Business Context and Reporting Period
Company: Renaissance Capital Growth & Income Fund III, Inc. (RENN Fund, Inc.)
Reporting Period: Fiscal Year Ended December 31, 1995
Business Type: Business Development Company (BDC) organized under Texas law and regulated under the Investment Company Act of 1940.
Objective: To provide current income and long-term capital appreciation by investing primarily in private placement securities (convertible preferred stock and debentures) of small and medium-sized public companies.
Key Financial Metrics
| Metric | 1995 | 1994 |
|---|---|---|
| Total Assets | $41,995,915 | $39,476,579 |
| Net Assets | $40,500,172 | $39,182,525 |
| Net Assets Per Share | $9.54 | $9.42 |
| Investment Income | $3,070,938 | $573,868 |
| Net Income | $2,503,034 | $206,970 |
| Net Income Per Share | $0.59 | $0.08 |
| Operating Expenses | $1,266,174 | $366,898 |
| Cash Used in Operating Activities | ($1,234,699) | ($191,510) |
| Dividends Paid | $798,050 | $0 |
Portfolio Composition (Dec 31, 1995):
- Eligible Portfolio Companies: $12,948,546 (33.49% of investments)
- Short-term Investments & Cash: $24,727,794 (66.51% of investments)
- Total Shares Outstanding: 4,244,630
Material Changes vs. Prior Period
- Investment Activity: The Fund significantly increased its deployment of capital, making four new portfolio investments totaling $9,348,546 in 1995, compared to one investment of $3,600,000 in 1994.
- Revenue Growth: Total investment income increased by approximately 436% to $3.07 million, driven by interest income ($2.59M), dividend income ($256k), and fee income ($227k).
- Profitability: Net income surged to $2.5 million in 1995 from $207k in 1994. This was aided by $698,270 in net unrealized appreciation on investments, a non-cash item not present in 1994.
- Expense Increase: Operating expenses rose to $1.27 million from $367k, primarily due to full-year operations and management fees of $709,381 (1.75% of assets).
- Liquidity: Cash and cash equivalents decreased from $13.1 million to $3.4 million as capital was deployed into portfolio companies.
Guidance, Outlook, and Risks
- Dividend Policy: The Fund intends to pay quarterly dividends from current investment income. Dividends are generally paid within 120 days of the quarter-end. In 1995, dividends were paid quarterly.
- Outlook: The Fund continues to seek additional investment opportunities in "Emerging Growth Companies." It anticipates paying a quarterly dividend reflecting prior quarter earnings.
- Liquidity Risk: Portfolio investments are generally non-liquid, restricted from public trading, and have fixed terms (typically seven years). The Fund does not intend to use leverage.
- Valuation Risk: A significant portion of the portfolio ($13.4 million) is valued based on fair value estimates by the Investment Adviser rather than active market quotations. These valuations are subjective and may differ from realizable values.
- Management Fees: The Investment Adviser receives a 1.75% annual management fee and a 20% incentive fee on realized capital gains (net of losses). No incentive fees were incurred in 1995 as no capital gains were realized.
Investor Verification Checklist
- Valuation Methodology: Verify the assumptions used by the Investment Adviser to value the $13.4 million in non-marketable securities, as these are subjective.
- Portfolio Concentration: Confirm that no single portfolio company exceeds the 10% net asset limit policy.
- Receivable Status: Note the $2.5 million receivable from a rescinded investment; verify the subsequent collection status (filing states it was reimbursed post-year-end).
- Dividend Sustainability: Assess whether current interest and fee income from the portfolio are sufficient to sustain quarterly dividends without drawing from capital.
- Related Party Transactions: Review the $709k management fee and $295k expense reimbursements paid to the affiliated Renaissance Group.