3. Investments

Investments may be categorized based on the types of inputs used in valuing such investments. The level in the U.S. GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Per ASC 820, leveling for each investment is conducted at each quarter end. Transfers between levels are made in accordance with the Company’s accounting policy. Transfers between levels are recognized as of the beginning of the reporting period.

At March 31, 2025, the Company’s investments were categorized as follows:


	Fair Value Measurements
March 31, 2025	Level 1		Level 2 (1)		Level 3		Total
Investments:
First Lien Secured Debt (2)	$	—	$	136,437	$	190,513	$	326,950
Second Lien Secured Debt		—		1,661		9,904		11,565
Corporate Bond		—		30,403		28,427		58,830
Revolver		—		—		4,124		4,124
Equity - Preferred Equity		—		—		1,844		1,844
Equity - Common Stock		—		—		3,159		3,159
Total investments	$	—	$	168,501	$	237,971	$	406,472
Derivatives	$	—	$	150	$	—	$	150
Cash equivalents	$	170	$	—	$	—	$	170

At December 31, 2024, the Company’s investments were categorized as follows:


	Fair Value Measurements
December 31, 2024	Level 1		Level 2 (1)		Level 3		Total
Investments:
First Lien Secured Debt (2)	$	—	$	145,651	$	162,088	$	307,739
Second Lien Secured Debt		—		2,022		8,144		10,166
Corporate Bond		—		33,226		28,185		61,411
Revolver		—		—		2,456		2,456
Equity - Preferred Equity		—		—		2,391		2,391
Equity - Common Stock		—		—		3,980		3,980
Total investments	$	—	$	180,899	$	207,244	$	388,143
Derivatives	$	—	$	299	$	—	$	299
Cash equivalents	$	356	$	—	$	—	$	356

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(1)

Fair value based upon quoted prices in inactive markets or quotes for comparable investments.

(2)

Includes senior secured loans.

Unobservable inputs used in the fair value measurement of Level 3 investments as of March 31, 2025 included the following:


	March 31, 2025
					Range
	Fair Value		Valuation Technique	Unobservable Input	Low			High			Weighted Average
Corporate Bond	$	14,733	Yield analysis	Market yield		12.27	%		13.27	%		12.77	%
Corporate Bond	$	13,694	Yield analysis	Market yield		5.25	%		5.25	%		5.25	%
			Black Scholes Option Pricing Model	Volatility		10.00	%		41.50	%		25.75	%
			Black Scholes Option Pricing Model	Term	1.35 years			1.35 years			1.35 years
			Black Scholes Option Pricing Model	Risk free rate		3.55	%		3.55	%		3.55	%
First Lien Secured Debt	$	41,277	Yield analysis	Market yield		8.79	%		13.59	%		10.91	%
First Lien Secured Debt	$	106,788	Yield analysis	Market yield		9.32	%		12.68	%		10.72	%
			EV market multiple analysis	EBITDA multiple	5.50x			15.25x			9.17x
First Lien Secured Debt	$	4,071	EV market multiple analysis	EBITDA multiple	3.40x			7.3x			5.20x
First Lien Secured Debt	$	26,483	Recent transactions	Transaction price	N/A			N/A			N/A
First Lien Secured Debt	$	11,894	Market quotation	Market quotation	N/A			N/A			N/A
Second Lien Secured Debt	$	9,904	EV market multiple analysis	EBITDA multiple	6.63x			12.91x			10.79x
Revolver	$	4,124	Yield analysis	Market yield		9.32	%		12.68	%		9.98	%
			EV market multiple analysis	EBITDA multiple	5.50x			11.50x			7.83x
Equity - Common Stock	$	1,844	EV market multiple analysis	EBITDA multiple	6.63x			12.91x			9.77x
Equity - Preferred Equity	$	3,159	EV market multiple analysis	EBITDA multiple	6.63x			12.91x			11.25x
Total	$	237,971

Unobservable inputs used in the fair value measurement of Level 3 investments as of December 31, 2024 included the following:


	December 31, 2024
					Range
	Fair Value		Valuation Technique	Unobservable Input	Low			High			Weighted Average
Corporate Bond	$	14,700	Yield analysis	Market yield		12.27	%		13.27	%		12.77	%
Corporate Bond	$	13,485	Yield analysis	Market yield		10.41	%		11.32	%		10.87	%
			Black Scholes Option Pricing Model	Volatility		10.00	%		41.50	%		25.75	%
			Black Scholes Option Pricing Model	Term	1.59 years			1.59 years			1.59 years
			Black Scholes Option Pricing Model	Risk free rate		4.27	%		4.27	%		4.27	%
First Lien Secured Debt	$	19,870	Yield analysis	Market yield		10.00	%		10.68	%		10.34	%
First Lien Secured Debt	$	60,228	Yield analysis	Market yield		9.78	%		11.83	%		10.96	%
			EV market multiple analysis	EBITDA multiple	7.00x			15.25x			8.70x
First Lien Secured Debt	$	64,422	Recent transactions	Transaction price	N/A			N/A			N/A
First Lien Secured Debt	$	17,568	Market quotation	Market quotation	N/A			N/A			N/A
Second Lien Secured Debt	$	8,144	EV market multiple analysis	EBITDA multiple	6.75x			12.25x			10.00x
Revolver	$	352	Yield analysis	Market yield		9.78	%		10.31	%		10.05	%
			EV market multiple analysis	EBITDA multiple	7.00x			8.00x			7.50x
Revolver	$	1,321	Market quotation	Market quotation	N/A			N/A			N/A
Revolver	$	783	Recent transactions	Transaction price	N/A			N/A			N/A
Equity - Preferred Equity	$	2,391	EV market multiple analysis	EBITDA multiple	6.75x			7.25x			7.00x
Equity - Common Stock	$	3,980	EV market multiple analysis	EBITDA multiple	6.8x			12.3x			10.59x
Total	$	207,244

Certain fair value measurements may employ more than one valuation technique, with each valuation technique receiving a relative weight between 0% and 100%. Generally, a change in an unobservable input may result in a change to the value of an investment as follows:


Input	Impact to Value if Input Increases	Impact to Value if Input Decreases
Discount rate	Decrease	Increase
Revenue multiples	Increase	Decrease
EBITDA multiples	Increase	Decrease
Book value multiples	Increase	Decrease
Implied volatility	Increase	Decrease
Term	Decrease	Increase
Yield	Decrease	Increase

Changes in investments categorized as Level 3 for the three months ended March 31, 2025 were as follows:


	Three Months Ended March 31, 2025
	First Lien Secured Debt			Second Lien Secured Debt		Corporate Bond		Revolver			Equity - Preferred Equity			Equity - Common Stock			Total Investments
Beginning balance	$	162,088		$	8,144	$	28,185	$	2,456		$	2,391		$	3,980		$	207,244
Net realized and unrealized gains (losses)		1,144			395		80		(2	)		(547	)		(821	)		249
Acquisitions (1)		33,475			1,365		72		1,845			—			—			36,757
Dispositions (2)		(6,194	)		—		90		(175	)		—			—			(6,279	)
Transfers in (out) of Level 3 (3)		—			—		—		—			—			—			—
Reclassifications		—			—		—		—			—			—			—
Ending balance	$	190,513		$	9,904	$	28,427	$	4,124		$	1,844		$	3,159		$	237,971
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)	$	1,059		$	394	$	82	$	(7	)	$	(547	)	$	(203	)	$	778

Changes in investments categorized as Level 3 for the three months ended March 31, 2024 were as follows:


	Three Months Ended March 31, 2024
	First Lien Secured Debt			Second Lien Secured Debt		Corporate Bond		Revolver			Equity - Preferred Equity		Equity - Common Stock		Total Investments
Beginning balance	$	118,248		$	2,012	$	28,147	$	584		$	3,151	$	267	$	152,409
Net realized and unrealized gains (losses)		272			16		8		3			—		1,601		1,900
Acquisitions (1)		38,611			106		150		178			—		—		39,045
Dispositions (2)		(32,194	)		—		—		(250	)		—		—		(32,444	)
Transfers in (out) of Level 3 (3)		(12,298	)		—		—		—			—		—		(12,298	)
Reclassifications		—			—		—		—			—		—		—
Ending balance	$	112,639		$	2,134	$	28,305	$	515		$	3,151	$	1,868	$	148,612
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)	$	422		$	16	$	8	$	4		$	—	$	1,601	$	2,051

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(1)

Includes payments received in kind, accretion of original issue, market discounts, securities received in corporate actions and restructuring.

(2)

Includes principal paydowns, and may include securities delivered in corporate actions and restructuring of investments.

(3)

Represents non-cash transfers between fair value categories. Transfers in (out) of Level 3 are the result of changes in the observability of significant inputs and / or available market data for certain investments. There were no transfers between Level 1 and Level 2 fair value measurements during the period shown.

Redwood Enhanced Income Corp. 10-Q