Exhibit 10.5
SECOND AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT
BETWEEN
FIFTH STREET FINANCE CORP.
AND
FIFTH STREET MANAGEMENT LLC
     This Second Amended and Restated Investment Advisory Agreement (this
“Agreement”) made this 2nd day of May 2011, by and between FIFTH STREET FINANCE
CORP., a Delaware corporation (the “Company”), and FIFTH STREET MANAGEMENT LLC,
a Delaware limited liability company (the “Adviser”).
     WHEREAS, the Company is a closed-end management investment fund that has
elected to be regulated as a business development company (“BDC”) under the
Investment Company Act of 1940, as amended (the “Investment Company Act”); and
     WHEREAS, the Adviser is organized as an investment adviser that is
registered under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”); and
     WHEREAS, the Company and the Adviser entered into an investment advisory
agreement, dated December 14, 2007 (the “Original Advisory Agreement”);
     WHEREAS, the Company and the Adviser entered into an amended and restated
investment advisory agreement, dated April 30, 2008 (the “First Amended and
Restated Advisory Agreement”), which amended and restated in its entirety the
Original Advisory Agreement; and
     WHEREAS, the Company and the Adviser further desire to amend and restate in
its entirety the First Amended and Restated Advisory Agreement to reflect, among
other things, (i) the fact that the Adviser has agreed to permanently waive that
portion of its Base Management Fee (as defined below) attributable to the
Company’s assets held in the form of cash and cash equivalents as of the end of
each quarter beginning on March 31, 2010 and (ii) changes in certain
non-substantive factual matters described therein that occurred subsequent to
the date of the execution of the First Amended and Restated Advisory 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 Adviser.
     (a) The Company hereby employs 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,
(i) in accordance with the investment objective, policies and restrictions that
are set forth in the reports and/or registration statements that the Company
files with the Securities and Exchange Commission (the “SEC”) from time to time;
(ii) during the

 

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term of this Agreement in accordance with all other applicable federal and state
laws, rules and regulations, and the Company’s charter and by-laws; and (iii) in
accordance with the Investment Company Act. Without limiting the generality of
the foregoing, the Adviser shall, during the term and subject to the provisions
of this Agreement (A) determine the composition of the portfolio of the Company,
the nature and timing of the changes therein and the manner of implementing such
changes; (B) identify, evaluate and negotiate the structure of the investments
made by the Company; (C) close, monitor and service the Company’s investments;
(D) determine the securities and other assets that the Company shall purchase,
retain, or sell; (E) perform due diligence on prospective portfolio companies;
and (F) 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. 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 obtain debt
financing, the Adviser shall arrange for such financing on the Company’s behalf,
subject to the oversight and approval of the Company’s Board.
     (b) The Adviser hereby accepts such employment and agrees during the term
hereof to render the services described herein for the compensation provided
herein.
     (c) 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 Adviser
and not 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.
     (d) 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.
     (e) Subject to review by and the overall control of the Board of the
Company, 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 with respect to the Company’s portfolio transactions and shall
render to the Company’s 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 shall surrender promptly to the
Company any such records upon the Company’s request, provided that the Adviser
may retain a copy of such records.

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2. Company’s Responsibilities and Expenses Payable by the Company.
     All personnel of the Adviser, when and to the extent engaged in providing
investment advisory services hereunder, and the compensation and routine
overhead expenses of such personnel allocable to such services, shall be
provided and paid for by the Adviser and not by the Company. The Company shall
bear all other costs and expenses of its operations and transactions, including
(without limitation) fees and expenses relating to: organizational and offering
expenses; the investigation and monitoring of the Company’s investments; the
cost of calculating the Company’s net asset value; the cost of effecting sales
and repurchases of shares of the Company’s common stock and other securities;
management and incentive fees payable pursuant to the investment advisory
agreement; fees payable to third parties relating to, or associated with, making
investments and valuing investments (including third-party valuation firms);
transfer agent and custodial fees; fees and expenses associated with marketing
efforts (including attendance at investment conferences and similar events);
federal and state registration fees; any exchange listing fees; federal, state
and local taxes; independent directors’ fees and expenses; brokerage
commissions; costs of proxy statements, stockholders’ reports and notices; costs
of preparing government filings, including periodic and current reports with the
SEC; fidelity bond, liability insurance and other insurance premiums; and
printing, mailing, independent accountants and outside legal costs and all other
direct expenses incurred by either FSC, Inc. or the Company in connection with
administering the Company’s business, including payments under the
administration agreement dated as of May 2, 2011 (the “Adminstration Agreement”)
that will be based upon the Company’s allocable portion of overhead and other
expenses incurred by the Company’s administrator, FSC, Inc., in performing its
obligations under the Administration Agreement and the compensation of the
Company’s chief financial officer and chief compliance officer, and their
respective staffs.
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 (“Base Management Fee”) and an incentive fee (“Incentive Fee”) as
hereinafter set forth. The Adviser may agree to temporarily or permanently
waive, in whole or in part, the Base Management Fee and/or the Incentive Fee.
See Appendix A for examples of how these fees are calculated.
     (a) The Base Management Fee shall be calculated at an annual rate of 2% of
the Company’s gross assets, excluding any cash and cash equivalents. For
purposes of this Agreement, the term “cash and cash equivalents” will have the
meaning ascribed to it from time to time in the notes to the financial
statements that the Company files with the SEC. The Base Management Fee shall be
payable quarterly in arrears, and shall be calculated based on the value of the
Company’s gross assets at the end of each fiscal quarter, and appropriately
adjusted for any equity capital raises or repurchases during such quarter. The
Base Management Fee for any partial month or quarter shall be appropriately
prorated.
     (b) The Incentive Fee shall consist of two parts, as follows:

  (i)   The first part shall be calculated and payable quarterly in arrears
based on the Company’s ‘‘Pre-Incentive Fee Net Investment Income’’ for the
immediately preceding fiscal quarter. For this purpose, ‘‘Pre-Incentive

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      Fee Net Investment Income’’ means interest income, dividend income and any
other income (including any other fees (other than fees for providing managerial
assistance), such as commitment, origination, structuring, diligence and
consulting fees or other fees that the Company receives from portfolio
companies) accrued during the fiscal quarter, minus the Company’s operating
expenses for the quarter (including the Base Management Fee, expenses payable
under the Administration Agreement with FSC, Inc., 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 payment-in-kind interest and zero coupon securities),
accrued income that the Company has not yet received in cash. Pre-Incentive Fee
Net Investment Income does not include any realized capital gains, realized
capital losses or unrealized capital appreciation or depreciation. Pre-Incentive
Fee Net Investment Income, expressed as a rate of return on the value of the
Company’s net assets at the end of the immediately preceding fiscal quarter,
shall be compared to a ‘‘hurdle rate’’ of 2% per quarter (8% annualized),
subject to a ‘‘catch-up’’ provision measured as of the end of each fiscal
quarter. The Company’s net investment income used to calculate this part of the
incentive fee is also included in the amount of the Company’s gross assets used
to calculate the 2% base management fee. The operation of the incentive fee with
respect to the Company’s Pre-Incentive Fee Net Investment Income for each
quarter is as follows:

  •   No incentive fee is payable to the Adviser in any fiscal quarter in which
the Company’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle
rate of 2% (the ‘‘preferred return’’ or ‘‘hurdle’’).     •   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 hurdle
rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is
payable to the Adviser. The Company refers to this portion of the Company’s
Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is
less than or equal to 2.5%) as the ‘‘catch-up.’’ The ‘‘catch-up’’ provision is
intended to provide the Adviser with an incentive fee of 20% on all of the
Company’s Pre-Incentive Fee Net Investment Income as if a hurdle rate did not
apply when the Company’s Pre-Incentive Fee Net Investment Income exceeds 2.5% in
any fiscal quarter; and     •   20% of the amount of the Company’s Pre-Incentive
Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10%
annualized) is payable to the Adviser once the hurdle is reached and the
catch-up is achieved, (20% of all Pre-Incentive Fee Net Investment Income
thereafter is allocated to the Adviser).

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  (ii)   The second part of the incentive fee shall be determined and payable in
arrears as of the end of each fiscal year (or upon termination of the investment
advisory agreement, as of the termination date), commencing on September 30,
2008 and shall equal 20% of the Company’s realized capital gains, if any, on a
cumulative basis from inception through the end of each fiscal year, computed
net of all realized capital losses and unrealized capital depreciation on a
cumulative basis, less the aggregate amount of any previously paid capital gain
incentive fees.

4. Covenants of the Adviser.
     The Adviser covenants that it will maintain its registration as an
investment adviser under the Advisers 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. 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. Other Activities 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, member (including its members and the owners of its members),
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. 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

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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.
7. Responsibility of Dual Directors, Officers and/or Employees.
     If any person who is a manager, partner, member, officer or employee of the
Adviser 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, member,
officer and/or employee of the Adviser shall be deemed to be acting in such
capacity solely for the Company, and not as a manager, partner, member, officer
or employee of the Adviser or under the control or direction of the Adviser,
even if paid by the Adviser.
8. Limitation of Liability of the Adviser; Indemnification.
     The Adviser (and its officers, managers, partners, members (and their
members, including the owners of their members), agents, employees, controlling
persons and any other person or entity affiliated with the Adviser) 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, members (and their members, including the
owners of their members), agents, employees, controlling persons and any other
person or entity affiliated with the Adviser, 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 8 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 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.
9. Effectiveness, Duration and Termination of Agreement.
     This Agreement shall become effective as of the date above written. This
Agreement shall remain in effect until March 1, 2012, 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
Company’s Board, or by the vote of a majority of the outstanding

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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 and
each of whom is an “independent director” under applicable New York Stock
Exchange listing standards. This Agreement may be terminated at any time,
without the payment of any penalty, upon 60 days’ written notice, by the vote of
a majority of the outstanding voting securities of the Company, or by the vote
of the Company’s directors or by the Adviser. This Agreement shall 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). The provisions of
Paragraph 8 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.
10. 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.
11. Amendments.
     This Agreement may be amended by mutual consent.
12. 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. 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 Company is
regulated as a BDC under the Investment Company Act, this Agreement shall also
be construed 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. To the fullest extent
permitted by law, in the event of any dispute arising out of the terms and
conditions of this Agreement, the parties hereto consent and submit to the
jurisdiction of the courts of the State of New York in the county of New York
and of the U.S. District Court for the Southern District of New York.

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

            FIFTH STREET FINANCE CORP.
      By:           Name:   Leonard M. Tannenbaum        Title:   Chief
Executive Officer     

            FIFTH STREET MANAGEMENT LLC
      By:           Name:   Bernard D. Berman        Title:   President   

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Appendix A
Example 1: Income Related Portion of Incentive Fee for Each Fiscal Quarter
     Alternative 1
     Assumptions
     Investment income (including interest, dividends, fees, etc.) = 1.25%

     Hurdle rate(1) = 2%

     Management fee(2) = 0.5%

     Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.2%

     Pre-Incentive Fee Net Investment Income

     (investment income — (management fee + other expenses) = 0.55%

     Pre-Incentive Fee Net Investment Income does not exceed hurdle rate,
therefore there is no income-related incentive fee.
     Alternative 2
     Assumptions
     Investment income (including interest, dividends, fees, etc.) = 2.9%

     Hurdle rate(1) = 2%

     Management fee(2) = 0.5%

     Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.2%

     Pre-Incentive Fee Net Investment Income

     (investment income — (management fee + other expenses) = 2.2%

     Incentive fee = 100% X Pre-Incentive Fee Net Investment Income (subject to
‘‘catch-up’’)(4)

     = 100% X (2.2% — 2%)

     = 0.2%

    Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does
not fully satisfy the ‘‘catch-up’’ provision, therefore the income related
portion of the incentive fee is 0.2%.

     Alternative 3
     Assumptions
     Investment income (including interest, dividends, fees, etc.) = 3.5%
     Hurdle rate(1) = 2%

     Management fee(2) = 0.5%

     Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.2%

     Pre-Incentive Fee Net Investment Income

     (investment income — (management fee + other expenses) = 2.8%

     Incentive fee = 100% _ Pre-Incentive Fee Net Investment Income (subject to
‘‘catch-up’’)(4)

     Incentive fee = 100% X ‘‘catch-up’’ + (20% X (Pre-Incentive Fee Net
Investment Income — 2.5%))

     Catch up = 2.5% — 2%

     = 0.5%

     Incentive fee = (100% X 0.5%) + (20% X (2.8% — 2.5%))

     = 0.5% + (20% X 0.3%)

     = 0.5% + 0.06%

     = 0.56%

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    Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, and fully
satisfies the ‘‘catch-up’’ provision, therefore the income related portion of
the incentive fee is 0.56%.

 

(1)   Represents 8% annualized hurdle rate.   (2)   Represents 2% annualized
base management fee.   (3)   Excludes organizational and offering expenses.  
(4)   The ‘‘catch-up’’ provision is intended to provide the Adviser with an
incentive fee of 20% on all Pre-Incentive Fee Net Investment Income as if a
hurdle rate did not apply when the Company’s net investment income exceeds 2.5%
in any fiscal quarter.

Example 2: Capital Gains Portion of Incentive Fee(*):
     Alternative 1:
     Assumptions

    Year 1: $20 million investment made in Company A (‘‘Investment A’’), and
$30 million investment made in Company B (‘‘Investment B’’)

    Year 2: Investment A sold for $50 million and fair market value (‘‘FMV’’) of
Investment B determined to be $32 million

    Year 3: FMV of Investment B determined to be $25 million

    Year 4: Investment B sold for $31 million

The capital gains portion of the incentive fee would be:

    Year 1: None

    Year 2: Capital gains incentive fee of $6 million ($30 million realized
capital gains on sale of Investment A multiplied by 20%)

    Year 3: None à $5 million (20% multiplied by ($30 million cumulative capital
gains less $5 million cumulative capital depreciation)) less $6 million
(previous capital gains fee paid in Year 2)

    Year 4: Capital gains incentive fee of $200,000 à $6.2 million ($31 million
cumulative realized capital gains multiplied by 20%) less $6 million (capital
gains incentive fee taken in Year 2)

     Alternative 2
     Assumptions

    Year 1: $20 million investment made in Company A (‘‘Investment A’’),
$30 million investment made in Company B (‘‘Investment B’’) and $25 million
investment made in Company C (‘‘Investment C’’)

    Year 2: Investment A sold for $50 million, FMV of Investment B determined to
be $25 million and FMV of Investment C determined to be $25 million

    Year 3: FMV of Investment B determined to be $27 million and Investment C
sold for $30 million

    Year 4: FMV of Investment B determined to be $35 million

    Year 5: Investment B sold for $20 million

The capital gains incentive fee, if any, would be:

    Year 1: None

    Year 2: $5 million capital gains incentive fee à 20% multiplied by
$25 million ($30 million realized capital gains on Investment A less unrealized
capital depreciation on Investment B)

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    Year 3: $1.4 million capital gains incentive fee(1) à $6.4 million (20%
multiplied by $32 million ($35 million cumulative realized capital gains less
$3 million unrealized capital depreciation)) less $5 million capital gains
incentive fee received in Year 2

    Year 4: None

    Year 5: None à $5 million (20% multiplied by $25 million (cumulative
realized capital gains of $35 million less realized capital losses of
$10 million)) less $6.4 million cumulative capital gains incentive fee paid in
Year 2 and Year 3(2)

 

*   The hypothetical amounts of returns shown are based on a percentage of the
Company’s total net assets and assume no leverage. There is no guarantee that
positive returns will be realized and actual returns may vary from those shown
in this example.   (1)   As illustrated in Year 3 of Alternative 1 above, if the
Company were to be wound up on a date other than its fiscal year end of any
year, the Company may have paid aggregate capital gains incentive fees that are
more than the amount of such fees that would be payable if the Company had been
wound up on its fiscal year end of such year.   (2)   As noted above, it is
possible that the cumulative aggregate capital gains fee received by the Adviser
($6.4 million) is effectively greater than $5 million (20% of cumulative
aggregate realized capital gains less net realized capital losses or net
unrealized depreciation ($25 million)).

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