10-K: NexPoint Capital Reports 2025 Financials: NAV Declines Amid Unrealized Losses

NexPoint Capital, Inc. reported a decrease in net asset value and net assets for the fiscal year ended December 31, 2025, primarily driven by net unrealized depreciation on investments.

Summary

• Net assets decreased from $45,276,270 at December 31, 2024, to $36,737,934 at December 31, 2025.
• Net asset value per share declined from $5.21 at December 31, 2024, to $4.39 at December 31, 2025.
• Net investment income shifted from a gain of $607,948 or $0.07 per share in 2024 to a loss of $(231,994) or $(0.03) per share for 2025.
• Net realized gain (loss) on investments was $(70,279) in 2025, compared to $(494,867) in 2024.
• Net change in unrealized appreciation (depreciation) on investments was a significant depreciation of $(3,557,965) or $(0.41) per share in 2025, a notable decline from appreciation of $1,883,903 or $0.22 per share in 2024.
• The total investment portfolio fair value decreased from $44.5 million in 2024 to $37.6 million in 2025.
• The portfolio consisted of 23 positions in 2025, with 14.2% in first lien senior secured loans, 0.7% in corporate bonds, 32.2% in common stock, 30.0% in preferred stock, and 22.9% in LLC interests.
• The estimated gross annual portfolio yield (prior to leverage costs) increased to 9.4% in 2025 from 2.45% in 2024.
• Fixed income investments on non-accrual increased to 9.4% in 2025 from 7.2% in 2024.
• Cash and cash equivalents decreased substantially from $1,671,503 in 2024 to $352,412 in 2025.
• Quarterly cash distributions of $0.09 per share were declared, totaling $0.36 per share for 2025, with $3,047,552 classified as a return of capital.
• The Adviser's cumulative recoupable expense waivers totaled $1,426,759 as of December 31, 2025.
• A tender offer for up to 1% of outstanding common stock was announced on February 20, 2026, and completed on March 23, 2026, repurchasing 84,095.835 shares.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a negative report due to significant declines in net assets and net asset value per share, a shift to net investment loss, and substantial unrealized depreciation on investments, despite an increase in portfolio yield. The increase in non-accrual fixed income investments also raises credit quality concerns.

Positives

• The estimated gross annual portfolio yield (prior to leverage costs) increased significantly to 9.4% in 2025 from 2.45% in 2024.
• Non-income producing equity or other investments decreased slightly to 29% of fair value in 2025 from 31% in 2024.
• The company maintains a robust and evolving enterprise-wide cybersecurity risk management program.
• The Adviser has committed $2,275,000 cumulatively since inception to voluntarily reimburse the Company for unrealized losses, which are non-recoupable.

Negatives

• Net assets decreased by $8,538,336, from $45,276,270 in 2024 to $36,737,934 in 2025.
• Net asset value per share declined from $5.21 in 2024 to $4.39 in 2025.
• Net investment income shifted from a gain of $607,948 in 2024 to a loss of $(231,994) in 2025.
• Net change in unrealized appreciation (depreciation) on investments was a significant depreciation of $(3,557,965) in 2025, compared to appreciation of $1,883,903 in 2024.
• Cash and cash equivalents decreased substantially from $1,671,503 in 2024 to $352,412 in 2025.
• Fixed income investments on non-accrual increased to 9.4% in 2025 from 7.2% in 2024, indicating potential credit quality issues.
• A significant portion of distributions ($3,047,552 in 2025) was classified as a return of capital, indicating distributions exceeded earnings and profits.
• The company did not make any new long or short investments in portfolio companies in 2025, indicating a lack of new investment activity.
• Proceeds from sales and principal repayments on long investments decreased from $12,347,585 in 2024 to $2,814,571 in 2025.
• Net portfolio activity remained negative at $(2,617,050) in 2025.

Risks

• Operating under the constraints imposed on the company as a Business Development Company (BDC) and Regulated Investment Company (RIC) may hinder the achievement of its investment objective.
• The company depends upon key personnel of the Adviser and its affiliates, and their inability to manage investments effectively could hinder the company's ability to achieve its investment objective.
• The company's performance is distinct from other funds managed by the Adviser, and there is no assurance of replicating historical results.
• The highly competitive market for investment opportunities may limit the company's investment opportunities.
• Global capital markets are in a period of disruption and instability, which could negatively impact the company's business, financial condition, and results of operations.
• The company may be precluded from investing in what it believes are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act.
• Equity capital may be difficult to raise because, as a BDC, the company is generally unable to issue and sell common stock at a price below net asset value per share without stockholder approval.
• The illiquidity of the company's investments may make it difficult to sell such investments if required, potentially realizing significantly less than the recorded value.
• Capital markets volatility also affects investment valuations, especially for non-publicly traded assets, which could adversely affect net asset value.
• Failure to qualify for treatment as a RIC would result in corporate-level income tax.
• Distributions may exceed net investment income, resulting in portions being treated as a return of capital for tax purposes, which lowers tax basis.
• The company may have difficulty paying required distributions if it recognizes income before or without receiving cash (e.g., original issue discount, payment-in-kind interest).
• The company may retain a portion of its earnings and be subject to excise tax on such earnings if it fails to distribute sufficient amounts.
• The management and incentive fee structure may create incentives for the Adviser that are not fully aligned with stockholders' interests and may induce speculative investments.
• The Investment Advisory Agreement and Administration Agreement with the Adviser were not negotiated on an arms-length basis and may not be as favorable as if negotiated with an unaffiliated third party.
• The company's ability to enter into transactions with its affiliates will be restricted, which may limit the scope of available investments.
• The Adviser may be entitled to receive substantial compensation from the company if a liquidity event is consummated, which could negatively impact investment returns.
• Because the company expects to distribute substantially all of its ordinary income and net realized capital gains, it will need additional capital to finance growth, which may not be available on favorable terms.
• The valuation process for certain portfolio holdings creates a conflict of interest due to the management fee being based on consolidated gross assets.
• Many portfolio investments are recorded at fair value as determined in good faith by the Adviser, leading to uncertainty in valuation and potential material differences from realized values.
• The company may experience fluctuations in its quarterly results due to various factors, including interest rates, default rates, expenses, and economic conditions.
• Changes in laws or regulations governing operations (e.g., Dodd-Frank Act, Derivatives Rule) may adversely affect business or cause alterations to business strategy.
• The Board may change the company's investment objective, operating policies, and strategies without prior notice or stockholder approval (except as required by the 1940 Act).
• The company will incur significant costs as a public company, including compliance with the Sarbanes-Oxley Act.
• Provisions of Delaware General Corporation Law and the company's certificate of incorporation and bylaws could deter takeover attempts.
• The Adviser can resign on 120 days' notice, and the company may not be able to find a suitable replacement, resulting in operational disruption.
• The company depends on information systems, and systems failures or cyber-attacks could significantly disrupt business.
• If the company internalizes its management functions, shareholder interest could be diluted, and significant costs associated with being self-managed could be incurred.
• Through its investment in a REIT Subsidiary, the company may be subject to risks associated with investing in real estate-related securities.
• Investments may be risky, and investors could lose all or part of their investment, especially in subordinated debt.
• Secured loans carry risks that collateral may decrease in value, be difficult to sell, or be subordinated to other creditors.
• Mezzanine loans are generally subordinated and unsecured, resulting in greater risk and volatility.
• The company expects to invest in securities rated below investment grade, which are viewed as speculative.
• Derivative transactions (warrants, swaps, options, futures) involve risks such as imperfect correlation, counterparty default, illiquidity, and leveraged exposure.
• Equity investments may not appreciate in value and could decline.
• The company is subject to risks associated with middle-market companies, including limited financial resources, shorter operating histories, and dependence on small management teams.
• As a non-diversified investment company, the company is not limited by the 1940 Act with respect to the proportion of assets invested in a single issuer, leading to higher fluctuation risk.
• The portfolio may be concentrated in a limited number of portfolio companies, industries, and/or sectors, increasing the risk of significant loss.
• Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of portfolio investments.
• Short sales by the company that are not offset by a long position theoretically involve unlimited loss potential.
• Investments in the healthcare industry are subject to numerous risks, including competition, extensive government regulation, and commercial difficulties.
• The company may hold debt securities of leveraged companies that may enter into bankruptcy proceedings, leading to potential losses.
• Economic recessions or downturns could impair the ability of portfolio companies to repay loans and increase costs.
• Investments in syndicated loans carry risks related to agent actions and potential lender defaults.
• Investments in CLOs may be riskier and less transparent than direct investments in underlying companies.
• Certain tax consequences of investments, including those in Passive Foreign Investment Companies (PFICs) and Controlled Foreign Corporations (CFCs), could subject the company to U.S. federal income tax.
• Failure to make follow-on investments in portfolio companies could impair the value of the portfolio.
• Not holding controlling equity interests in portfolio companies means the company may not be in a position to exercise control over business decisions.
• Defaults by issuers of holdings will harm operating results, potentially leading to non-accrual status and inability to make distributions.
• The Adviser's limited liability and indemnification may lead it to act in a riskier manner on the company's behalf.
• The company may be obligated to pay the Adviser incentive compensation even if a net loss is incurred due to a decline in portfolio value.
• Portfolio companies may prepay loans, which may reduce yields if capital returned cannot be invested in transactions with equal or greater expected yields.
• The disposition of investments may result in contingent liabilities.
• Engaging in hedging transactions may expose the company to risks and limit the ability to participate in benefits of lower interest rates.
• Investments in securities of foreign companies may involve significant risks in addition to those inherent in U.S. investments.
• Investments in foreign sovereign debt carry the risk that governmental issuers may be unable or unwilling to repay principal or pay interest.
• The company is not obligated to complete a liquidity event by a specified date, making it difficult for an investor to sell shares.
• The share repurchase program has numerous restrictions and limitations, and may not allow investors to recover the full amount of their investment.
• The timing of repurchase offers may be at a time that is disadvantageous to stockholders.
• There is a risk that investors may not receive distributions or that distributions may not grow over time.
• Investing in the company's shares may involve an above-average degree of risk and is intended for long-term investors.
• The company may allocate the net proceeds from the offering in ways with which investors may not agree.

Future Outlook

The company's investment objective is to generate high current income and long-term capital appreciation, primarily through investments in middle-market healthcare companies, non-healthcare sectors, syndicated floating rate debt, and collateralized loan obligations (CLOs). It expects to focus on stable companies with positive cash flow and growth potential, anticipating that rising interest rates will lead middle-market companies to seek specialty finance vehicles. The company believes significant investment opportunities exist in the healthcare sector due to demographic changes and payment system reforms. It intends to continue investing primarily in high income-generating debt and income-generating equity of privately held U.S. companies, with a concentration in senior floating rate debt. The Expense Limitation Agreement is expected to continue through at least April 30, 2026.

Management Comments

• Our management, including the principal executive officer and principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
• Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2025.

Industry Context

StockSavvy.ai notes that the company's focus on middle-market healthcare companies aligns with broader demographic trends (aging Baby Boomers) and healthcare payment system reforms, which are expected to drive demand and create disruption in the sector. The strategy to invest in syndicated floating rate debt and CLOs is a common approach for BDCs seeking income and managing interest rate risk, especially in a rising rate environment. The observed decline in net assets and NAV per share, coupled with increased non-accrual fixed income investments, suggests that despite strategic alignment, the company faced significant valuation challenges in its portfolio, potentially reflecting broader market pressures on illiquid, privately held assets.

Comparison to Industry Standards

• The filing states that many competitors are substantially larger with greater financial, technical, and marketing resources, and some may offer more favorable terms to borrowers due to lower cost of funds.
• StockSavvy.ai notes that the increase in estimated gross annual portfolio yield to 9.4% in 2025 from 2.45% in 2024 is a positive indicator of income generation, potentially outperforming some peers in a rising rate environment.
• However, the significant net unrealized depreciation of $(3,557,965) and the increase in fixed income investments on non-accrual to 9.4% suggest potential underperformance in asset valuation and credit quality compared to BDCs with more stable portfolios or better risk management in volatile markets.
• The decline in NAV per share from $5.21 to $4.39 is a notable underperformance compared to broader market indices or more liquid BDC peers.

Corporate Governance

Legal Proceedings

• Neither the Company nor any of its subsidiaries is currently a party to any pending material legal proceedings, nor is any material legal proceeding threatened against the Company or its subsidiaries.

Related Party Transactions

• The Company has an Investment Advisory Agreement with NexPoint Advisors, L.P. (the Adviser), which is controlled by James Dondero, the Company's president.
• The Adviser is contractually obligated to waive fees and reimburse certain expenses under an Expense Limitation Agreement, with cumulative recoupable fees of $1,426,759 as of December 31, 2025.
• The Adviser provides administrative services under an Administration Agreement, for which the Company reimburses allocable overhead and other expenses.
• NexPoint Securities, Inc. (the Dealer Manager) is an affiliate of the Adviser.
• Liberty CLO Holdco Ltd. (Liberty) purchased 2,549,002 shares (30.5% of outstanding common stock as of December 31, 2025) from the Adviser on July 21, 2023, for approximately $11.2 million.
• The Adviser has committed $2,275,000 cumulatively since inception to voluntarily reimburse the Company for unrealized losses, which are non-recoupable.
• As of December 31, 2025, the Company owed $226,186 to the Adviser and was owed $118,906 from the Adviser.
• The Adviser and its affiliates manage other investment funds, accounts, or vehicles with potentially overlapping investment mandates, leading to potential conflicts of interest in investment allocation, managed by an allocation policy and SEC exemptive relief.

Stakeholder Impact

• Shareholders: Experienced a significant decline in Net Asset Value (NAV) per share and net assets. Distributions included a substantial return of capital, which reduces tax basis. The share repurchase program offers limited liquidity at a potentially disadvantageous price.
• Adviser: Continues to receive management and administration fees. The incentive fee structure may incentivize riskier investments. Has recoupable expense waivers and has made non-recoupable reimbursements for unrealized losses.
• Portfolio Companies: Subject to the company's investment decisions, monitoring, and potential financial distress if loans are not repaid.
• Creditors: Holders of senior securities have claims superior to common stockholders. The company's ability to service debt depends on financial performance.

Next Steps

• The Board will continue to determine and declare ordinary cash distributions on a weekly basis, paid quarterly.
• The Board will continue to distribute any net capital gains at least annually.
• The Expense Limitation Agreement will continue through at least April 30, 2026.
• The company will continue to monitor developments and manage investments to achieve its investment objective.
• The company will continue to review its current policies and procedures to comply with the Sarbanes-Oxley Act and related regulations.
• The company will file its definitive Proxy Statement relating to the 2026 Annual Meeting of Stockholders within 120 days after December 31, 2025.

Key Dates

Recommendation

The company's financial performance for 2025 shows a concerning trend with a significant decline in net assets and net asset value per share, a shift from net investment income to a net loss, and substantial unrealized depreciation on investments. The increase in non-accrual fixed income investments indicates deteriorating credit quality within the portfolio. While the gross annual portfolio yield increased, the overall negative financial results and the high proportion of distributions classified as return of capital suggest that the company is struggling to generate sustainable earnings relative to its distributions and asset base. The illiquidity of its investments and the competitive market further compound the risks. A seasoned investor would likely view these results as a strong indicator of fundamental weakness and recommend selling to mitigate further capital erosion.

Keywords

Business Development Company, BDC, Regulated Investment Company, RIC, Middle-market lending, Healthcare investments, Senior secured loans, Preferred stock, LLC interests, Private equity, Credit risk, Valuation, SEC filing, 10-K, Investment management, Financial reporting, Unrealized depreciation, Dividend distributions, Share repurchase, SOFR, PIK interest, Affiliated investments