Exhibit 10.2

INVESTMENT SUB-ADVISORY AGREEMENT

BETWEEN

FSIC III ADVISOR, LLC

AND

GSO / BLACKSTONE DEBT FUNDS MANAGEMENT LLC

THIS INVESTMENT SUB-ADVISORY AGREEMENT (“Agreement”) made this 2nd day of
January, 2014, by and between FSIC III ADVISOR, LLC, a Delaware limited
liability company (the “Adviser”) and GSO / BLACKSTONE DEBT FUNDS MANAGEMENT
LLC, a Delaware limited liability company (the “Sub-Adviser”).

WHEREAS, the Adviser and the Sub-Adviser are investment advisers that are or
will be registered under the Investment Advisers Act of 1940, as amended (the
“Advisers Act”), and engage in the business of providing investment management
services; and

WHEREAS, the Adviser has been retained to act as the investment adviser to FS
Investment Corporation III (the “BDC”), a newly organized, non-diversified,
closed-end management investment company that intends to elect to be regulated
as a business development company under the Investment Company Act of 1940, as
amended (the “1940 Act”), pursuant to an Investment Advisory and Administrative
Services Agreement dated December 20, 2013 (the “Advisory Agreement”), a copy of
which is attached hereto as Exhibit A; and

WHEREAS, the Advisory Agreement permits the Adviser, subject to the supervision
and direction of the BDC’s board of directors (the “Board”), to obtain the
services of an investment sub-adviser to assist the Adviser in fulfilling its
duties thereunder, subject to the requirements of the 1940 Act; and

WHEREAS, the Adviser desires to retain the Sub-Adviser to assist it in
fulfilling certain of its obligations under the Advisory Agreement, and the
Sub-Adviser is willing to render such services subject to the terms and
conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the parties hereby agree as follows:

1. Duties of the Sub-Adviser.

(a) Retention of Sub-Adviser. The Adviser hereby employs the Sub-Adviser to
assist the Adviser in managing the investment and reinvestment of the assets of
the BDC, subject to the terms set forth herein and subject to the supervision of
the Board.

(b) Responsibilities of Sub-Adviser. Without limiting the generality of the
foregoing, the Sub-Adviser shall, during the term and subject to the provisions
of this Agreement:

 

  (i)

make recommendations to the Adviser as to the composition and allocation of the
portfolio of the BDC, the nature and timing of the

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  changes therein and the manner of implementing such changes, including
recommendations as to the specific securities and other assets to be purchased,
retained, or sold by the BDC;

 

  (ii) place orders with respect to, and arrange for, any investment (including
executing and delivering all documents relating to the BDC’s investments on
behalf of the BDC), upon receiving a proper instruction from the Adviser;

 

  (iii) assist the Adviser in identifying, evaluating and negotiating the
structure of the investments made by the BDC;

 

  (iv) assist the Adviser in monitoring and servicing the BDC’s investments;

 

  (v) assist the Adviser in performing due diligence on prospective portfolio
companies;

 

  (vi) assist the Adviser in negotiating, obtaining and managing financing
facilities for the benefit of the BDC or its subsidiaries; and

 

  (vii) provide the Adviser with such other research and related services as the
Adviser may, from time to time, reasonably require for the Adviser to manage the
BDC.

Notwithstanding the foregoing, however, all investment decisions will ultimately
be the responsibility of the Adviser. Furthermore, the parties acknowledge and
agree that the Sub-Adviser shall be required to provide only the services
expressly described in this Section 1(b), and shall have no responsibility to
provide any other services to the Adviser or the BDC, including, but not limited
to, administrative (such as valuation-related services), management or other
similar services.

(c) Acceptance of Employment. The Sub-Adviser hereby agrees during the term
hereof to render the services described herein for the compensation provided
herein, subject to the limitations contained herein. The Sub-Adviser shall carry
out its responsibilities under this Agreement in compliance with: (i) the BDC’s
investment objectives, policies and restrictions as set forth in the BDC’s
then-effective registration statement on Form N-2 filed with the Securities and
Exchange Commission (the “SEC”), as amended from time to time, the BDC’s
prospectus that forms a part of the Registration Statement, as amended and
supplemented, and/or the BDC’s periodic reports filed with the SEC from time to
time; (ii) such policies, directives, regulatory restrictions and compliance
policies as the Adviser may from time to time establish or issue and communicate
to the Sub-Adviser in writing; and (iii) applicable law and related regulations.
The Adviser shall promptly notify the Sub-Adviser in writing of changes to
(i) or (ii) above and shall notify the Sub-Adviser in writing of changes to
(iii) above promptly after it becomes aware of such changes. In no event shall
the Sub-Adviser be held responsible for failing to comply with any of (i),
(ii) or (iii) unless it had previously received the notification in the
foregoing sentence.

 

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(d) Independent Contractor Status. The Sub-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 Adviser or the BDC in any way or otherwise be deemed an agent of
the Adviser or the BDC.

2. Expenses.

Except as provided below in this Section 2, the Sub-Adviser assumes no
obligation with respect to, and shall not be responsible for, the expenses of
the Adviser or the BDC in fulfilling the Sub-Adviser’s obligations hereunder.

During the term of this Agreement, the Sub-Adviser shall pay all expenses
incurred by it in connection with the activities it undertakes to meet its
obligations hereunder. The Sub-Adviser shall, at its sole expense, employ or
associate itself with such persons as it believes to be particularly fitted to
assist it in the execution of its duties under this Agreement, including without
limitation, persons employed or otherwise retained by the Sub-Adviser or made
available to the Sub-Adviser by its members or affiliates. The Adviser shall
cause the Sub-Adviser to be reimbursed by the BDC or the Adviser, as
appropriate, for expenses reasonably incurred by the Sub-Adviser at the request
of or on behalf of the BDC or the Adviser, to the same extent as such expenses
would be reimbursable to the Adviser pursuant to Sections 2(b) and 2(c) of the
Advisory Agreement had such expenses been incurred by the Adviser. The
Sub-Adviser shall maintain and supply to the BDC and the Adviser as they may
reasonably request, records of all such expenses.

3. Compensation.

In consideration for the Sub-Adviser’s services hereunder, with respect to each
Term Year (as defined below), the Adviser shall pay the Sub-Adviser the fee
described below, payable quarterly in arrears (within 10 days of when fees are
paid to the Adviser):

(a) With respect to any fees (including, without limitation, the Base Management
Fees and Incentive Fees, as such terms are defined in the Advisory Agreement)
payable to the Adviser (and not waived) pursuant to the Advisory Agreement
during a Term Year, the Sub-Adviser shall be entitled to receive 50% of any such
amounts.

(b) In the event that this Agreement is terminated other than at the end of a
calendar year, for purposes of determining fees payable to the Sub-Adviser
during the Term Year in which such termination occurs, the advisory fees payable
to the Adviser shall be calculated as if the Advisory Agreement terminated as of
the termination date of this Agreement.

For purposes of this Agreement, a “Term Year” shall mean each annual period
beginning on the Effective Date (as defined in Section 9 hereof) or anniversary
thereof, and ending on the day prior to the anniversary of the Effective Date.

4. Representations and Warranties of the Sub-Adviser.

The Sub-Adviser represents and warrants to the Adviser and the BDC as follows:

(a) The Sub-Adviser is registered as an investment adviser under the Advisers
Act and shall maintain such registration;

 

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(b) The Sub-Adviser is a limited liability company duly organized and validly
existing under the laws of the State of Delaware with the power to own and
possess its assets and carry on its business as it is now being conducted;

(c) The execution, delivery and performance by the Sub-Adviser of this Agreement
are within the Sub-Adviser’s powers and have been duly authorized by all
necessary action, and no action by or in respect of, or filing with, any
governmental body, agency or official is required on the part of the Sub-Adviser
for the execution, delivery and performance by the Sub-Adviser of this
Agreement, and the execution, delivery and performance by the Sub-Adviser of
this Agreement do not contravene or constitute a default under (i) any provision
of applicable law, rule or regulation, (ii) the Sub-Adviser’s governing
instruments, or (iii) any agreement, judgment, injunction, order, decree or
other instrument binding upon the Sub-Adviser;

(d) Part 2 of the Sub-Adviser’s most recent Form ADV filed with the SEC pursuant
to Section 203(c) of the Advisers Act, previously provided to the Adviser, is a
true and complete copy of the form. The Sub-Adviser will promptly provide the
Adviser and the BDC with a complete copy of all subsequent amendments to Part 2
of its Form ADV;

(e) The Sub-Adviser has adopted a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act (“Rule 17j-1”) and will provide
the Adviser and the BDC with a copy of that code, together with evidence of its
adoption. Within 20 days of the end of each calendar quarter during which this
Agreement remains in effect, a senior managing director or managing director of
the Sub-Adviser shall certify to the Adviser or the BDC that the Sub-Adviser has
complied with the requirements of Rule 17j-1 during the previous quarter and
that there have been no material violations of the Sub-Adviser’s code of ethics
or, if such a material violation has occurred, that appropriate action has been
taken in response to such violation. Upon written request of the Adviser or the
BDC, the Sub-Adviser shall permit representatives of the Adviser or the BDC to
examine the reports (or summaries of the reports) required to be made to the
Sub-Adviser by Rule 17j-1(c)(1) and other records evidencing enforcement of the
code of ethics; and

(f) The Sub-Adviser shall comply in all material respects with all requirements
applicable to the investment adviser of a business development company like the
BDC under the Advisers Act, including Rule 206(4)-7 thereunder, and the 1940
Act.

5. Representations and Warranties of the Adviser.

The Adviser represents and warrants to the Sub-Adviser and the BDC as follows:

(a) The Adviser shall be registered as an investment adviser under the Advisers
Act as of the date the BDC commences investment operations and shall maintain
such registration;

(b) The Adviser is a limited liability company duly organized and validly
existing under the laws of the State of Delaware with the power to own and
possess its assets and carry on its business as it is now being conducted;

 

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(c) The execution, delivery and performance by the Adviser of this Agreement are
within the Adviser’s powers and have been duly authorized by all necessary
action and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the execution,
delivery and performance by the Adviser of this Agreement do not contravene or
constitute a default under (i) any provision of applicable law, rule or
regulation, (ii) the Adviser’s governing instruments, or (iii) any agreement,
judgment, injunction, order, decree or other instrument binding upon the
Adviser;

(d) Part 2 of the Adviser’s most recent Form ADV that will be filed with the SEC
pursuant to Section 203(c) of the Advisers Act, and that will be provided to the
Sub-Adviser, shall be a true and complete copy of the form. The Adviser will
promptly provide the Sub-Adviser with a complete copy of all subsequent
amendments to Part 2 of its Form ADV;

(e) The Adviser and the BDC have duly entered into the Advisory Agreement
pursuant to which the BDC authorized the Adviser to enter into this Agreement;

(f) The Adviser shall comply in all material respects with all requirements
applicable to the investment adviser of a business development company like the
BDC under the Advisers Act, including Rule 206(4)-7 thereunder, and the 1940
Act;

(g) The Adviser has implemented anti-money laundering policies and procedures
that are reasonably designed to comply with applicable provisions of the Bank
Secrecy Act, as amended by the USA PATRIOT Act of 2001, as amended, and any
other applicable anti-money laundering laws and regulations;

(h) To the Adviser’s knowledge, the assets of the BDC, were (A) not and are not
directly or indirectly derived from activities that may contravene applicable
laws and regulations, including anti-money laws and regulations and the laws,
regulations and Executive Orders administered by the U.S. Department of
Treasury’s Office of Foreign Assets Control (“OFAC”) and (B) derived from the
offering of the BDC’s interests;

(i) The Adviser (or any person controlling or controlled by the Adviser, any
person having a beneficial interest in the Adviser, or any person for whom the
Adviser is acting as agent or nominee in connection with the BDC) is not (A) an
individual or entity named on any available lists of known or suspected
terrorists, terrorist organizations or of other sanctioned persons issued by the
United States government and the government(s) of any jurisdiction(s) in which
the Adviser is doing business, including the SDN List administered by OFAC, as
such list may be amended from time to time; (B) an individual or entity
otherwise prohibited by the OFAC sanctions programs; or (C) a current or former
senior foreign political figure (“SFPF”) or politically exposed person (“PEP”),
or an immediate family member or close associate of such an individual;

(j) The Adviser, upon reasonable request by the Sub-Adviser, will provide such
information as the Sub-Adviser may need to satisfy applicable anti-money
laundering laws and regulations; and

 

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(k) The Adviser acknowledges and agrees that:

 

  (i) the Sub-Adviser and its affiliates perform investment advisory services
for various clients and accounts (which includes registered investment
companies, business development companies and other clients and proprietary
accounts, collectively, the “Advisory Clients”). The Adviser agrees that the
Sub-Adviser may give advice and take action with respect to any of its other
Advisory Clients, in accordance with the investment objectives and strategies of
such other Advisory Clients, which may differ from advice given or the timing or
nature of action taken with respect to the BDC so long as it is the
Sub-Adviser’s policy, to the extent practicable, to recommend for allocation
and/or allocate investment opportunities to the BDC on a fair and equitable
basis relative to its other Advisory Clients. It is understood that the
Sub-Adviser shall not have any obligation to recommend for purchase or sale any
loans or securities which its principals, affiliates or employees may purchase
or sell for its or their own accounts or for any other Advisory Clients if, in
the opinion of the Sub-Adviser, such transaction or investment appears
unsuitable, impractical or undesirable for the BDC;

 

  (ii) the Sub-Adviser and its affiliates may aggregate purchase or sale orders
for Advisory Clients (including proprietary positions) in accordance with its
current aggregation and allocation policy, but only if (x) in the Sub-Adviser’s
reasonable judgment such aggregation results in an overall economic or other
benefit to the assets taking into consideration the advantageous selling or
purchase price, brokerage commission and other expenses and factors and (y) the
Sub-Adviser’s actions with respect to aggregating orders for multiple Advisory
Clients, as well as the BDC, are consistent with applicable law. However, the
Sub-Adviser is under no obligation to aggregate any such orders under any
circumstances;

 

  (iii) circumstances may arise under which the Sub-Adviser determines there is
a limited supply or demand for a particular security. Under such circumstances,
the Sub-Adviser shall recommend for allocation and/or allocate such security to
the BDC and the Advisory Client in accordance with its then-current aggregation
and allocation policy, the Adviser’s then-current allocation policy and any
applicable exemptive orders, and in a fair and equitable manner consistent with
its fiduciary duties owed to the BDC and such other Advisory Clients;

 

  (iv)

as a regular part of the restructuring and advisory practice of an affiliate of
the Sub-Adviser (the “Restructuring Affiliate”), the Restructuring Affiliate
advises debtors and creditors in connection with out-of-court debt
restructurings and workouts and with bankruptcy proceedings. The Restructuring
Affiliate also serves as adviser to official creditor committees established
pursuant to such proceedings. In situations in which an issuer of an investment
recommended to the Adviser (on behalf of the BDC) or a creditor or group of
creditors of such issuer) is a client or

 

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  potential client of the Restructuring Affiliate (any such investment, a
“Conflicted Investment”), the Sub-Adviser may recommend the sale of the
Conflicted Investment or take such other actions as reasonably necessary to the
extent deemed advisable by the Restructuring Affiliate, in consultation with the
Sub-Adviser’s compliance officer, in order to avoid actual or perceived
conflicts of interest between the best interests of the BDC and its stockholders
and the restructuring and reorganization advisory practice, whether or not such
recommended disposition or other actions would have been recommended absent the
conflict; provided, however, in each case, any recommendation or action on the
part of the Sub-Adviser must be in compliance with the 1940 Act. Further, there
may also be instances in which the work of the Restructuring Affiliate prevents
the Sub-Adviser from recommending the purchase of an investment. Notwithstanding
anything to the contrary contained elsewhere herein, due to certain
confidentiality obligations which the Restructuring Affiliate may be subject to,
the Sub-Adviser shall not be obligated to inform the Adviser of the nature of
the Restructuring Affiliate’s participation in any Conflicted Investment at the
time of any action related to Conflicted Investments;

 

  (v) it has received Part 2 of the Sub-Adviser’s Form ADV filed with the SEC
pursuant to Section 203(c) of the Advisers Act, which states information
relative to the Sub-Adviser’s investment and brokerage policies and other
important matters, and which the Sub-Adviser warrants is the current filing of
such form;

 

  (vi) the Sub-Adviser makes no warranty that any investments recommended by the
Sub-Adviser hereunder will not depreciate in value or at any time not be
affected by adverse tax consequences, nor does it give any warranty as to the
performance or profitability of the assets or the success of any investment
strategy recommended by the Sub-Adviser; and

 

  (vii) it has received, read and understood the Sub-Adviser’s disclosures
regarding conflicts of interest attached hereto as Exhibit B and such
disclosures have been provided to the Board in connection with their
consideration of this Agreement.

6. Survival of Representations and Warranties; Duty to Update Information.

All representations and warranties made by the Sub-Adviser and the Adviser
pursuant to Sections 4 and 5, respectively, shall survive for the duration of
this Agreement and the parties hereto shall promptly notify each other in
writing upon becoming aware that any of the foregoing representations and
warranties are no longer true.

7. Liability and Indemnification.

(a) The duties of the Sub-Adviser shall be confined to those expressly set forth
herein. The Sub-Adviser shall not be liable for any loss arising out of any
instrument hereunder,

 

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except a loss resulting from willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of reckless disregard of its
obligations and duties hereunder, except as may otherwise be provided under
provisions of applicable state law which cannot be waived or modified hereby.
(As used in this Section 7(a), the term “Sub-Adviser” shall include, without
limitation, its affiliates and the Sub-Adviser’s and its affiliates’ respective
partners, shareholders, directors, members, principals, officers, employees and
other agents of the Sub-Adviser).

(b) The Sub-Adviser shall indemnify the Adviser and the BDC, and their
respective affiliates and controlling persons, for any liability and expenses,
including reasonable attorneys’ fees, which the Adviser, the BDC or their
respective affiliates and controlling persons may sustain as a result of the
Sub-Adviser’s willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties hereunder.

(c) The Adviser shall indemnify the Sub-Adviser, its affiliates and its
controlling persons, for any liability and expenses, including reasonable
attorneys’ fees, howsoever arising from, or in connection with, the
Sub-Adviser’s performance of its obligations under this Agreement or the
Adviser’s breach of the terms, representations and warranties herein; provided,
however, that the Sub-Adviser shall not be indemnified for any liability or
expenses that may be sustained as a result of the Sub-Adviser’s willful
misfeasance, bad faith, or gross negligence in the performance of the
Sub-Adviser’s duties or by reason of the reckless disregard of the Sub-Adviser’s
duties and obligations under this Agreement.

8. Confidentiality.

(a) Subject to Section 8(b), each of the Sub-Adviser and the Adviser acknowledge
and agree that pursuant to this Agreement, either party may have access to the
other party’s confidential and proprietary information and materials concerning
or pertaining to the other’s business. Each party will receive and hold such
information in the strictest confidence, and acknowledge, represent, and warrant
that it will use its best efforts to protect the confidentiality of this
information. Each party agrees that, without the prior written consent of the
other party, they will not use, copy, or divulge to third parties or otherwise
use, except in accordance with the terms of this Agreement, any information
obtained from or through the other party in connection with this Agreement other
than as reasonably necessary in the course of their business; provided that such
recipients must agree to protect the confidentiality of such information and use
such information only for the purposes of providing services to the BDC;
provided, further, however, this covenant shall not apply to information
(x) which is in the public domain now or when it becomes in the public domain in
the future, other than by reason of a breach of this Agreement, (y) which has
come to either party from a lawful source not bound to maintain the
confidentiality of such information, other than from the other party or an
affiliate or representative of that party, or (z) disclosures which are required
by law, regulatory authority, regulation or legal process.

(b) The Adviser agrees that the Sub-Adviser shall have the right to disclose the
performance of the BDC to third parties at any time, subject to the prior review
and approval of the general form and scope of such disclosure by the Adviser
(which approval shall not be unreasonably withheld, conditioned or delayed).

 

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(c) Notwithstanding anything to the contrary herein, each party to this
Agreement (and each employee, representative, or other agent of such party) may
disclose to any and all persons, without limitation of any kind, the tax
treatment and tax structure of (i) the BDC and (ii) any of its transactions, and
all materials of any kind (including opinions or other tax analyses) that are
provided to such party relating to such tax treatment and tax structure.

(d) The representations and warranties made by the Sub-Adviser and the Adviser
pursuant to this Section 8 shall survive the termination of this Agreement.

9. Duration and Termination of Agreement.

(a) Term and Effectiveness. This Agreement shall become effective as of the date
that the BDC meets the minimum offering requirement, as such term is defined in
the prospectus contained in the BDC’s registration statement on Form N-2 as
first declared effective by the SEC (the “Effective Date”). This Agreement shall
remain in effect for two years, and thereafter shall continue automatically for
successive annual periods, provided that such continuance is specifically
approved at least annually by (i) the vote of the Board, or by the vote of a
majority of the outstanding voting securities of the BDC and (ii) the vote of a
majority of the BDC’s directors who are not parties to this Agreement or
“interested persons” (as such term is defined in Section 2(a)(19) of the 1940
Act) of any such party, in accordance with the requirements of the 1940 Act.

(b) Termination. This Agreement may be terminated at any time, without the
payment of any penalty, upon 60 days’ written notice, by (i) the Adviser, if the
Board or a majority of the outstanding voting securities of the BDC determine
that this Agreement should be terminated, or (ii) the Sub-Adviser. This
Agreement shall automatically terminate in the event of (1) its “assignment” (as
such term is defined for purposes of Section 15(a)(4) of the 1940 Act), or
(2) the termination of the Advisory Agreement. The provisions of Section 7 of
this Agreement shall remain in full force and effect, and the Adviser and the
BDC shall remain entitled to the benefits thereof, notwithstanding any
termination of this Agreement.

(c) Notwithstanding any termination of this Agreement, the Sub-Adviser shall be
entitled to receive all amounts payable to it and not yet paid pursuant to
Sections 2 or 3 hereof.

10. Services Not Exclusive.

Nothing in this Agreement shall prevent the Sub-Adviser or any member, manager,
officer, employee or other affiliate thereof from acting as investment adviser
for any other person, firm or corporation, or from engaging in any other lawful
activity, and shall not in any way limit or restrict the Sub-Adviser or any of
its members, managers, officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting.

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.

 

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12. Amendments.

This Agreement may be amended by mutual consent of the parties, subject to the
requirements of applicable law.

13. Governing Law.

Notwithstanding the place where this Agreement may be executed by any of the
parties hereto, this Agreement shall be construed in accordance with the laws of
the State of New York. For so long as the BDC is regulated as a BDC under the
1940 Act and the Sub-Adviser is regulated as an investment adviser under the
Advisers Act, this Agreement shall also be construed in accordance with the
applicable provisions of the 1940 Act and the Advisers Act, respectively, and
any then-current regulatory interpretations thereunder. To the extent the
applicable laws of the State of New York, or any of the provisions herein,
conflict with the provisions of the 1940 Act, the latter shall control.

14. Severability.

If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby.

 

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

 

FSIC III ADVISOR, LLC By:   /s/ Gerald F. Stahlecker Name:   Gerald F.
Stahlecker Title:   Executive Vice President

 

 

 

 

GSO / BLACKSTONE DEBT FUNDS MANAGEMENT LLC By:   /s/ Marisa J. Beeney Name:  
Marisa J. Beeney Title:   Authorized Signatory

 

 

 

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EXHIBIT A

Advisory Agreement

[See Attached]

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EXHIBIT B

Conflicts of Interest

 

(1) Certain inherent conflicts of interest arise from the fact that GSO /
Blackstone Debt Funds Management LLC (the “Sub-Adviser”), The Blackstone Group
L.P. (“Blackstone Group”) and their affiliates (the “Affiliates”, and
collectively, “Blackstone” or the “Firm”) provide investment advisory services
both to FSIC III Advisor, LLC (the “Adviser”), on behalf of FS Investment
Corporation III (the “BDC”), and other clients, including other investment
funds, and any other investment vehicles that the Sub-Adviser or its respective
Affiliates may establish from time to time, as well as client accounts and
proprietary accounts managed by the Sub-Adviser and its Affiliates in which the
BDC will not have an interest (such other clients, funds and accounts,
collectively the “Other GSO Accounts”). In addition, Blackstone Group and its
Affiliates provide investment management services to other clients, including
other investment funds and any other investment vehicles that Blackstone Group
or any of its Affiliates may establish from time to time, client accounts and
proprietary accounts in which the BDC will not have an interest (such other
clients, funds and accounts, collectively the “Other Blackstone Accounts” and
together with the Other GSO Accounts, the “Other Accounts”). The respective
investment programs of the BDC and the Other Accounts may or may not be
substantially similar. The Firm may give advice and recommend securities to
Other Accounts, in accordance with the investment objectives and strategies of
such Other Accounts, which may differ from advice given to, or the timing or
nature of the action taken with respect to, the BDC so long as it is the
Sub-Adviser’s policy, to the extent practicable, to recommend for allocation
and/or allocate investment opportunities to the BDC on a fair and equitable
basis relative to its Other Accounts, even though their investment objectives
may overlap with those of the BDC. Affiliates of the Sub-Adviser engage in
investment advisory business with respect to accounts that compete with the BDC
and have no obligation to make their investment opportunities available to the
BDC;

 

(2) While the Sub-Adviser will seek to manage potential conflicts of interest in
good faith, the portfolio strategies employed by the Sub-Adviser and Blackstone
in managing their respective Other Accounts could conflict with the transactions
and strategies employed by the Sub-Adviser in managing the BDC and may affect
the prices and availability of the securities and instruments in which the BDC
invests. Conversely, participation in specific investment opportunities may be
appropriate, at times, for both the BDC and Other Accounts;

 

(3) The Sub-Adviser may have a conflict of interest in allocating investment
opportunities between the BDC and Other Accounts including where the Sub-Adviser
may be incentivized to recommend investments for the BDC that may favor the
interests of Other Accounts. This potential conflict may be exacerbated where
the Sub-Adviser has more attractive incentive fees for such Other Accounts, or
where individuals of the Sub-Adviser who are responsible for selecting
investments for the BDC have large personal stakes in Other Accounts. In each
such case, such transactions will be governed by, and the Sub-Adviser will
execute such transactions in accordance with, procedures designed and adopted by
the Sub-Adviser to manage such conflicts of interest;

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(4) Certain distressed investment opportunities may offer high potential
returns, but may not be suitable for the BDC. As a result, such investment
opportunities may be allocated to Other Accounts with similar investment
strategies as the BDC and may not be allocated to the BDC. Such investments,
while high risk, can at times offer exceptional returns, and the BDC may not be
able to participate in these investments;

 

(5) It is the policy of the Sub-Adviser to share appropriate investment
opportunities (and sale opportunities) with the Other Accounts. In general, this
means that such opportunities will be allocated pro rata among the BDC and the
Other Accounts based on available capacity for such investment in each account
(including with respect to guidelines as to concentration of holdings), taking
into account available cash and the relative capital of the respective accounts.
Nevertheless, investment and/or sale opportunities may be allocated other than
on a pro rata basis, if the Sub-Adviser deems in good faith that a different
allocation among the BDC and the Other Accounts is appropriate, taking into
account, among other considerations (a) risk-return profile of the proposed
investment and the BDC’s or Other Account’s current risk profile; (b) the
particular BDC’s or the Other Accounts’ investment guidelines, restrictions and
objectives, including whether such objectives are considered solely in light of
the specific investment under consideration or in the context of the portfolio’s
overall holdings; (c) the potential for the proposed investment to create an
industry, sector or issuer imbalance in the BDC’s and the Other Accounts’
portfolios; (d) liquidity requirements of the BDC and Other Accounts, including
during a wind-down of the BDC or Other Account; (e) tax consequences;
(f) regulatory restrictions; (g) the need to re-size risk in the BDC’s or Other
Accounts’ portfolios; (h) redemption/withdrawal requests from the BDC and Other
Accounts and anticipated future contributions into the BDC and Other Accounts;
(i) the work of a particular investment team in sourcing an opportunity;
(j) proximity of the BDC or Other Account to the end of its specified term;
(k) when a pro rata allocation could result in de minimis or odd lot
allocations; (l) degree of leverage availability and any requirements or other
terms of any existing leverage facilities; (m) the nature and extent of
involvement in the transaction on the part of the respective teams of investment
professionals dedicated to the BDC; (n) available cash; and (o) other
considerations deemed relevant by the Sub-Adviser and its Affiliates. Because of
these and other factors, certain Other Accounts may effectively have priority in
investment allocations over the BDC, notwithstanding the Sub-Adviser’s general
policy of pro rata allocation. The BDC should be aware that individual conflicts
will not necessarily be resolved in favor of the BDC’s interests, but the BDC
will be treated fairly and equitably over time and in a manner consistent with
the Sub-Adviser’s fiduciary duties. Orders may be combined for all such
accounts, and if any order is not filled at the same price, they may be
allocated on an average price basis. Similarly, if an order on behalf of more
than one account cannot be fully executed under prevailing market conditions,
securities may be allocated among the different accounts on a basis which the
Sub-Adviser or its Affiliates consider equitable;

 

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(6) From time to time, the BDC and Other Accounts may make investments at
different levels of a borrower’s or an issuer’s capital structure or otherwise
in different classes of a borrower’s or an issuer’s securities, as may be
permitted by law and subject to compliance with appropriate procedures. Such
investments may inherently give rise to conflicts of interest or perceived
conflicts of interest between or among the various classes of securities that
may be held by such entities. In addition, when the BDC and Other Accounts hold
investments in the same borrower or issuer (including in the same level of the
capital structure), the BDC may be prohibited by applicable law from
participating in restructuring, work-outs, renegotiations, or other activities
related to its investment in the borrower or issuer due to the fact that Other
Accounts hold investments in the same borrower or issuer. As a result, the BDC
may not be permitted by law to make the same investment decisions as Other
Accounts in the same or similar situations even if the Sub-Adviser believes it
would be in the best economic interests of the BDC to do so. Also, the BDC may
be prohibited by applicable law from investing in a borrower or issuer that
Other Accounts are also investing in or currently invest in even if the
Sub-Adviser believes it would be in the best economic interests of the BDC to do
so. In addition, entering into certain transactions that are not deemed “joint”
transactions for purposes of the Investment Company Act of 1940, as amended (the
“1940 Act”) and relevant guidance from the Securities and Exchange Commission
may potentially lead to joint transactions within the meaning of the 1940 Act in
the future. This may be the case, for example, with issuers who are near default
and more likely to enter into restructuring or work-out transactions with their
existing debt holders, which may include the BDC and its affiliates. In some
cases, to avoid the potential of future joint transactions, the Sub-Adviser may
avoid allocating an investment opportunity to the BDC that it would otherwise
allocate, subject to the Sub-Adviser’s and Adviser’s then-current allocation
policy and any applicable exemptive orders, and to the Sub-Adviser’s obligation
to allocate opportunities in a fair and equitable manner consistent with its
fiduciary duties owed to the BDC and Other Accounts and policies related to
approvals of investments;

 

(7) The Sub-Adviser or certain of its Affiliates may come into possession of
material non-public information with respect to a borrower or an issuer. Should
this occur, the Sub-Adviser would be restricted from buying or selling
securities, derivatives or loans of the borrower or the issuer on behalf of the
BDC until such time as the information became public or was no longer deemed
material to preclude the BDC from participating in an investment. Disclosure of
such information to the Sub-Adviser’s personnel responsible for the affairs of
the BDC will be on a need-to-know basis only, and the Adviser on behalf of the
BDC may not be free to act upon any such information. Therefore, the Adviser and
the BDC may not have access to material non-public information in the possession
of the Firm which might be relevant to an investment decision to be made on
behalf of the BDC, and the Adviser may initiate a transaction or sell an
investment which, if such information had been known to it, may not have been
undertaken. Due to these restrictions, the Adviser may not be able to initiate a
transaction that it otherwise might have initiated and may not be able to sell
an investment that it otherwise might have sold;

 

(8)

As part of its regular business, Blackstone provides a broad range of investment
banking, advisory, and other services. In the regular course of its investment
banking and advisory businesses, Blackstone represents potential purchasers,
sellers and other involved parties, including corporations, financial buyers,
management, shareholders and institutions, with

 

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  respect to transactions that could give rise to investments that are suitable
for the BDC. In such a case, Blackstone’s client would typically require
Blackstone to act exclusively on its behalf, thereby precluding the BDC from
participating in such transactions. Blackstone will be under no obligation to
decline any such engagements in order to make an investment opportunity
available to the BDC. In connection with its investment banking, advisory and
other businesses, Blackstone may come into possession of information that limits
its ability to engage in potential transactions. The BDC’s activities may be
constrained as a result of the inability of Blackstone personnel to use such
information. For example, employees of Blackstone may be prohibited by law or
contract from sharing information with members of the BDC’s investment team at
the Sub-Adviser or the Adviser. Additionally, there may be circumstances in
which one or more of certain individuals associated with Blackstone will be
precluded from providing services related to the BDC’s activities because of
certain confidential information available to those individuals or to other
parts of Blackstone. In certain seller assignments, the seller may permit the
BDC to act as a participant in such transaction, which would raise certain
conflicts of interest inherent in such a situation (including as to the
negotiation of the purchase price);

 

(9) Blackstone has long-term relationships with a significant number of
corporations and their senior management. In determining whether to recommend
that the BDC invest in a particular transaction, the Sub-Adviser will consider
those relationships, which may result in the Sub-Adviser turning away certain
transactions on behalf of the BDC in view of such relationships, as may be
permitted by law. The BDC may also co-invest with clients of Blackstone in
particular investment opportunities, and the relationship with such clients
could influence the decisions made by the Sub-Adviser with respect to such
investments, as may be permitted by law and in accordance with the Sub-Adviser’s
applicable procedures. The Sub-Adviser may also have additional conflicts of
interest, including where the Sub-Adviser may be incentivized to recommend
investments for the BDC that may favor the interests of Other Accounts. In each
such case, such transactions will be governed by, and the Sub-Adviser will
execute such transactions in accordance with, procedures designed and adopted by
the Sub-Adviser to manage such conflicts of interest;

 

(10) The Firm may represent creditors or debtors in restructuring or
reorganization proceedings or negotiations, including under Chapter 11 of the
Bankruptcy Code. From time to time the Firm may serve as advisor to creditor or
equity committees. This involvement may limit or preclude the flexibility that
the BDC may otherwise have to participate in restructurings or the Sub-Adviser
may recommend that the BDC liquidate any existing positions of the applicable
issuer. The Firm may be compensated for these representations; however, such
compensation will not be passed through to the BDC;

 

(11)

The Sub-Adviser and its members, partners, officers and employees will devote as
much of their time to the activities of the BDC as they deem necessary and
appropriate. The Firm is not restricted from forming additional investment
funds, from entering into other investment advisory relationships or from
engaging in other business activities, even

 

B-4

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though such activities may be in competition with the BDC and/or may involve
substantial time and resources of the Sub-Adviser. These activities could be
viewed as creating a conflict of interest in that the time and effort of the
members of the Sub-Adviser and its officers and employees will not be devoted
exclusively to the business of the BDC but will be allocated between the
business of the BDC and the management of the monies of other advisees of the
Sub-Adviser;

 

(12) Situations may arise where certain assets held by Other Accounts may be
traded to the BDC or vice versa. Such transactions will be conducted in
accordance with, and subject to the Sub-Adviser’s fiduciary obligations to the
BDC, the 1940 Act and the rules thereunder and other applicable law;

 

(13) The officers, directors, members, managers, and employees of the
Sub-Adviser or Blackstone may trade in securities for their own accounts,
subject to restrictions and reporting requirements as may be required by law and
Firm policies, or otherwise determined from time to time by the Sub-Adviser;

 

(14) The Firm may expand the range of services that it provides over time. The
Firm will not be restricted in the scope of its business or in the performance
of any such services (whether now offered or undertaken in the future) even if
such activities could give rise to conflicts of interest, and whether or not
such conflicts are described herein. The Firm has, and will continue to develop,
relationships with a significant number of companies, financial sponsors and
their senior managers, including relationships with clients who may hold or may
have held investments similar to those intended to be made by the BDC. These
clients may themselves represent appropriate investment opportunities for the
BDC or may compete with the BDC for investment opportunities;

 

(15) The entities in which the BDC invests may be counterparties or participants
in agreements, transactions or other arrangements with portfolio companies of
other investment funds managed by the Firm. From time to time employees of the
Sub-Adviser may serve as directors or advisory board members of certain
portfolio companies or other entities. In connection with such services, the
Sub-Adviser may receive directors’ fees or other similar compensation. Such
amounts have not been, and are not expected to, be material;

 

(16) Other present and future activities of Blackstone may give rise to
additional conflicts of interest. In the event that a conflict of interest
arises, the Sub-Adviser will attempt to resolve such conflicts in a fair and
equitable manner and subject to applicable law; and

 

(17) By approving the Investment Sub-Advisory Agreement by and between the
Adviser and the Sub-Adviser, the Adviser and the BDC will be deemed to have
acknowledged the existence of any such actual and potential conflicts of
interest and to have waived any claim with respect to any liability arising from
the existence of any such conflicts of interest.

 

B-5