Exhibit 10.1

 

INVESTMENT ADVISORY AGREEMENT

 

BETWEEN

 

PORTMAN RIDGE FINANCE CORPORATION

 

AND

 

SIERRA CREST INVESTMENT MANAGEMENT LLC

 

This Agreement (the “Agreement”) is made as of the day of April 1, 2019 by and
between Portman Ridge Finance Corporation, a Delaware corporation (the
“Company”), and Sierra Crest Investment Management LLC, a Delaware limited
liability company (the Adviser”).

 

WHEREAS, the Company is a non-diversified, closed-end management investment fund
that is regulated as a business development company (“BDC”) under the Investment
Company Act of 1940, as amended (the “Investment Company Act”);

 

WHEREAS, the Adviser is an investment adviser that is registered under the
Investment Advisers Act of 1940, as amended (the “Advisers Act”); and

 

WHEREAS, the Company desires to retain the Adviser to furnish investment
advisory services to the Company on the terms and conditions hereinafter set
forth, and the Adviser desires to be retained to provide such services.

 

NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
for other good and valuable consideration, the parties hereby agree as follows:

 

1.Duties of the Adviser

 

(a)          The Company hereby retains the Adviser to act as the investment
adviser to the Company and to manage the investment and reinvestment of the
assets of the Company, subject to the supervision of the Board of Directors of
the Company (the “Board”), for the period and upon the terms herein set forth,
(x) in accordance with the investment objective, policies and restrictions that
are set forth in the Company’s Registration Statement on Form N-2, dated July
20, 2017, as the same shall be amended from time to time (as amended, the
“Registration Statement”); (y) in accordance with the Investment Company Act;
and (z) in accordance with all other applicable federal and state laws, rules
and regulations, and the Company’s articles of incorporation and bylaws as the
same shall be amended from time to time. Without limiting the generality of the
foregoing, the Adviser shall, during the term and subject to the provisions of
this Agreement: (i) determine the composition of the portfolio of the Company,
the nature and timing of the changes therein and the manner of implementing such
changes; (ii) identify, evaluate and negotiate the structure of the investments
made by the Company; (iii) monitor the Company’s investments; (iv) determine the
securities and other assets that the Company will purchase, retain, or sell; (v)
assist the Board with its valuation of the Company’s assets; (vi) direct
investment professionals of the Adviser to provide managerial assistance to
portfolio companies of the Company as requested by the Company, from time to
time; (vii) perform due diligence on prospective portfolio companies; (viii)
exercise voting rights in respect of the Company’s portfolio securities and
other investments; (ix) serve on, and exercise observer rights for, boards of
directors and similar committees of the Company’s portfolio companies; and
(x) provide the Company with such other investment advisory, research, and
related services as the Company may, from time to time, reasonably require for
the investment of its funds. Subject to the supervision of the Board, the
Adviser shall have the power and authority on behalf of the Company to
effectuate its investment decisions for the Company, including the execution and
delivery of all documents relating to the Company’s investments and the placing
of orders for other purchase or sale transactions on behalf of the Company. In
the event that the Company determines to acquire or refinance any debt
financing, the Adviser will arrange for such financing on the Company’s behalf.
If it is necessary or appropriate for the Adviser to make investments on behalf
of the Company through a special purpose vehicle, the Adviser shall have
authority to create or arrange for the creation of such special purpose vehicle
and to make such investments through such special purpose vehicle (in accordance
with the Investment Company Act).

 

 

 

 

(b)          The Adviser hereby accepts such retention as investment adviser and
agrees during the term hereof to render the services described herein for the
compensation provided herein.

 

(c)          This Agreement is intended to create, and creates, a contractual
relationship for services to be rendered by the Adviser acting in the ordinary
course of its business and is not intended to create, and does not create, a
partnership, joint venture or any like relationship among the parties hereto (or
any other parties). The Adviser shall for all purposes herein provided be deemed
to be an independent contractor and, except as expressly provided or authorized
herein, shall have no authority to act for or represent the Company in any way
or otherwise be deemed an agent of the Company.

 

(d)          The Adviser shall keep and preserve for the period required by the
Investment Company Act any books and records relevant to the provision of its
investment advisory services to the Company and shall specifically maintain all
books and records in accordance with Section 31(a) of the Investment Company Act
with respect to the Company’s portfolio transactions and shall render to the
Board such periodic and special reports as the Board may reasonably request. The
Adviser agrees that all records that it maintains for the Company are the
property of the Company and will surrender promptly to the Company any such
records upon the Company’s request, provided that the Adviser may retain a copy
of such records.

 

(e)          The Adviser shall be primarily responsible for the execution of any
trades in securities in the Company’s portfolio and the Company’s allocation of
brokerage commissions.

 

(f)           The Adviser has a fiduciary responsibility and duty to the Company
and the Company’s stockholders for the safekeeping and use of all the funds and
assets of the Company, whether or not in the Adviser’s immediate possession or
control.

 

2

 

 

(g)          Subject to the prior approval by the Board and the stockholders of
the Company to the extent required under the Investment Company Act, the Adviser
is hereby authorized to enter into one or more sub-advisory agreements with
other investment advisers (each, a “Sub-Adviser”) pursuant to which the Adviser
may obtain the services of the Sub-Adviser(s) to assist the Adviser in
fulfilling its responsibilities hereunder. Specifically, the Adviser may retain
a Sub-Adviser to recommend specific securities or other investments based upon
the Company’s investment objective and policies, and work, along with the
Adviser, in structuring, negotiating, arranging or effecting the acquisition or
disposition of such investments and monitoring investments on behalf of the
Company, subject to the oversight of the Adviser and the Company. The Company
shall be responsible for any compensation payable to any Sub-Adviser. Any
sub-advisory agreement entered into by the Adviser shall be in accordance with
the requirements of the Investment Company Act and other applicable federal and
state law.

 

2.Company’s Responsibilities and Expenses Payable by the Company

 

All investment professionals of the Adviser, and their respective staffs, when
and to the extent engaged in providing investment advisory and management
services hereunder, and the compensation and routine overhead expenses
(including rent, office equipment and utilities) of such personnel allocable to
such services, will be provided and paid for by the Adviser and not by the
Company. The Company will bear all expenses of its operations and transactions,
including (without limitation except as noted) those relating to: the cost of
its organization and any offerings; the cost of calculating its net asset value,
including the cost of any third-party valuation services; the cost of effecting
any sales and repurchases of the Company’s common stock and other securities;
fees and expenses payable under any dealer manager or placement agent
agreements, if any; administration fees payable under the administration
agreement (the “Administration Agreement”) between the Company and BC Partners
Management LLC (the “Administrator”) and any sub-administration agreements,
including related expenses; debt service and other costs of borrowings or other
financing arrangements; costs of hedging; expenses, including travel expense,
incurred by the Adviser, or members of the Investment Team, or payable to third
parties, performing due diligence on prospective portfolio companies and, if
necessary, enforcing the Company’s rights; transfer agent and custodial fees;
fees and expenses associated with marketing efforts; federal and state
registration fees, any stock exchange listing fees and fees payable to rating
agencies; federal, state and local taxes; independent directors’ fees and
expenses including certain travel expenses; costs of preparing financial
statements and maintaining books and records and filing reports or other
documents with the Securities and Exchange Commission (the “SEC”) (or other
regulatory bodies) and other reporting and compliance costs, including
registration and listing fees, and the compensation of professionals responsible
for the preparation of the foregoing; the costs of any reports, proxy statements
or other notices to stockholders (including printing and mailing costs), the
costs of any stockholder or director meetings and the compensation of personnel
responsible for the preparation of the foregoing and related matters;
commissions and other compensation payable to brokers or dealers; research and
market data; fidelity bond, directors and officers errors and omissions
liability insurance and other insurance premiums; direct costs and expenses of
administration, including printing, mailing, long distance telephone and staff;
fees and expenses associated with independent audits, outside legal and
consulting costs; costs of winding up; costs incurred by either the
Administrator or the Company in connection with administering the Company’s
business, including payments under the Administration Agreement for
administrative services that will be equal to an amount that reimburses the
Administrator for its costs and expenses and the Company's allocable portion of
overhead incurred by the Administrator in performing its obligations under the
Administration Agreement, including, the formation or maintenance of entities or
vehicles to hold the Company’s assets for tax or other purposes; extraordinary
expenses (such as litigation or indemnification); and costs associated with
reporting and compliance obligations under the Investment Company Act and
applicable federal and state securities laws. Notwithstanding anything to the
contrary contained herein, the Company may reimburse the Adviser (or its
affiliates) for an allocable portion of the compensation paid by the Adviser (or
its affiliates) to the Company’s Chief Compliance Officer and Chief Financial
Officer and their respective staffs (based on a percentage of time such
individuals devote, on an estimated basis, to the business affairs of the
Company.

 

3

 

 

3.Compensation of the Adviser

 

The Company agrees to pay, and the Adviser agrees to accept, as compensation for
the services provided by the Adviser hereunder, a base management fee (the
“Management Fee”) and an incentive fee (the “Incentive Fee”) as hereinafter set
forth. The Company shall make any payments due hereunder to the Adviser or to
the Adviser’s designee as the Adviser may otherwise direct.

 

(a)          For services rendered under this Agreement, the Management Fee will
be payable quarterly in arrears. Management Fees for any partial month or
quarter will be appropriately prorated and adjusted for any share issuances or
repurchases during the relevant month or quarter. The Management fee shall be
calculated as follows:

 

(i)          For the period from the date of this Agreement (the “Effective
Date”) through the end of the first calendar quarter after the Effective Date,
the Management Fee shall be calculated at an annual rate of 1.50% of the
Company’s gross assets as of the end of such calendar quarter.

 

(ii)         Subsequently, the Management Fee shall be calculated at an annual
rate of 1.50% of the Company’s average gross assets, at the end of the two most
recently completed calendar quarters; provided, however, the Management Fee
shall be calculated at an annual rate of 1.00% of the Company’s average gross
assets that exceed the product of (i) 200% and (ii) the value of the Company’s
net asset value at the end of the most recently completed calendar quarter.

 

(iii)        For purposes of this Agreement, gross assets means the Company’s
total assets determined on a consolidated basis in accordance with generally
accepted accounting principles in the United States, or GAAP, excluding cash and
cash equivalents, but including assets purchased with borrowed amounts.

 

(b)          The Company will pay the Adviser an Incentive Fee, consisting of
two parts, as follows:

 

(i)          An Income Incentive Fee with respect to the Company’s
“Pre-Incentive Fee Net Investment Income” (as defined below) in each calendar
quarter as follows:

 

·With the exception of the Capital Gains Incentive Fee (as defined and discussed
in greater detail below), no Incentive Fee is payable to the Adviser in any
calendar quarter in which the Company’s Pre-Incentive Fee Net Investment Income
does not meet or exceed the quarterly preferred return of 1.75%.

 

4

 

 

·100% of the Company’s Pre-Incentive Fee Net Investment Income with respect to
that portion of such Pre-Incentive Fee Net Investment Income, if any, that
exceeds the quarterly preferred return but is less than 2.121%, the upper level
breakpoint.

 

·17.50% of the amount of the Company’s Pre-Incentive Fee Net Investment Income,
if any, that exceeds 2.121% in any calendar quarter.

 

·“Pre-Incentive Fee Net Investment Income” shall mean dividends (including
reinvested dividends), interest and fee income accrued by the Company during the
calendar quarter, minus operating expenses for the quarter (including the
Management Fee, expenses payable under the Administration Agreement, and any
interest expense and dividends paid on any issued and outstanding preferred
stock, but excluding the Incentive Fee). Pre-Incentive Fee Net Investment Income
includes, in the case of investments with a deferred interest feature (such as
original issue discount, debt instruments with pay-in-kind interest and zero
coupon securities), accrued income that the Company may not have received in
cash. The Adviser is not obligated to return to the Company the incentive fee it
receives on payment-in-kind interest that is later determined to be
uncollectible in cash. Pre-Incentive Fee Net Investment Income does not include
any realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation.

 

(ii)         The second part of the Incentive Fee (the “Capital Gains Incentive
Fee”) will be determined and payable in arrears as of the end of each calendar
year of the Company (or upon termination of this Agreement as set forth below)
commencing with the calendar year ending December 31, 2019, and will equal
17.50% of cumulative realized capital gains, computed net of all realized
capital losses and unrealized capital depreciation on a cumulative basis, in
each case calculated from the Effective Date, less the aggregate amount of any
previously paid Capital Gains Incentive Fee calculated in accordance with GAAP.
Each year, the fee paid for the Capital Gains Incentive Fee is net of the
aggregate amount of any previously paid capital gains incentive fee for prior
periods. The Company will accrue, but will not pay, a Capital Gains Incentive
Fee with respect to unrealized appreciation because a Capital Gains Incentive
Fee would be owed to the Adviser if the Company were to sell the relevant
investment and realize a capital gain. In no event will the Capital Gains
Incentive Fee be in excess of the amount permitted by the Advisers Act,
including Section 205 thereof.

 

(iii)        Examples of the quarterly incentive fee calculation are attached
hereto as Annex A. Such examples are included for illustrative purposes only and
are not considered part of this Agreement.

 

Notwithstanding anything to the contrary contained in this Agreement, the
Company and the Adviser acknowledge and agree that the provisions of this
Section 3 shall be of no force and effect unless and until this Agreement has
been approved by (i) the vote of a majority of the outstanding voting securities
of the Company and (ii) the vote of the Board and the vote of a majority of the
Company’s Directors who are not parties to this Agreement or “interested
persons” (as such term is defined in Section 2(a)(19) of the Investment Company
Act) of any such party, each in accordance with the requirements of the
Investment Company Act (the “Approval Date”). For the avoidance of doubt, the
Adviser shall receive no compensation with respect to services provided
hereunder prior to the Approval Date.

 

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4.Covenants of the Adviser

 

The Adviser agrees that it will remain registered as an investment adviser under
the Advisers Act so long as it is the investment adviser to the Company and the
Company maintains its election to be regulated as a BDC under the Investment
Company Act, or otherwise is an investment company registered under the
Investment Company Act. The Adviser agrees that its activities will at all times
be in compliance in all material respects with all applicable federal and state
laws governing its operations and investments.

 

5.Excess Brokerage Commissions

 

The Adviser is hereby authorized, to the fullest extent now or hereafter
permitted by law, to cause the Company to pay a member of a national securities
exchange, broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another member of such
exchange, broker or dealer would have charged for effecting that transaction, if
the Adviser determines in good faith, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, and operational facilities of the firm and the firm’s
risk and skill in positioning blocks of securities, that such amount of
commission is reasonable in relation to the value of the brokerage and/or
research services provided by such member, broker or dealer, viewed in terms of
either that particular transaction or its overall responsibilities with respect
to the Company’s portfolio, and constitutes the best net results for the
Company.

 

6.Investment Team

 

The Adviser shall manage the Company’s portfolio through a team of investment
professionals (the “Investment Team”) knowledgeable in the Company’s business,
in cooperation with the Company’s Chief Executive Officer. The Investment Team
shall be comprised of senior personnel of the Adviser, supported by and with
access to the investment professionals, analytical capabilities and support
personnel of the Company.

 

7.Limitations on the Retention of the Adviser

 

The services of the Adviser to the Company are not exclusive, and the Adviser
may engage in any other business or render similar or different services to
others including, without limitation, the direct or indirect sponsorship or
management of other investment-based accounts or commingled pools of capital,
however structured, having investment objectives similar to those of the
Company, so long as its services to the Company hereunder are not impaired
thereby, and nothing in this Agreement shall limit or restrict the right of any
manager, partner, officer or employee of the Adviser to engage in any other
business or to devote his or her time and attention in part to any other
business, whether of a similar or dissimilar nature, or to receive any fees or
compensation in connection therewith (including fees for serving as a director
of, or providing consulting services to, one or more of the Company’s portfolio
companies, subject to applicable law). So long as this Agreement or any
extension, renewal or amendment remains in effect, the Adviser shall be the only
investment adviser for the Company, subject to the Adviser’s right to enter into
sub-advisory agreements as set forth herein. The Adviser assumes no
responsibility under this Agreement other than to render the services called for
hereunder. It is understood that directors, officers, employees and stockholders
of the Company are or may become interested in the Adviser and its affiliates,
as directors, officers, employees, partners, stockholders, members, managers or
otherwise, and that the Adviser and directors, officers, employees, partners,
stockholders, members and managers of the Adviser and its affiliates are or may
become similarly interested in the Company as stockholders or otherwise.

 

6

 

 

8.Responsibility of Dual Directors, Officers and/or Employees

 

If any person who is a manager, partner, officer or employee of the Adviser or
the Administrator is or becomes a director, officer and/or employee of the
Company and acts as such in any business of the Company, then such manager,
partner, officer and/or employee of the Adviser or the Administrator shall be
deemed to be acting in such capacity solely for the Company, and not as a
manager, partner, officer or employee of the Adviser or the Administrator or
under the control or direction of the Adviser or the Administrator, even if paid
by the Adviser or the Administrator.

 

9.Limitation of Liability of the Adviser; Indemnification

 

The Adviser (and its officers, managers, partners, agents, employees,
controlling persons, members and any other person or entity affiliated with the
Adviser, including without limitation its general partner and the Administrator)
shall not be liable to the Company for any action taken or omitted to be taken
by the Adviser in connection with the performance of any of its duties or
obligations under this Agreement or otherwise as an investment adviser of the
Company (except to the extent specified in Section 36(b) of the Investment
Company Act concerning loss resulting from a breach of fiduciary duty (as the
same is finally determined by judicial proceedings) with respect to the receipt
of compensation for services), and the Company shall indemnify, defend and
protect the Adviser (and its officers, managers, partners, agents, employees,
controlling persons, members and any other person or entity affiliated with the
Adviser, including without limitation its general partner and the Administrator
each of whom shall be deemed a third party beneficiary hereof) (collectively,
the “Indemnified Parties”) and hold them harmless from and against all damages,
liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) incurred by the Indemnified Parties in or
by reason of any pending, threatened or completed action, suit, investigation or
other proceeding (including an action or suit by or in the right of the Company
or its security holders) arising out of or otherwise based upon the performance
of any of the Adviser’s duties or obligations under this Agreement or otherwise
as an investment adviser of the Company. Notwithstanding the preceding sentence
of this Section 9 to the contrary, nothing contained herein shall protect or be
deemed to protect the Indemnified Parties against or entitle or be deemed to
entitle the Indemnified Parties to indemnification in respect of, any liability
to the Company or its security holders to which the Indemnified Parties would
otherwise be subject by reason of criminal conduct, willful misfeasance, bad
faith or gross negligence in the performance of the Adviser’s duties or by
reason of the reckless disregard of the Adviser’s duties and obligations under
this Agreement (as the same shall be determined in accordance with the
Investment Company Act and any interpretations or guidance by the SEC or its
staff thereunder).

 

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10.Effectiveness, Duration and Termination of Agreement

 

(a)          This Agreement shall become effective on the Effective Date. This
Agreement may be terminated at any time, without the payment of any penalty, on
60 days’ written notice, by the vote of a majority of the outstanding voting
shares of the Company or by the vote of the Company’s directors or by the
Adviser. “Majority of the outstanding shares” means the lesser of (1) 67% or
more of the outstanding shares of the Company’s common stock present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Company’s common stock are present or represented by proxy or (2) a majority of
outstanding shares of the Company’s common stock. The provisions of Section 9 of
this Agreement shall remain in full force and effect, and the Adviser shall
remain entitled to the benefits thereof, notwithstanding any termination of this
Agreement. Further, notwithstanding the termination or expiration of this
Agreement as aforesaid, the Adviser shall be entitled to any amounts owed under
Section 3 through the date of termination or expiration, and Section 9 shall
continue in force and effect and apply to the Adviser and its representatives as
and to the extent applicable.

 

(b)          This Agreement shall continue in effect for two years from the date
hereof, and thereafter shall continue automatically for successive annual
periods, provided that such continuance is specifically approved at least
annually by (A) the vote of the Board, or by the vote of a majority of the
outstanding voting securities of the Company and (B) the vote of a majority of
the Company’s directors who are not parties to this Agreement or “interested
persons” (as such term is defined in Section 2(a)(19) of the Investment Company
Act) of any such party, in accordance with the requirements of the Investment
Company Act.

 

(c)          This Agreement will automatically terminate in the event of its
“assignment” (as such term is defined for purposes of Section 15(a)(4) of the
Investment Company Act).

 

11.Notices

 

Any notice under this Agreement shall be given in writing, addressed and
delivered or mailed, postage prepaid, to the other party at its principal
office.

 

12.Amendments

 

This Agreement may be amended by mutual consent, but the consent of the Company
must be obtained in conformity with the requirements of the Investment Company
Act.

 

13.Entire Agreement; Governing Law

 

This Agreement contains the entire agreement of the parties and supersedes all
prior agreements, understandings and arrangements with respect to the subject
matter hereof. This Agreement shall be construed in accordance with the laws of
the State of New York and in accordance with the applicable provisions of the
Investment Company Act. In such case, to the extent the applicable laws of the
State of New York, or any of the provisions herein, conflict with the provisions
of the Investment Company Act, the latter shall control.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed on the date above written.

 

  PORTMAN RIDGE FINANCE CORPORATION       By: /s/ Edward Goldthorpe   Name:
Edward Goldthorpe   Title: President and Chief Executive Officer         SIERRA
CREST INVESTMENT MANAGEMENT LLC         By: /s/ Edward Goldthorpe   Name: Edward
Goldthorpe   Title: Officer and Authorized Person

 

Signature Page to Investment Advisory Agreement

 

 

 

 

ANNEX A

EXAMPLES OF INCENTIVE FEE CALCULATION

 

Example 1: Income Related Portion of Incentive Fee(1):

 

Alternative 1 - Assumptions

Investment income (including interest, dividends, fees, etc.) = 2.00%.

Quarterly preferred return (2) = 1.75%.

Management fee(6) = 0.375%.

Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.25%.

Pre-incentive fee net investment income =

(investment income – (management fee + other expenses)) = 1.38%.

Pre-incentive net investment income does not exceed Quarterly Preferred Return,
therefore there is no incentive fee.

 

Alternative 2 - Assumptions

Investment income (including interest, dividends, fees, etc.) = 2.50%.

Quarterly preferred return (2) = 1.75%.

Management fee(6) = 0.375%.

Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.25%.

Pre-incentive fee net investment income =

(investment income – (management fee + other expenses)) = 1.875%

Incentive fee = 17.5% × pre-incentive fee net investment income, subject to the
“catch-up”(7) 

Catch-up = 1.875% -1.75% =0.125%

Incentive fee = 100%  x (1.875%-1.75%) = 0.125%.

 

Alternative 3 - Assumptions

Investment income (including interest, dividends, fees, etc.) = 3.00%.

Quarterly preferred return (2) = 1.75%.

Upper Level Breakpoint =2.121%

Management fee(6) = 0.375%.

Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.25%.

Pre-incentive fee net investment income =

(investment income – (management fee + other expenses)) = 2.38%.

Incentive fee = 17.5% × pre-incentive fee net investment income, subject to
“catch-up”(7) 

Incentive fee = 100% × “catch-up” + (17.5% × (pre-incentive fee net investment
income – 1.818%)).

Catch-up = 2.121% – 1.75% = 0.371%

Incentive fee = (100% × 0.371%) + (17.5% × (2.38% – 2.121%))

= 0.371% + (17.5% × 0.254%)

= 0.371% + 0.044%

= 0.416%

 

 

Notes:

1.  The hypothetical amount of pre-incentive fee net investment income shown is
expressed as a rate of return on the value of the Company’s net assets at the
end of the immediately preceding calendar quarter. 2.  Represents 7.00%
annualized hurdle rate. 4.  Hypothetical other expenses. Excludes organizational
and offering expenses. 6. Represents 1.50% annualized management fee. 7.  The
“catch-up” provision is intended to provide the Investment Adviser with an
incentive fee of approximately 17.5% on all of the Company’s pre-incentive fee
net investment income as if a quarterly preferred return did not apply when the
Company’s net investment income exceeds 2.121 % in any calendar quarter. The
“catch-up” portion of the Company’s pre-incentive fee net investment income is
the portion that exceeds the 1.75% quarterly preferred return but is less than
or equal to 2.121 % in any quarter.

 

A-1

 

 

Example 2: Capital Gains Portion of Incentive Fee:

 

Year 1: The Company makes an investment in Company A (“Investment A”), an
investment in Company B (“Investment B”), an investment in Company C
(“Investment C”), an investment in Company D (“Investment D”) and an investment
in Company E (“Investment E”). On the last day of the first calendar quarter the
fair market value (“FMV”) of each of Investment A, Investment B, Investment C,
Investment D and Investment E is $10 million. For purposes of calculating the
Capital Gains Incentive Fee, the cost basis of each of Investment A, Investment
B, Investment C, Investment D and Investment E is considered to be its FMV as of
the last day of the first calendar quarter; provided, however, that in no event
will the Capital Gains Incentive Fee payable pursuant hereto be in excess of the
amount permitted by the Investment Advisers Act of 1940, as amended, including
Section 205 thereof.

 

Year 2: Investment A sold for $20 million, fair market value (“FMV”) of
Investment B determined to be $8 million, FMV of Investment C determined to be
$12 million, and FMV of Investments D and E each determined to be $10 million.

 

Year 3: FMV of Investment of B determined to be $8 million, FMV of Investment C
determined to be $14 million, FMV of Investment D determined to be $14 million
and FMV of Investment E determined to be $16 million.

 

Year 4: $10 million investment made in Company F (“Investment F”), Investment D
sold for $12 million, FMV of Investment B determined to be $10 million, FMV of
Investment C determined to be $16 million and FMV of Investment E determined to
be $14 million.

 

Year 5: Investment C sold for $20 million, FMV of Investment B determined to be
$14 million, FMV of Investment E determined to be $10 million and FMV of
Investment F determined to $12 million.

 

Year 6: Investment B sold for $16 million, FMV of Investment E determined to be
$8 million and FMV of Investment F determined to be $15 million.

 

Year 7: Investment E sold for $8 million and FMV of Investment F determined to
be $17 million.

 

Year 8: Investment F sold for $18 million.

 

These assumptions are summarized in the following chart:

 

   Investment
A  Investment
B  Investment
C  Investment
D  Investment
E  Investment
F  Cumulative
Unrealized
Capital
Depreciation  Cumulative
Realized
Capital
Losses  Cumulative
Realized
Capital
Gains Year 1  

$10 million

(FMV/cost basis)

  $10 million (FMV/cost basis)  $10 million (FMV/cost basis)  $10 million
(FMV/cost basis)  $10 million (FMV/cost basis)  —  —  —  — Year 2  $20 million
(sale price)  $8 million FMV  $12 million FMV  $10 million FMV  $10 million FMV 
—  $2 million  —  $10 million Year 3  —  $8 million FMV  $14 million FMV 
$14 million FMV  $16 million FMV  —  $2 million  —  $10 million Year 4  — 
$10 million FMV  $16 million FMV 

$12 million

(sale price)

  $14 million FMV  $10 million (cost basis)  —  —  $12 million Year 5  — 
$14 million FMV  $20 million
(sale price)  —  $10 million FMV  $12 million FMV  —  —  $22 million Year 6  — 
$16 million
(sale price)  —  —  $8 million
FMV  $15 million FMV  $2 million  —  $28 million Year 7  —  —  —  —  $8 million
(sale price)  $17 million FMV  —  $2 million  $28 million Year 8  —  —  —  —  — 
$18 million (sale price)  —  $2 million  $36 million

 

A-2

 

 

The capital gains portion of the Incentive Fee would be:

 

Year 1: None

 

Year 2: Capital Gains Incentive Fee = 17.5% multiplied by ($10 million realized
capital gains on sale of Investment A less $2 million cumulative capital
depreciation) = $1.4 million

 

Year 3: Capital Gains Incentive Fee = 17.5% multiplied by ($10 million
cumulative realized capital gains less $2 million cumulative capital
depreciation)) less $1.4 million cumulative Capital Gains Incentive Fee
previously paid = $1.4 million less $1.4 million = $0.00

 

Year 4: Capital Gains Incentive Fee = (17.5% multiplied by ($12 million
cumulative realized capital gains)) less $1.4 million cumulative Capital
Incentive Gains Fee previously paid = $2.1 million less $1.4 million = $0.7
million

 

Year 5: Capital Gains Incentive Fee = (17.5% multiplied by ($22 million
cumulative realized capital gains)) less $2.1 million cumulative Capital Gains
Incentive Fee previously paid = $3.85 million less $2.1 million = $1.75 million

 

Year 6: Capital Gains Incentive Fee = (17.5% multiplied by ($28 million
cumulative realized capital gains less $2 million cumulative capital
depreciation)) less $3.85 million cumulative Capital Gains Incentive Fee
previously paid = $4.55 million less 3.85 million = $0.70 million

 

Year 7: Capital Gains Incentive Fee = (17.5% multiplied by ($28 million
cumulative realized capital gains less $2 million cumulative realized capital
losses)) less $4.55 million cumulative Capital Gains Incentive Fee previously
paid = $4.55 million less $4.5 million = $0.00

 

Year 8: Capital Gains Incentive Fee = (17.5% multiplied by ($36 million
cumulative realized capital gains less $2 million cumulative realized capital
losses)) less $4.55 million cumulative Capital Gains Incentive Fee previously
paid = $5.95 million less $4.55 million = $1.4 million

 

A-3