NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Barings Participation
Investors (the “Trust”) was organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts
pursuant to a Declaration of Trust dated April 7, 1988.
The Trust
is a diversified closed-end management investment company. Barings LLC (“Barings”), a wholly-owned indirect subsidiary of
Massachusetts Mutual Life Insurance Company (“MassMutual”), acts as its investment adviser. The Trust’s investment
objective is to maintain a portfolio of securities providing a current yield and, when available, an opportunity for capital gains. The
Trust’s principal investments are privately placed, below investment grade, long-term debt obligations including bank loans and
mezzanine debt instruments. Such direct placement securities may, in some cases, be accompanied by equity features such as common stock,
preferred stock, warrants, conversion rights, or other equity features. The Trust typically purchases these investments, which are not
publicly tradable, directly from their issuers in private placement transactions. These investments are typically made to small or middle
market companies. In addition, the Trust may invest, subject to certain limitations, in marketable debt securities (including high yield
and/or investment grade securities) and marketable common stock. Below investment grade or high yield securities have predominantly speculative
characteristics with respect to the capacity of the issuer to pay interest and repay capital.
On January 27,
1998, the Board of Trustees authorized the formation of a wholly-owned subsidiary of the Trust (“PI Subsidiary Trust”) for
the purpose of holding certain investments. The results of the PI Subsidiary Trust are consolidated in the accompanying financial statements.
Footnote 2.D below discusses the Federal tax consequences of the PI Subsidiary Trust.
| 2. | Significant
Accounting Policies |
The following
is a summary of significant accounting policies followed consistently by the Trust in the preparation of its consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Trustees
have determined that the Trust is an investment company in accordance with Accounting Standards Codification (“ASC”) 946,
Financial Services – Investment Companies, for the purpose of financial reporting.
A.
Fair Value Measurements:
Under U.S.
GAAP, fair value represents the price that should be received to sell an asset (exit price) in an orderly transaction between willing
market participants at the measurement date.
Determination
of Fair Value
The determination
of the fair value of the Trust’s investments is the responsibility of the Trust’s Board of Trustees (the
“Trustees”).
The Trustees have adopted procedures for the valuation of the Trust’s securities and have delegated responsibility for applying
those procedures to Barings. Barings has established a Pricing Committee which is responsible for setting the guidelines used in following
the procedures adopted by the Trustees ensuring that those guidelines are being followed. Barings considers all relevant factors that
are reasonably available, through either public information or information available to Barings, when determining the fair value of a
security. The Trustees meet at least once each quarter to approve the value of the Trust’s portfolio securities as of the close
of business on the last business day of the preceding quarter. This valuation requires the approval of a majority of the Trustees of
the Trust, including a majority of the Trustees who are not interested persons of the Trust or of Barings. In approving valuations, the
Trustees will consider reports by Barings analyzing each portfolio security in accordance with the procedures and guidelines referred
to above, which include the relevant factors referred to below. Barings has agreed to provide such reports to the Trust at least quarterly.
The consolidated financial statements include private placement restricted securities valued at $163,620,424 (102.80% of net assets)
as of June 30, 2022, the values of which have been estimated by the Trustees based on the process described above in the absence of readily
ascertainable market values. Due to the inherent uncertainty of valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and the differences could be material.
Independent
Valuation Process
The
fair value of bank loans and equity investments that are unsyndicated or for which market quotations are not readily available,
including middle-market bank loans, will be submitted to an independent provider to perform an independent valuation on those bank
loans and equity investments as of the end of each quarter. Such bank loans and equity investments will be held at cost until such
time as they are sent to the valuation provider for an initial valuation subject to override by the Adviser should it determine that
there have been material changes in interest rates and/or the credit quality of the issuer. The independent valuation provider
applies various methods (synthetic rating analysis, discounting cash flows, and re-underwriting analysis) to establish the rate of
return a market participant would require (the “discount rate”) as of the valuation date, given market conditions,
prevailing lending standards and the perceived credit quality of the issuer. Future expected cash flows for each investment are
discounted back to present value using these discount rates in the discounted cash flow analysis. A range of value will be provided
by the valuation provider and the Adviser will determine the point within that range that it will use in making valuation
recommendations to the Trustees, and will report to the Trustees on its rationale for each such determination. The Adviser will
continue to use its internal valuation model as a comparison point to validate
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
the price range provided by the valuation provider
and, where applicable, in determining the point within that range that it will use in making valuation recommendations to the
Trustees. If the Advisers’ Pricing Committee disagrees with the price range provided, it may make a fair value recommendation
to the Trustees that is outside of the range provided by the independent valuation provider, and will notify the Trustees of any
such override and the reasons therefore. In certain instances, the Trust may determine that it is not cost-effective, and as a
result is not in the shareholders’ best interests, to request the independent valuation firm to perform the Procedures on
certain investments. Such instances include, but are not limited to, situations where the fair value of the investment in the
portfolio company is determined to be insignificant relative to the total investment portfolio. Finally, the Trustees determined in
good faith that the Trust’s investments were valued at fair value in accordance with the Trust’s valuation policies and
procedures and the 1940 Act based on, among other things, the input of Barings, the Trust’s Audit Committee and the
independent valuation firm.
Following
is a description of valuation methodologies used for assets recorded at fair value.
Corporate
Public Securities at Fair Value – Bank Loans, Corporate Bonds, Preferred Stocks and Common Stocks
The Trust
uses external independent third-party pricing services to determine the fair values of its Corporate Public Securities. At June 30, 2022,
100% of the carrying value of these investments was from external pricing services. In the event that the primary pricing service does
not provide a price, the Trust utilizes the pricing provided by a secondary pricing service.
Public
debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust’s pricing services
use multiple valuation techniques to determine fair value. In instances where significant market activity exists, the pricing services
may utilize a market based approach through which quotes from market makers are used to determine fair value. In instances where significant
market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market
characteristics such as benchmark yield curves, option adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated
timing of principal underlying prepayments, collateral, and other unique security features in order to estimate the relevant cash flows,
which are then discounted to calculate the fair value.
The Trust’s
investments in bank loans are normally valued at the bid quotation obtained from dealers in loans by an independent pricing service in
accordance with the Trust’s valuation policies and procedures approved by the Trustees.
Public
equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sales price of that day.
At least
annually, Barings conducts reviews of the primary pricing vendors to validate that the inputs used in that vendors’ pricing process
are deemed to be market observable as defined in the standard. While Barings is not provided access to proprietary models of the vendors,
the reviews have included on-site walk-throughs of the pricing process, methodologies and control procedures for each asset class and
level for which prices are provided. The reviews also include an examination of the underlying inputs and assumptions for a sample of
individual securities across asset classes, credit rating levels and various durations. In addition, the pricing vendors have an established
challenge process in place for all security valuations, which facilitates identification and resolution of prices that fall outside expected
ranges. Barings believes that the prices received from the pricing vendors are representative of prices that would be received to sell
the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
Corporate
Restricted Securities at Fair Value – Bank Loans, Corporate Bonds
The fair
value of certain notes is determined using an internal model that discounts the anticipated cash flows of those notes using a specific
discount rate. Changes to that discount rate are driven by changes in general interest rates, probabilities of default and credit adjustments.
The discount rate used within the models to discount the future anticipated cash flows is considered a significant unobservable input.
Increases/(decreases) in the discount rate would result in a (decrease)/increase to the notes’ fair value.
The fair
value of certain distressed notes is based on an enterprise waterfall methodology which is discussed in the equity security valuation
section below.
Corporate
Restricted Securities at Fair Value – Common Stock, Preferred Stock and Partnerships & LLC’s
The fair
value of equity securities is determined using an enterprise waterfall methodology. Under this methodology, the enterprise value of the
company is first estimated and that value is then allocated to the company’s outstanding debt and equity securities based on the
documented priority of each class of securities in the capital structure. Generally, the waterfall proceeds from senior debt, to senior
and junior subordinated debt, to preferred stock, then finally common stock.
To estimate
a company’s enterprise value, the company’s trailing twelve months earnings before interest, taxes, depreciation and amortization
(“EBITDA”) is multiplied by a valuation multiple.
Both the
company’s EBITDA and valuation multiple are considered significant unobservable inputs. Increases/(decreases) to the company’s
EBITDA and/or valuation multiple would result in increases/(decreases) to the equity value.
Barings Participation
Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Short-Term
Securities
Short-term
securities with more than sixty days to maturity are valued at fair value, using external independent third-party services. Short-term
securities, of sufficient credit quality, having a maturity of sixty days or less are valued at amortized cost, which approximates fair
value.
New
Accounting Pronouncement
In March
2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04 (“ASU 2020-04”) “Reference
Rate Reform (Topic 848): Facilitation of the
Effects
of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for applying generally
accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference
LIBOR or another reference rate expected to be discontinued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December
31, 2022. The Trust expects that the adoption of this guidance will not have a material impact on the Trust’s financial position,
result of operations or cash flows.
Fair Value Hierarchy
The Trust categorizes its investments measured
at fair value in three levels, based on the inputs and assumptions used to determine fair value. These levels are as follows:
Level 1 – quoted prices in active
markets for identical securities
Level 2 – other significant observable
inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 – significant unobservable
inputs (including the Trust’s own assumptions in determining the fair value of investments)
The following table summarizes the levels in the
fair value hierarchy into which the Trust’s financial instruments are categorized as of June 30, 2022.
The fair values of the Trust’s investments
disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation
as of June 30, 2022 are as follows:
| Assets: | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Restricted Securities | |
| | | |
| | | |
| | | |
| | |
| Corporate Bonds | |
$ | 17,560,272 | | |
$ | — | | |
$ | 7,426,676 | | |
$ | 10,133,596 | |
| Bank Loans | |
| 133,430,890 | | |
| — | | |
| — | | |
| 133,430,890 | |
| Common Stock - U.S. | |
| 1,948,563 | | |
| — | | |
| — | | |
| 1,948,563 | |
| Preferred Stock | |
| 1,628,302 | | |
| — | | |
| — | | |
| 1,628,302 | |
| Partnerships and LLCs | |
| 16,479,073 | | |
| — | | |
| — | | |
| 16,479,073 | |
| Public Securities | |
| | | |
| | | |
| | | |
| | |
| Bank Loans | |
| 3,004,168 | | |
| — | | |
| 1,681,466 | | |
| 1,322,702 | |
| Corporate Bonds | |
| 1,156,817 | | |
| — | | |
| 1,156,817 | | |
| — | |
| Common Stock - U.S. | |
| 40,425 | | |
| 7,558 | | |
| — | | |
| 32,867 | |
| Preferred Stock | |
| — | | |
| — | | |
| — | | |
| — | |
| Short-term Securities | |
| — | | |
| — | | |
| — | | |
| — | |
| Total | |
$ | 175,248,510 | | |
$ | 7,558 | | |
$ | 10,264,959 | | |
$ | 164,975,993 | |
See
information disaggregated by security type and industry classification in the Consolidated
Schedule of Investments. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Quantitative Information about Level 3 Fair
Value Measurements
The following table represents quantitative information
about Level 3 fair value measurements as of June 30, 2022.
| |
Fair
Value |
Valuation
Technique |
Unobservable
Inputs |
Range |
Weighted* |
| Bank Loans |
$ 108,729,167 |
Income
Approach |
Implied
Spread |
8.6% - 18.7% |
10.5% |
| |
|
|
|
|
|
| |
$ 1,246,166 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.0x
to 11.6x |
7.1x |
| |
|
|
|
|
|
| Corporate
Bonds |
$ 9,253,008 |
Income
Approach |
Implied
Spread |
13.0% - 23.7% |
16.6% |
| |
|
|
|
|
|
| |
$ 880,587 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.5x
to 6.8x |
5.5x |
| |
|
|
|
|
|
| Equity Securities** |
$ 18,297,710 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.0x
to 52.5x |
16.2x |
Certain of the Trust’s Level 3 equity
securities investments may be valued using unadjusted inputs that have not been internally developed by the Trust, including recently
purchased securities held at cost. As a result, fair value of assets of $26,569,355 have been excluded
from the preceding table.
| * | The weighted
averages disclosed in the table above were weighted by relative fair value |
| ** | Including
partnerships and LLC’s |
Following is a
reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:
| Assets: | |
Beginning
balance at
12/31/2021 | | |
Included
in
earnings | | |
Purchases | | |
Sales | | |
Prepayments | | |
Transfers
into
Level 3 | | |
Transfers
out of
Level 3 | | |
Ending
balance at
06/30/2022 | |
| Restricted
Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Corporate
Bonds | |
$ | 9,549,244 | | |
$ | 511,774 | | |
$ | 96,832 | | |
$ | (24,254 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 10,133,596 | |
| Bank
Loans | |
| 130,187,625 | | |
| (980,847 | ) | |
| 14,417,119 | | |
| (350,022 | ) | |
| (9,842,985 | ) | |
| — | | |
| — | | |
| 133,430,890 | |
| Common
Stock - U.S. | |
| 1,257,986 | | |
| 324,091 | | |
| 450,162 | | |
| (83,676 | ) | |
| — | | |
| — | | |
| — | | |
| 1,948,563 | |
| Preferred
Stock | |
| 1,608,973 | | |
| 470 | | |
| 27,551 | | |
| (8,692 | ) | |
| — | | |
| — | | |
| — | | |
| 1,628,302 | |
| Partnerships
and LLCs | |
| 17,285,572 | | |
| (2,286,544 | ) | |
| 1,511,954 | | |
| (31,909 | ) | |
| — | | |
| — | | |
| — | | |
| 16,479,073 | |
| Public
Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Bank
Loans | |
| 1,127,428 | | |
| (88,793 | ) | |
| 284,692 | | |
| — | | |
| (625 | ) | |
| — | | |
| — | | |
| 1,322,702 | |
| Common
Stock - U.S. | |
| 33,565 | | |
| (698 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 32,867 | |
| Corporate
Bonds | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Preferred
Stock | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| | |
$ | 161,050,393 | | |
$ | (2,520,547 | ) | |
$ | 16,788,310 | | |
$ | (498,553 | ) | |
$ | (9,843,610 | ) | |
$ | — | | |
$ | — | | |
$ | 164,975,993 | |
| * | For the six months ended June 30, 2022, transfers into and out of Level 3 were the result of changes
in the observability of significant inputs for certain portfolio companies. |
Barings Participation
Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Income,
Gains and Losses on Level 3 assets included in Net Increase in Net Assets resulting from Operations for the year are presented in the
following accounts on the Statement of Operations:
| |
Net Increase
(Decrease)
in Net Assets
Resulting
from
Operations | | |
Change in
Unrealized
(Depreciation)
in Net Assets
from assets
still held | |
Interest Income
(OID Amortization) | |
$ | 256,002 | | |
| — | |
Net realized gain on
investments before taxes | |
$ | 234,337 | | |
| — | |
Net change in unrealized
(depreciation) of investments
before taxes | |
$ | (3,010,886 | ) | |
| (4,440,990 | ) |
B.
Accounting for Investments:
Investment
Income
Investment
transactions are accounted for on the trade date. Interest income, including the amortization of premiums and accretion of discounts
on bonds held using the yield-to-maturity method, is recorded on the accrual basis to the extent that such amounts are expected to be
collected. Generally, when interest and/or principal payments on a loan become past due, or if the Trust otherwise does not expect the
borrower to be able to service its debt and other obligations, the Trust will place the investment on non-accrual status and will cease
recognizing interest income on that investment for financial reporting purposes until all principal and interest have been brought current
through payment or due to a restructuring such that the interest income is deemed to be collectible. The Trust writes off any previously
accrued and uncollected interest when it is determined that interest is no longer considered collectible. As of June 30, 2022, the
fair value of the Trust’s non-accrual assets was $5,140,223, or 2.9% of the total fair value of the Trust’s portfolio, and
the cost of the Trust’s non-accrual assets was $7,981,431, or 4.6% of the total cost of the Trust’s portfolio.
Payment-in-Kind
Interest
The Trust
currently holds, and expects to hold in the future, some investments in its portfolio that contain Payment-in-Kind (“PIK”)
interest provisions. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance
of the investment, rather than being paid to the Trust in cash, and is recorded as interest income. Thus, the actual collection of PIK
interest may be deferred until the time of debt principal repayment. PIK interest, which is a non-cash source of income at the time of
recognition, is included in the Trust’s taxable income and therefore affects the amount the Trust is required to distribute
to its
stockholders to maintain its qualification as a “regulated investment company” for federal income tax purposes, even though
the Trust has not yet collected the cash.
Generally,
when current cash interest and/or principal payments on an investment become past due, or if the Trust otherwise does not expect the
borrower to be able to service its debt and other obligations, the Trust will place the investment on PIK non-accrual status and will
cease recognizing PIK interest income on that investment for financial reporting purposes until all principal and interest have been
brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The Trust writes
off any accrued and uncollected PIK interest when it is determined that the PIK interest is no longer collectible. As of June 30,
2022, the Trust held no PIK non-accrual assets.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Realized
gains and losses on investment transactions and unrealized appreciation and depreciation of investments are reported for financial statement
and Federal income tax purposes on the identified cost method.
C.
Use of Estimates:
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and the differences could be material.
D.
Federal Income Taxes:
The Trust
has elected to be taxed as a “regulated investment company” under the Internal Revenue Code, and intends to maintain this
qualification and to distribute substantially all of its net taxable income to its shareholders. In any year when net long-term capital
gains are realized by the Trust, management, after evaluating the prevailing economic conditions, will recommend that Trustees either
designate the net realized long-term gains as undistributed and pay the federal capital gains taxes thereon, or distribute all or a portion
of such net gains.
The Trust
is taxed as a regulated investment company and is therefore limited as to the amount of non-qualified income that it may receive as the
result of operating a trade or business, e.g. the Trust’s pro rata share of income allocable to the Trust by a partnership operating
company. The Trust’s violation of this limitation could result in the loss of its status as a regulated investment company, thereby
subjecting all of its net income and capital gains to corporate taxes prior to distribution to its shareholders. The Trust, from time-to-time,
identifies investment opportunities in the securities of entities that could cause such trade or business income to be allocable to the
Trust. The PI Subsidiary Trust (described in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Footnote 1, above) was formed in order to allow investment in such securities without adversely
affecting the Trust’s status as a regulated investment company.
The PI
Subsidiary Trust is not taxed as a regulated investment company. Accordingly, prior to the Trust receiving any distributions from the
PI Subsidiary Trust, all of the PI Subsidiary Trust’s taxable income and realized gains, including non-qualified income and realized
gains, is subject to taxation at prevailing corporate tax rates. As of June 30, 2022, the PI Subsidiary Trust has incurred
income tax benefit of $18,861.
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of the existing assets and liabilities and their respective tax basis. As of June 30, 2022, the PI Subsidiary Trust
has a deferred tax liability of $364,128.
E.
Distributions to Shareholders:
The Trust
records distributions to shareholders from distributable earnings and net realized gains, if any, on the ex-dividend date. The Trust’s
dividend is declared four times per year. The Trust’s net realized capital gain distribution, if any, is declared in December.
| 3. | Investment
Advisory and Administrative Services Contract |
A. Services:
Under an
Investment Advisory and Administrative Services Contract (the “Contract”) with the Trust, Barings has agreed to use its best
efforts to present to the Trust a continuing and suitable investment program consistent with the investment objectives and policies of
the Trust. Barings represents the Trust in any negotiations with issuers, investment banking firms, securities brokers or dealers and
other institutions or investors relating to the Trust’s investments. Under the Contract, Barings also provides administration of
the day-to-day operations of the Trust and provides the Trust with office space and office equipment, accounting and bookkeeping services,
and necessary executive, clerical and secretarial personnel for the performance of the foregoing services.
B.
Fee:
For its
services under the Contract, Barings is paid a quarterly investment advisory fee equal to 0.225% of the value of the Trust’s net
assets as of the last business day of each fiscal quarter, an amount approximately equivalent to 0.90% on an annual basis. A majority
of the Trustees, including a majority of the Trustees who are not interested persons of the Trust or of Barings, approve the valuation
of the Trust’s net assets as of such day.
C.
Basis for Board Renewal of Contract
At a meeting
of the Trustees held by remote electronic communications (in accordance with Securities and Exchange Commission relief) on April 18,
2022, the Trustees (including a majority of the Trustees who are not “interested
persons” of the Trust or Barings) unanimously
approved a one-year continuance of the Contract.
Prior to
the meeting, the Trustees requested and received from Ropes & Gray LLP, counsel to the Trust, a memorandum describing the Trustees’
legal responsibilities in connection with their review and re-approval of the Contract. The Trustees also requested and received from
Barings extensive written and oral information regarding, among other matters: the principal terms of the Contract; the reasons why Barings
was proposing the continuance of the Contract; Barings and its personnel; the Trust’s investment performance, including comparative
performance information; the nature and quality of the services provided by Barings to the Trust; financial results and condition of
Barings; the fee arrangements between Barings and the Trust; fee and expense information, including comparative fee and expense information;
profitability of the advisory arrangement to Barings; and “fallout” benefits to Barings resulting from the Contract.
In connection
with their deliberations regarding the continuation of the Contract, the Trustees, including the independent Trustees, considered such
information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant.
The Trustees’ conclusion as to the continuance of the Contract was based on a comprehensive consideration of all information provided
to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations
are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different
weights to various factors. It is also important to recognize that the fee arrangements between Barings and the Trust are the result
of years of review and discussion between the independent Trustees and Barings, that certain aspects of such arrangements may receive
greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration
of these same arrangements during the course of the year and in prior years.
Nature,
Extent and Quality of Services to be Provided by Barings to the Trust
In evaluating
the scope and quality of the services provided by Barings to the Trust, the Trustees considered, among other factors: (i) the scope of
services required to be provided by Barings under the Contract; (ii) Barings’ ability to find and negotiate private placement securities
that are consistent with the stated investment objectives of the Trust; (iii) the experience and quality of Barings’ staff; (iv)
the strength of Barings’ financial condition; (v) the nature of the private placement market compared to public markets (including
the fact that finding, analyzing, negotiating and servicing private placement securities is more labor-intensive than buying and selling
public securities and the administration of private placement securities is more extensive, expensive, and requires greater time and
expertise
Barings Participation
Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
than a portfolio of only public securities); (vi) the potential advantages afforded to the Trust by its ability to co-invest
in negotiated private placements with MassMutual and its affiliates; and (vii) the scope of services provided by Barings in light of
regulatory and legislative initiatives that have required increased legal, compliance and business attention and diligence. Based on
such considerations, the Trustees concluded that, overall, they are satisfied with the nature, extent and quality of services provided
by Barings, and expected to be provided in the future, under the renewed Contract.
Investment
Performance
The Trustees
also examined the Trust’s short-term, intermediate-term, and long-term performance as compared against various benchmark indices
presented at the meeting, which showed that the Trust had outperformed the Credit Suisse Leveraged Loan Index for the 3-month, year-to-date,
1- and 3- year periods, had outperformed the Bloomberg Barclays US Corporate High Yield Index for the 3-month, year-to-date, 1-, 3-,
5- and 10-year periods, and had underperformed the S&P 500 Index for the 1-, 3- ,5- and 10-year periods, in each case ended December
31, 2021. In addition, the Trustees considered comparisons of the Trust’s performance with the performance of (i) selected closed-end
investment companies and funds that may invest in private placement securities and/or bank loans; (ii) selected business development
companies with comparable types of investments; and (iii) investment companies included in the Broadridge closed-end bond universe. The
Trustees considered that, while such comparisons are helpful in judging performance, they are not directly comparable in terms of types
of investments. Based on these considerations and the detailed performance information provided to the Trustees at the regular Board
meetings each quarter, the Trustees concluded that the Trust’s absolute and relative performance over time have been sufficient
to warrant renewal of the Contract.
Advisory
Fee/Costs of Services Provided and Profitability/ Manager’s “Fallout” Benefits
In connection
with the Trustees’ consideration of the advisory fee paid by the Trust to Barings under the Contract, Barings noted that it was
unaware of any registered closed-end investment companies that are directly comparable to the Trust in terms of the types of investments
and percentages invested in private placement securities (which require more extensive advisory and administrative services than a portfolio
of publicly traded securities, as previously discussed) other than Barings Corporate Investors, which is also advised by Barings. Under
the terms of its Investment Services Contract, Barings Corporate Investors is charged a quarterly investment advisory fee of 0.3125%
of net asset value as of the end of each quarter, which is approximately equal to 1.25% annually. In considering the fee rate provided
in the Contract, the Trustees noted the advisory fee charged by Barings to various private and public funds that Barings
manages that
invest in similar asset classes, and observed that the fee charged to Barings Corporate Investors is lower than the Trust’s advisory
fee.
At the
request of the Trustees, Barings provided information concerning the profitability of Barings’ advisory relationship with the Trust.
The Trustees also considered the non-economic benefits Barings and its affiliates derived from its relationship with the Trust, including
the reputational benefits derived from having the Trust listed on the New York Stock Exchange, and the de minimis amount of commissions
resulting from the Trust’s portfolio transactions used by Barings for third-party soft dollar arrangements. The Trustees recognized
that Barings should be entitled to earn a reasonable level of profit for services provided to the Trust and, based on their review, concluded
that they were satisfied that Barings’ historical level of profitability from its relationship with the Trust was not excessive
and that the advisory fee structure under the Contract is reasonable.
Economies
of Scale
The Trustees
considered the concept of economies of scale and possible advisory fee reductions if the Trust were to grow in assets. Given that the
Trust is not continuously offering shares, such growth comes principally from retained net realized gain on investments and dividend
reinvestment. The Trustees concluded that the absence of breakpoints in the fee schedule under the Contract was currently acceptable
given the Trust’s current size and closed-end fund structure.
Based on
their evaluation of factors that they deemed to be material, including those factors described above, the Trustees (including a majority
of the Trustees who are not “interested persons” of the Trust or Barings) unanimously concluded that the Trust’s Contract
should be continued for an additional one-year period.
Senior
Secured Indebtedness
MassMutual
holds the Trust’s $15,000,000 Senior Fixed Rate Convertible Note (the “Note”) issued by the Trust on December 13,
2011. The Note is due December 13, 2023 and accrues interest at 4.09% per annum. MassMutual, at its option, can convert the principal
amount of the Note into common shares. The dollar amount of principal would be converted into an equivalent dollar amount of common shares
based upon the average price of the common shares for ten business days prior to the notice of conversion. For the six months ended June
30, 2022, the Trust incurred total interest expense on the Note of $306,750.
The Trust
may redeem the Note, in whole or in part, at the principal amount proposed to be redeemed together with the accrued and unpaid interest
thereon through the redemption date plus the Make Whole Premium. The Make Whole Premium equals the excess of (i) the present value
of the scheduled payments of principal and interest which the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Trust would
have paid but for the proposed redemption, discounted at the rate of interest of U.S. Treasury obligations whose maturity approximates
that of the Note plus 0.50% over (ii) the principal of the Note proposed to be redeemed.
Credit
Facility
On July
22, 2021 (the “Effective Date”), MassMutual provided to the Trust, a five-year $15,000,000 committed revolving credit facility.
Interest charged is at the rate of LIBOR (London Interbank Offered Rate) plus 2.25% on the outstanding borrowings. The Trust will also
be responsible for paying a commitment fee of 0.50% on the unused amount. For purposes of calculating the commitment fee for the period
from the Effective Date to the earlier to occur of (x) the date that is 270 days after the Effective Date and (y) the first date on which
the aggregate outstanding borrowings is greater than $7,500,000, the unused amount shall be deemed to be in an amount equal to $7,500,000.
As of June 30, 2022, the Trust had $8,200,000 of outstanding borrowings on the revolving credit facility.
| 5. | Purchases
and Sales of Investments |
| | |
For
the six
months ended
06/30/2022 | |
| | |
Cost
of
Investments
Acquired | | |
Proceeds
from
Sales or
Maturities | |
| | |
| | |
| |
| Corporate restricted securities | |
$ | 18,775,056 | | |
$ | 13,338,303 | |
| | |
| | | |
| | |
| Corporate public securities | |
| 290,250 | | |
| 625 | |
In the normal
course of its business, the Trust trades various financial instruments and enters into certain investment activities with investment
risks. These risks include: (i) market risk, (ii) volatility risk and (iii) credit, counterparty and liquidity risk. It
is the Trust’s policy to identify, measure and monitor risk through various mechanisms including risk management strategies and
credit policies. These include monitoring risk guidelines and diversifying exposures across a variety of instruments, markets and counterparties.
There can be no assurance that the Trust will be able to implement its credit guidelines or that its risk monitoring strategies will
be successful.
Impacts
of COVID-19
The pandemic
related to the global spread of novel coronavirus disease (COVID-19), which was first detected in December 2019, has resulted in significant
disruptions to global business activity and the global economy, as well as the economies of individual countries, the financial performance
of individual companies and sectors, and the securities and commodities markets in general. This pandemic, the full effects of which
are still unknown, has resulted in substantial market volatility and may continue to adversely impact the prices and liquidity of the
Trust’s investments and the Trust’s performance.
LIBOR
The United
Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced a desire to phase out the use of LIBOR
by the end of 2021. LIBOR has historically been a common benchmark interest rate index used to make adjustments to variable-rate loans.
It is used throughout global banking and financial industries to determine interest rates for a variety of financial instruments and
borrowing arrangements. The transition process might lead to increased volatility and illiquidity in markets that currently rely on LIBOR
to determine interest rates. It could also lead to a reduction in the value of some LIBOR-based investments held by a fund and reduce
the effectiveness of new hedges placed against existing LIBOR-based investments. While some LIBOR-based instruments contemplate a scenario
where LIBOR is no longer available by providing for an alternative rate-setting methodology, not all have such provisions and there may
be significant uncertainty regarding the effectiveness of any such alternative methodologies.
| 7. | Commitments
and Contingencies |
During the
normal course of business, the Trust may enter into contracts and agreements that contain a variety of representations and warranties.
The exposure, if any, to the Trust under these arrangements is unknown as this would involve future claims that may or may not be made
against the Trust and which have not yet occurred. The Trust has no history of prior claims related to such contracts and agreements.
Barings Participation
Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
At June 30, 2022 the Trust had
the following unfunded commitments:
Delayed Draw Term Loans:
| Investment | |
Unfunded Amount | | |
Unfunded Value | |
| Amtech Software | |
$ | 363,636 | | |
$ | 364,439 | |
| Best Lawyers | |
| 221,154 | | |
| 221,582 | |
| Dwyer Instruments, Inc. | |
| 131,579 | | |
| 131,165 | |
| Electric Power Systems International Inc. | |
| 50,125 | | |
| 50,644 | |
| eShipping | |
| 293,035 | | |
| 293,674 | |
| FragilePAK | |
| 539,063 | | |
| 547,409 | |
| Heartland Veterinary Partners | |
| 46,000 | | |
| 46,425 | |
| Kano Laboratories LLC | |
| 569,601 | | |
| 569,500 | |
| National Auto Care | |
| 142,157 | | |
| 142,085 | |
| Navia Benefit Solutions Inc. | |
| 543,720 | | |
| 546,513 | |
| Portfolio Group | |
| 244,950 | | |
| 245,861 | |
| ROI Solutions, LLC | |
| 534,628 | | |
| 541,313 | |
| Scaled Agile, Inc. | |
| 287,170 | | |
| 290,116 | |
| SEKO Worldwide, LLC | |
| 160,320 | | |
| 160,103 | |
| Smartling, Inc. | |
| 202,941 | | |
| 203,394 | |
| Standard Elevator Systems | |
| 514,576 | | |
| 515,355 | |
| Stratus Unlimited | |
| 172,106 | | |
| 173,833 | |
| Syntax Systems Ltd. | |
| 193,308 | | |
| 193,555 | |
| Tencarva Machinery Company | |
| 233,555 | | |
| 233,914 | |
| The Caprock Group | |
| 360,424 | | |
| 362,536 | |
| Ziyad | |
| 276,811 | | |
| 277,175 | |
| | |
| | | |
| | |
| | |
$ | 6,080,858 | | |
$ | 6,110,589 | |
Revolvers:
| Investment | |
Unfunded Amount
| | |
Unfunded Value
| |
| Accurus Aerospace
Corporation | |
$ | 60,981 | | |
$ | 60,945 | |
| Amtech Software | |
| 90,909 | | |
| 91,110 | |
| Best Lawyers | |
| 97,308 | | |
| 97,522 | |
| BrightSign | |
| 134,202 | | |
| 131,899 | |
| CAi Software | |
| 235,746 | | |
| 235,377 | |
| Cash Flow Management | |
| 52,239 | | |
| 52,364 | |
| Cogency Global | |
| 82,652 | | |
| 82,754 | |
| Comply365 | |
| 52,748 | | |
| 52,713 | |
| Decks Direct | |
| 263,455 | | |
| 259,308 | |
| EFI Productivity Software | |
| 73,012 | | |
| 73,133 | |
| eShipping | |
| 170,937 | | |
| 171,310 | |
| Jones Fish | |
| 164,557 | | |
| 164,732 | |
| LeadsOnline | |
| 194,577 | | |
| 194,839 | |
| Marshall Excelsior Co. | |
| 33,005 | | |
| 32,924 | |
| Narda-MITEQ | |
| 207,682 | | |
| 202,677 | |
| National Auto Care | |
| 98,039 | | |
| 98,021 | |
| Office Ally | |
| 133,124 | | |
| 132,923 | |
| Omega Holdings | |
| 37,914 | | |
| 38,060 | |
| Polara | |
| 108,266 | | |
| 108,058 | |
| ProfitOptics | |
| 193,548 | | |
| 193,731 | |
| Scaled Agile, Inc. | |
| 231,716 | | |
| 234,034 | |
| Smartling, Inc. | |
| 101,471 | | |
| 101,697 | |
| Standard Elevator Systems | |
| 98,822 | | |
| 98,979 | |
| Syntax Systems Ltd. | |
| 44,762 | | |
| 44,853 | |
| Tank Holding Corp | |
| 12,727 | | |
| 12,748 | |
| Tencarva Machinery Company | |
| 297,534 | | |
| 297,992 | |
| The Caprock Group | |
| 105,981 | | |
| 106,361 | |
| Woodland Foods, Inc. | |
| 128,377 | | |
| 128,757 | |
| Ziyad | |
| 173,007 | | |
| 173,234 | |
| | |
$ | 3,679,299 | | |
$ | 3,673,054 | |
Total Unfunded
Commitments | |
$ | 9,760,157 | | |
$ | 9,783,643 | |
As of June 30, 2022, unfunded commitments
had unrealized appreciation of $23,486 or 0.01% of net assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| 8. | Quarterly Results of Investment Operations (unaudited) |
| | |
March 31,
2022 | |
| | |
Amount
| | |
Per Share
| |
| | |
| | | |
| | |
| Investment income | |
$ | 2,970,053 | | |
| | |
| Net investment income (net of
taxes) | |
| 2,161,764 | | |
$ | 0.20 | |
| Net realized and unrealized
gain on investments (net of taxes) | |
| (725,503 | ) | |
| (0.07 | ) |
| | |
June 30,
2022 | |
| | |
Amount
| | |
Per Share
| |
| | |
| | | |
| | |
| Investment income | |
$ | 3,163,489 | | |
| | |
| Net investment income (net of
taxes) | |
| 2,376,358 | | |
$ | 0.22 | |
| Net realized and unrealized
loss on investments (net of taxes) | |
| (3,605,291 | ) | |
| (0.34 | ) |
| 9. | Results of Shareholder Meeting |
The Annual Meeting of Shareholders was
held on Thursday, May 19, 2022. The shareholders were asked to vote to re-elect Susan B. Sweeney as Trustee for a three-year term, and
to elect David M. Mihalick as Trustee for a three-year term. The shareholders approved the proposal. The Trust’s other Trustees,
Clifford M. Noreen, Michael H. Brown, Barbara M. Ginader, Edward P. Grace and Maleyne M. Syracuse continued to serve their respective
terms following the May 19, 2022 Annual Shareholder Meeting. Eric J. Lloyd’s term expired following the May 19, 2022 Annual
Shareholder Meeting. The results of the voting are set forth below.
| | |
Shares
for | | |
Withheld | |
| | |
| | |
| |
| Susan
B. Sweeney | |
| 13,935,056 | | |
| 341,034 | |
| David M.
Mihalick | |
| 13,965,684 | | |
| 310,406 | |
Barings Participation Investors
This
privacy notice is being provided on behalf of Barings LLC and its affiliates: Barings Securities LLC; Barings Australia Pty Ltd; Barings
Japan Limited; Barings Investment Advisers (Hong Kong) Limited; Barings Funds Trust; Barings Global Short Duration High Yield Fund; Barings
BDC, Inc.; Barings Corporate Investors and Barings Participation Investors (together, for purposes of this privacy notice, “Barings”).
When you use Barings you entrust us not only
with your hard-earned assets but also with your personal and financial data. We consider your data to be private and confidential, and
protecting its confidentiality is important to us. Our policies and procedures regarding your personal information are summarized below.
We may collect non-public personal information
about you from:
| • | Applications or other forms, interviews, or by other means; |
| • | Consumer or other reporting agencies, government agencies, employers or others; |
| • | Your transactions with us, our affiliates, or others; and |
We may share the financial information we collect
with our financial service affiliates, such as insurance companies, investment companies and securities broker-dealers. Additionally,
so that we may continue to offer you products and services that best meet your investment needs and to effect transactions that you request
or authorize, we may disclose the information we collect, as described above, to companies that perform administrative or marketing services
on our behalf, such as transfer agents, custodian banks, service providers or printers and mailers that assist us in the distribution
of investor materials or that provide operational support to Barings. These companies are required to protect this information and will
use this information only for the services for which we hire them, and are not permitted to use or share this information for any other
purpose. Some of these companies may perform such services in jurisdictions other than the United States. We may share some or all of
the information we collect with other financial institutions with whom we jointly market products. This may be done only if it is permitted
by the state in which you live. Some disclosures may be limited to your name, contact and transaction information with us or our affiliates.
Any disclosures will be only to the extent permitted
by federal and state law. Certain disclosures may require us to get an “opt-in” or “opt-out” from you. If this
is required, we will do so before information is shared. Otherwise, we do not share any personal information about our customers or former
customers unless authorized by the customer or as permitted by law.
We restrict access to personal information about
you to those employees who need to know that information to provide products and services to you. We maintain physical, electronic and
procedural safeguards that comply with legal standards to guard your personal information. As an added measure, we do not include personal
or account information in non-secure e-mails that we send you via the Internet without your prior consent. We advise you not to send such
information to us in non-secure e-mails.
This joint notice describes the privacy policies
of Barings, the Funds and Barings Securities LLC. It applies to all Barings and the Funds accounts you presently have, or may open in
the future, using your social security number or federal taxpayer identification number - whether or not you remain a shareholder of our
Funds or as an advisory client of Barings. As mandated by rules issued by the Securities and Exchange Commission, we will be sending you
this notice annually, as long as you own shares in the Funds or have an account with Barings.
Barings Securities LLC is a member of the Financial
Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Investors may obtain information about
SIPC including the SIPC brochure by contacting SIPC online at www.sipc.org or calling (202)-371-8300. Investors may obtain information
about FINRA including the FINRA Investor Brochure by contacting FINRA online at www.finra.org or by calling (800) 289-9999.
April 2019
This page left intentionally blank.
Members
of the Board of
Trustees
Clifford M.
Noreen
Chairman
Michael H. Brown*
Barbara M. Ginader*
Edward P. Grace
III*
David M. Mihalick
Susan B. Sweeney*
Maleyne M. Syracuse*
*Member of the
Audit Committee
Officers
Christina Emery
President
Jonathan Bock
Chief Financial
Officer
Jill Dinerman
Chief Legal
Officer
Michael Cowart
Chief Compliance
Officer
Elizabeth Murray
Principal Accounting
Officer
Christopher
D. Hanscom
Treasurer
Ashlee Steinnerd
Secretary
Alexandra Pacini
Assistant Secretary
Sean Feeley
Vice President
Jonathan Landsberg
Vice President
|
DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
Barings Participation Investors (the “Trust”)
offers a Dividend Reinvestment and Cash Purchase Plan (the “Plan”). The Plan provides a simple and automatic way for shareholders
to add to their holdings in the Trust through the receipt of dividend shares issued by the Trust or through the reinvestment of cash dividends
in Trust shares purchased in the open market. The dividends of each shareholder will be automatically reinvested in the Trust by DST Systems,
Inc., the Transfer Agent, in accordance with the Plan, unless such shareholder elects not to participate by providing written notice to
the Transfer Agent. A shareholder may terminate his or her participation by notifying the Transfer Agent in writing.
Participating shareholders may also make additional
contributions to the Plan from their own funds. Such contributions may be made by personal check or other means in an amount not less
than $100 nor more than $5,000 per quarter. Cash contributions must be received by the Transfer Agent at least five days (but no more
then 30 days) before the payment date of a dividend or distribution.
Whenever the Trust declares a dividend payable
in cash or shares, the Transfer Agent, acting on behalf of each participating shareholder, will take the dividend in shares only if the
net asset value is lower than the market price plus an estimated brokerage commission as of the close of business on the valuation day.
The valuation day is the last day preceding the day of dividend payment.
When the dividend is to be taken in shares, the
number of shares to be received is determined by dividing the cash dividend by the net asset value as of the close of business on the
valuation date or, if greater than net asset value, 95% of the closing share price. If the net asset value of the shares is higher than
the market value plus an estimated commission, the Transfer Agent, consistent with obtaining the best price and execution, will buy shares
on the open market at current prices promptly after the dividend payment date.
The reinvestment of dividends does not, in any
way, relieve participating shareholders of any federal, state or local tax. For federal income tax purposes, the amount reportable in
respect of a dividend received in newly-issued shares of the Trust will be the fair market value of the shares received, which will be
reportable as ordinary income and/or capital gains.
As compensation for its services, the Transfer
Agent receives a fee of 5% of any dividend and cash contribution (in no event in excess of $2.50 per distribution per shareholder.)
Any questions regarding the Plan should be addressed
to DST Systems, Inc., Transfer Agent for Barings Participation Investors’ Dividend Reinvestment and Cash Purchase Plan, P.O. Box
219086, Kansas City, MO 64121-9086.
|
| |
|
 |
Barings
Participation
Investors |