing Private Fund is managed by the
Current Advisers to Private Funds in accordance with an investment
advisory agreement (collectively, the ``Advisory Agreements''). The
Company expects that any portfolio company that is an appropriate
investment for a Private Fund \2\ may also be an appropriate investment
for the Company, with certain exceptions based on available capital or
diversification.
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\2\ ``Private Fund'' means any Existing Private Fund or any
entity (i) whose investment adviser is an Adviser, (b) that would be
an investment company but for section 3(c)(1) or 3(c)(7) of the Act,
and (c) that intends to participate in the Co-Investment Program.
``Adviser'' means (a) the Company Adviser, (b) the Current Advisers
to Private Funds and (c) any future investment adviser that
controls, or is controlled by or is under common control with any of
the Company Adviser or the Current Advisers to Private Funds and is
registered as an investment adviser under the Adviser Act.
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4. Applicants seek an order (``Order'') \3\ to allow the Company,
on the one hand, and one or more Private Funds that may be prohibited
from co-investing with the Company by reason of section 57 of the Act,
on the other hand, to co-invest in the same issuers of securities. For
purposes of the application, a ``Co-Investment Transaction'' means any
transaction in which the Company (or one of its Wholly-Owned Investment
Subsidiaries) participated together with a Private Fund in reliance on
the requested Order. ``Potential Co-Investment Transaction'' means any
investment opportunity in which the Company (or a Wholly-Owned
Investment Subsidiary) could not participate together with one or more
Private Funds without obtaining and relying on the Order.
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\3\ All existing entities that currently intend to rely on the
Order have been named as Applicants and any entities that may rely
on the Order in the future will comply with the terms and conditions
of the application.
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5. The Company may, from time to time, form a special purpose
subsidiary (a ``Wholly-Owned Investment Subsidiary'').\4\ Wholly-Owned
Investment Subsidiaries would be prohibited from investing in a Co-
Investment Transaction with any Private Fund because the Wholly-Owned
Investment Subsidiary would be a company controlled by the Company for
purposes of section 57(a)(4) and rule 17d-1. Applicants request that
any Wholly-Owned Investment Subsidiary be permitted to participate in
Co-Investment Transactions in lieu of the Company and that any Wholly-
Owned Investment Subsidiary's participation in any such transaction be
treated, for purposes of the Order, as though the Company were
participating directly. Applicants represent that this treatment is
justified because any Wholly-Owned Investment Subsidiary would have no
purpose other than serving as a holding vehicle for the Company's
investments or debt and, therefore, no conflicts of interest could
arise between the Company and any Wholly-Owned Investment Subsidiary.
The Board would make all relevant determinations under the conditions
with regard to a Wholly-Owned Investment Subsidiary's participation in
a Co-Investment Transaction, and the Board would be informed of, and
take into consideration, any proposed use of any Wholly-Owned
Investment Subsidiary in the Company's place. If the Company proposes
to participate in the same Co-Investment Transaction with any of its
Wholly-Owned Investment Subsidiaries, the Board will also be informed
of, and take into consideration, the relative participation of the
Company and any Wholly-Owned Investment Subsidiary. WhiteHorse
Warehouse is a Wholly-Owned Investment Subsidiary of the Company formed
for the special purpose of providing liquidity support through a credit
facility.
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\4\ The term ``Wholly-Owned Investment Subsidiary'' means an
entity (a) whose sole business purpose is to hold one or more
investments and issue debt on behalf of the Company, to obtain debt
financing for those investments and, in the case of a Wholly-Owned
Investment Subsidiary organized as a small business investment
company under the Small Business Investment Act of 1958 (``SBA
Act''), maintain a license under the SBA Act and issue debentures
guaranteed by the Small Business Administration; (b) that is wholly-
owned by the Company (with the Company at all times directly or
indirectly holding, beneficially and of record, 100% of the voting
and economic interests); (c) with respect to which the Board has the
sole authority to make all determinations with respect to the
Wholly-Owned Investment Subsidiary's participation under the
conditions of the application; and (d) that is an entity that would
be an investment company but for section 3(c)(1) or 3(c)(7) of the
Act.
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6. Applicants represent that the Current Advisers to Private Funds
will refer to the Company Adviser all Potential Co-Investment
Transactions within the Company's Objectives and Strategies \5\ that
are considered for a Private Fund, and such investment opportunities
may result in a Co-Investment Transaction. For each such referral, the
Company Adviser will consider only the investment objective, investment
policies, investment position, investment strategies, investment
restrictions, regulatory and tax requirements, capital available for
investment and other pertinent factors applicable to the Company.
Likewise, when selecting investments for a Private Fund, the Adviser to
the Private Fund will select investments separately for the Private
Fund, considering only the investment objective, investment policies,
investment position, investment strategies, investment restrictions,
regulatory and tax requirements, capital available for investment and
other pertinent factors applicable to such Private Fund. Each Co-
Investment Transaction and the proposed allocation of such Co-
Investment Transaction would be approved prior to the actual investment
by the required majority (within the meaning of section 57(o) of the
Act) of the Board (the ``Required Majority'').
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\5\ ``Objectives and Strategies'' means the Company's investment
objectives and strategies, as described in its registration
statement on Form N-2 and other filings made with the Commission by
the Company under the Securities Act of 1933 Act, as amended (``1933
Act''), any reports filed by the Company with the Commission under
the Securities Exchange Act of 1934, as amended, and the Company's
reports to stockholders.
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7. Other than pro rata dispositions and Follow-On Investments \6\
as
[[Page 34801]]
provided in conditions 7 and 8, and after making the determinations
required in conditions 1 and 2(a), the Company Adviser will present
each Potential Co-Investment Transaction and the proposed allocation to
the directors of the Board eligible to vote under section 57(o) of the
Act (``Eligible Directors''), and the Required Majority will approve
each Co-Investment Transaction prior to any investment by the Company.
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\6\ ``Follow-On Investment'' means any additional investment in
an existing portfolio company, including through the exercise of
warrants, conversion privileges or other rights to acquire
securities of the portfolio company.
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8. With respect to the pro rata dispositions and Follow-On
Investments provided in conditions 7 and 8, the Company may participate
in a pro rata disposition or Follow-On Investment without obtaining
prior approval of the Required Majority if, among other things: (i) The
proposed participation of the Company and each Private Fund in such
disposition or Follow-On-Investment is proportionate to its outstanding
investments in the issuer immediately preceding the disposition or
Follow-On Investment, as the case may be; and (ii) the Board has
approved the Company's participation in pro rata dispositions or
Follow-On Investments as being in the best interests of the Company. If
the Board does not so approve, any such disposition or Follow-On
Investment will be submitted to the Company's Eligible Directors. The
Board of the Company may at any time rescind, suspend or qualify its
approval of pro rata dispositions and Follow-On Investments with the
result that all dispositions and/or Follow-On Investments must be
submitted to the Eligible Directors.
9. No Independent Director will have any direct or indirect
financial interest in any Co-Investment Transaction or any interest in
any portfolio company, other than through an interest (if any) in the
securities of the Company.
Applicants' Legal Analysis
1. Section 57(a)(4) of the Act prohibits certain affiliated persons
of a BDC from participating in a joint transaction with the BDC in
contravention of rules as prescribed by the Commission. Section 57(i)
of the Act provides that, until the Commission prescribes rules under
section 57(a)(4), the Commission's rules under section 17(d) of the Act
applicable to registered closed-end investment companies will be deemed
to apply to BDCs. Because the Commission has not adopted any rules
under section 57(a)(4), rule 17d-1 applies to BDCs. The Company Adviser
and any Private Fund that it advises could be deemed to be persons
related to the Company in a manner described by section 57(b) and
therefore prohibited by section 57(a)(4) and rule 17d-1 from
participating in the Co-Investment Program. In addition, because the
other Advisers are ``affiliated persons'' of the Company Adviser, such
Advisers and Private Funds advised by any of them could be deemed to be
persons related to the Company in a manner described by section 57(b)
and also prohibited from participating in the Co-Investment Program.
Finally, because WhiteHorse Warehouse and any other Wholly-Owned
Investment Subsidiary are controlled by the Company, they are subject
to section 57(a)(4), and thus also subject to the provisions of rule
17d-1.
2. Rule 17d-1, as made applicable to BDCs by section 57(i),
prohibits any person who is related to a BDC in a manner described in
section 57(b), acting as principal, from participating in, or effecting
any transaction in connection with, any joint enterprise or other joint
arrangement or profit-sharing plan in which the BDC is a participant,
absent an order from the Commission. In passing upon applications under
rule 17d-1, the Commission considers whether the company's
participation in the joint transaction is consistent with the
provisions, policies, and purposes of the Act and the extent to which
such participation is on a basis different from or less advantageous
than that of other participants.
3. Applicants state that they expect that co-investment in
portfolio companies by the Company and the Private Funds will increase
favorable investment opportunities for the Company and the Private
funds.
4. Applicants submit that the Required Majority will approve each
Co-Investment Transaction before investment, and other protective
conditions set forth in the application, will ensure that the Company
will be treated fairly. Applicants state that the Company's
participation in the Co-Investment Transactions will be consistent with
the provisions, policies, and purposes of the Act and on a basis that
is not different from or less advantageous than that of other
participants.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Each time an investment adviser considers a Potential Co-
Investment Transaction for a Private Fund that falls within the
Company's then-current Objectives and Strategies, the Company Adviser
will make an independent determination of the appropriateness of such
investment for the Company in light of the Company's then-current
circumstances.
2. (a) If the Company Adviser deems the Company's participation in
any Potential Co-Investment Transaction to be appropriate for the
Company, it will then determine an appropriate level of investment for
the Company;
(b) If the aggregate amount recommended by the Company Adviser to
be invested in such Potential Co-Investment Transaction by the Company,
together with the amount proposed to be invested by the Private Funds,
collectively, in the same transaction, exceeds the amount of the
investment opportunity, then the investment opportunity will be
allocated among them pro rata based on each such party's capital
available for investment in the asset class being allocated, up to the
amount proposed to be invested by each party. The Company Adviser will
provide the Eligible Directors with information concerning the Private
Funds' available capital to assist the Eligible Directors with their
review of the Company's investments for compliance with these
allocation procedures; and
(c) After making the determinations required in conditions 1 and
2(a), the Company Adviser will then distribute written information
concerning the Potential Co-Investment Transaction, including the
amount proposed to be invested by the Company and any Private Fund, to
the Eligible Directors for their consideration. The Company will co-
invest with the Private Funds only if, prior to participating in such
Co-Investment Transaction, the Required Majority concludes that:
(i) The terms of the transaction, including the consideration to be
paid, are reasonable and fair to the Company and its stockholders and
do not involve overreaching in respect of the Company or its
stockholders on the part of any person concerned;
(ii) the transaction is consistent with:
(A) the interests of the stockholders of the Company; and
(B) the Company's then-current Objectives and Strategies;
(iii) the investment by the Private Funds would not disadvantage
the Company, and participation by the Company would not be on a basis
different from, or less advantageous than, that of the Private Funds;
provided, that if any of the Private Funds, but not the Company itself,
gains the right to nominate a director for election to a portfolio
company's board of directors or the right to have a board observer or
any similar right to participate in the governance or management of the
portfolio company,
[[Page 34802]]
such event will not be interpreted to prohibit the Required Majority
from reaching the conclusions required by this condition (2)(c)(iii),
if:
(A) The Eligible Directors will have the right to ratify the
selection of such director or board observer, if any;
(B) the Advisers agree to, and do, provide periodic reports to the
Company's Board with respect to the actions of the director or the
information received by the board observer or obtained through the
exercise of any similar right to participate in the governance or
management of the portfolio company; and
(C) any fees or other compensation that any Private Fund or any
affiliated person of any Private Fund receives in connection with the
right of the Private Funds to nominate a director or appoint a board
observer or otherwise to participate in the governance or management of
the portfolio company will be shared proportionately among the
participating Private Funds (which may, in turn, share their portion
with their affiliated persons) and the Company in accordance with the
amount of each party's investment; and
(iv) the proposed investment by the Company will not benefit the
Advisers or the Private Funds, or any affiliated person of any of them
(other than the parties to the Co-Investment Transaction), except (a)
to the extent permitted by condition 13; (b) to the extent permitted by
sections 17(e) or 57(k) of the Act as applicable; (c) indirectly, as a
result of an interest in the securities issued by one of the parties to
the Co-Investment Transaction; or (d) in the case of fees or other
compensation described in condition 2(c)(iii)(C).
3. The Company has the right to decline to participate in any
Potential Co-Investment Transaction or to invest less than the amount
proposed.
4. The Company Adviser will present to the Board, on a quarterly
basis, a record of all investments in Potential Co-Investment
Transactions made by the Private Funds during the preceding quarter
that fell within the Company's then-current Objectives and Strategies
that were not made available to the Company and an explanation of why
the investment opportunities were not offered to the Company. All
information presented to the Board pursuant to this condition will be
kept for the life of the Company and at least two years thereafter, and
will be subject to examination by the Commission and its Staff.
5. Except for Follow-On Investments made in accordance with
condition 8, the Company will not invest in reliance on the Order in
any issuer in which any Private Fund or any affiliated person of the
Private Funds is an existing investor.
6. The Company will not participate in any Potential Co-Investment
Transaction unless the terms, conditions, price, class of securities to
be purchased, settlement date and registration rights will be the same
for the Company as for each participating Private Fund. The grant to a
Private Fund, but not the Company, of the right to nominate a director
for election to a portfolio company's board of directors, the right to
have an observer on the board of directors or similar rights to
participate in the governance or management of the portfolio company
will not be interpreted so as to violate this condition 6, if
conditions 2(c)(iii)(A), (B) and (C) are met.
7. (a) If any Private Fund elects to sell, exchange or otherwise
dispose of an interest in a security that was acquired in a Co-
Investment Transaction, the Company Adviser will:
(i) Notify the Company of the proposed disposition at the earliest
practical time; and
(ii) formulate a recommendation as to participation by the Company
in any such disposition.
(b) The Company will have the right to participate in such
disposition on a proportionate basis at the same price and on the same
terms and conditions as those applicable to the participating Private
Funds.
(c) The Company may participate in such disposition without
obtaining prior approval of the Required Majority if: (i) The proposed
participation of the Company and of each Private Fund in such
disposition is proportionate to its outstanding investment in the
issuer immediately preceding the disposition; (ii) the Board has
approved as being in the best interests of the Company the ability to
participate in such dispositions on a pro rata basis (as described in
greater detail in this application); and (iii) the Board is provided on
a quarterly basis with a list of all dispositions made in accordance
with this condition. In all other cases, the Company Adviser will
provide its written recommendation as to the Company's participation to
the Eligible Directors, and the Company will participate in such
disposition solely to the extent that a Required Majority determines
that it is in the Company's best interests.
(d) The Company and each participating Private Fund shall each bear
its own expenses in connection with any such disposition.
8. (a) If any Private Fund desires to make a Follow-On Investment
in a portfolio company whose securities were acquired in a Co-
Investment Transaction, the Company Adviser will:
(i) Notify the Company of the proposed transaction at the earliest
practical time; and
(ii) formulate a recommendation as to the proposed participation,
including the amount of the proposed Follow-On investment, by the
Company.
(b) The Company may participate in such Follow-On Investment
without obtaining prior approval of the Required Majority if: (i) The
proposed participation of the Company and each Private Fund in such
investment is proportionate to its outstanding investment in the issuer
immediately preceding the Follow-On Investment; and (ii) the Board has
approved as being in the best interests of the Company the ability to
participate in Follow-On Investments on a pro rata basis (as described
in greater detail in this application). In all other cases, the Company
Adviser will provide its written recommendation as to the Company's
participation to the Eligible Directors, and the Company will
participate in such Follow-On Investment solely to the extent that a
Required Majority determines that it is in the Company's best
interests.
(c) If with respect to any Follow-On Investment:
(i) The amount of the opportunity is not based on the Company's and
the Private Funds' outstanding investments immediately preceding the
Follow-On Investment; and
(ii) the aggregate amount recommended by the Company Adviser to be
invested by the Company in the Follow-On Investment, together with the
amount proposed to be invested by the participating Private Funds in
the same transaction, exceeds the amount of the opportunity, then the
amount invested by each such party will be allocated among them pro
rata based on the ratio of capital available for investment in the
asset class being allocated of each party, up to the amount proposed to
be invested by each.
(d) The acquisition of Follow-On Investments as permitted by this
condition will be considered a Co-Investment Transaction for all
purposes and be subject to the other conditions set forth in this
application.
9. The Independent Directors will be provided quarterly for review
all information concerning Potential Co-Investment Transactions and Co-
Investment Transactions, including investments made by the Private
Funds
[[Page 34803]]
that the Company considered but declined to participate in, so that the
Independent Directors may determine whether all investments made during
the preceding quarter, including those investments which the Company
considered but declined to participate in, comply with the conditions
of the Order. In addition, the Independent Directors will consider at
least annually the continued appropriateness for the Company of
participating in new and existing Co-Investment Transactions.
10. The Company will maintain the records required by section
57(f)(3) of the Act as if each of the investments permitted under these
conditions were approved by the Required Majority under section 57(f)
of the Act.
11. No Independent Directors will also be a director, general
partner, managing member or principal, or otherwise an ``affiliated
person'' (as defined in the Act) of any Private Fund.
12. The expenses, if any, associated with acquiring, holding or
disposing of any securities acquired in a Co-Investment Transaction
(including, without limitation, the expenses of the distribution of any
such securities registered for sale under the 1933 Act) will, to the
extent not payable by an Adviser under any agreement with the Company
or the Private Funds, be shared by the Company and the Private Funds in
proportion to the relative amounts of the securities held or being
acquired or disposed of, as the case may be.
13. Any transaction fee (including break-up or commitment fees but
excluding broker's fees contemplated by section 17(e) or 57(k) of the
Act or received in connection with a Co-Investment Transaction will be
distributed to the Company and the Private Funds on a pro rata basis,
based on the amounts they invested or committed, as the case may be, in
such Co-Investment Transaction. If any transaction fee is to be held by
an Adviser to a Private Fund pending consummation of the Co-Investment
Transaction, the fee will be deposited into an account maintained by
such Adviser at a bank or banks having the qualifications prescribed in
section 26(a)(I) of the Act, and such account will earn a competitive
rate of interest that will also be divided pro rata among the Company
and the participating Private Funds based on the amounts they invest in
such Co-Investment Transaction. None of the Private Funds, Advisers of
the Private Funds nor any affiliated person of the Company will receive
additional compensation or remuneration of any kind as a result of, or
in connection with, a Co-Investment Transaction (other than (i) in the
case of the Company and the participating Private Funds, the pro rata
transaction fees described above and fees or other compensation
described in condition 2(c)(iii)(C) and (ii) in the case of the
Advisers, investment advisory fees paid in accordance with the Advisory
Agreements).
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14204 Filed 6-17-14; 8:45 am]
BILLING CODE 8011-01-P