December 28, 2007 

 Our Ref. No.: 2005831125 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL NGP Capital Resources Co.

DIVISION OF INVESTMENT MANAGEMENT File No. 814-00672 

In your letter dated December 26, 2007, you request our assurance that we: 

(i) would not recommend enforcement action to the Securities and Exchange 

Commission (“Commission”) against NGP Capital Resources Company (“NGP”) 

under section 55(a) of the Investment Company Act of 1940 (“Company Act”) if, as 

more fully described below, NGP acquires certain assets other than those assets 

described in section 55(a)(1)-(7) of the Company Act when NGP’s ratio calculated in 

accordance with section 55(a) of the Company Act is below 70%; (ii) concur with 

your view that, for purposes of section 58 of the Company Act, NGP would not have 

changed the nature of its business so as to cease to be a business development 

company by owning the LLC interests, as defined below; and (iii) would not 

recommend enforcement action to the Commission against NGP under sections 13 

or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”), or the rules 

thereunder, if NGP treats the passive intermediary entities in the three-tier conduit 

structure more fully described below as investment companies with respect to 

NGP’s financial statements. 

FACTS 

You state that NGP is a Maryland corporation that has elected to be 

regulated as a business development company under section 54(a) of the Company 

Act (a “BDC”). You state that NGP has its principal place of business in Houston, 

Texas, and is externally managed by NGP Investment Advisor, LP (the “Adviser”). 

You note that NGP was formed to invest primarily in small and mid-sized U.S.-

based energy companies that meet the definition of “eligible portfolio company” 

contained in section 2(a)(46) of the Company Act. 

You state that, effective January 1, 2008, the State of Texas will impose an 

annual margin tax generally upon all entities with limited liability protection in 

Texas1 equal to 1% of a taxable entity’s taxable margin, which is generally 

equivalent to the entity’s gross revenue on a combined group basis,2 less certain 

limited deductions, that is apportioned or allocated to Texas. You state that NGP 

expects to generate substantial revenue as a result of its capital gains and 

investment income earned on its portfolio investments. You state that it is likely 

1 You note that the margin tax replaces Texas’s earlier franchise tax system. 

2 You note that the Texas margin tax requires “combined group reporting” of certain

entities that are owned 50% or more, directly or indirectly, by one or more common 

owners, and are engaged in a unitary business. 
that a significant amount of this revenue will be subject to the Texas margin tax, 

because a substantial number of NGP’s investments will be in securities in which 

the payors: (i) are incorporated or organized in Texas (in the case of corporations or 

LLCs); or (ii) conduct day-to-day operations in Texas (in the case of partnerships) 

(“Texas Portfolio Companies”).3 You represent that, while open-end funds are 

exempt from the Texas margin tax, closed-end funds, including BDCs, are not. 

You state that Texas margin tax statute includes an exemption for certain 

passive entities. You state that, based upon advice of tax counsel at your firm, NGP 

believes that it can reduce by 99.9% its Texas margin tax on income and capital 

gains derived from holding its investments in the Texas Portfolio Companies by 

forming a series of intermediary entities to hold the securities issued by the Texas 

Portfolio Companies in order to take advantage of the passive entity exemption and 

the apportionment formula established by the margin tax statute applicable to 

combined groups. You represent that such a strategy is a lawful method of tax 

planning under Texas law, and that on July 13, 2007, NGP obtained an opinion of 

tax counsel from your firm that reflects that contention.4 

Accordingly, NGP proposes to establish a three-tier conduit structure. NGP 

would form two wholly owned limited liability company subsidiaries. One of the 

limited liability companies organized under the laws of the State of Texas (“GPLLC”) serves as the general partner of a Texas limited partnership (the 

“Partnership”), and owns a 0.1% interest in the Partnership. The other limited 

liability company organized under the laws of the State of Nevada (“LP-LLC”, and 

together with the GP-LLC, the “LLCs”) serves as the sole limited partner of the 

Partnership, and owns a 99.9% interest in the Partnership.5 You also state that the 

only purpose of the LLCs is to act as partners of the Partnership and that the LLCs 

will engage in no business other than holding their respective interests in the 

Partnership.6 You state that NGP will be the sole member of both LLCs, and will 

3 You represent that the Texas Portfolio Companies are each small and mid-sized 

companies that meet the definition of “eligible portfolio company” under section 

2(a)(46) of the Company Act and that NGP has acquired the investment securities it 

holds in each Texas Portfolio Company directly from the issuers of such securities. 

4 You also represent that this strategy is a lawful method of tax planning under 

Texas law for Texas companies that are operating companies. 

5 You also state that the Partnership will not admit any partners other than GPLLC and LP-LLC (together the “LLCs”), and will issue interests only to the LLCs. 

6 You also state that neither of the LLCs will admit any person other than NGP as a 

member, and neither will issue interests other than to NGP. 

2
 

hold the sole ownership interest in the LLCs (the “LLC interests”). You represent 

that each of the LLCs falls within the exception to the definition of investment 

company that is contained in Section 3(c)(7) of the Company Act.7 

You state that the sole purpose of the Partnership is to serve as a vehicle for 

NGP’s investments in the Texas Portfolio Companies. You state that the 

Partnership will not engage in any other investment activity, and will invest only in 

the Texas Portfolio Companies. You state that NGP will fund the Partnership by 

transferring the investments in the Texas Portfolio Companies that it already holds 

to the LLCs, which in turn will transfer those investments to the Partnership. NGP 

will make additional investments in Texas Portfolio Companies in the future by 

contributing cash to the LLCs, which in turn will contribute the cash to the 

Partnership, which will acquire additional securities of Texas Portfolio Companies. 

You state that the LLCs and the Partnership are mere conduits that will 

allow NGP to own the investments in the Texas Portfolio Companies indirectly.8 In 

particular, you state that NGP, and no other person, would directly control the 

LLCs and would indirectly control the Partnership. You represent that NGP will 

use its control to cause the Partnership and the LLCs to pass through all income, 

gains and losses on the Texas Portfolio Companies to NGP. You represent that the 

Adviser will manage the LLCs and the Partnership under the supervision of NGP’s 

board of directors, and all investments will be made in accordance with NGP’s 

stated investment objective, policies and restrictions. You further represent that 

NGP will be able, at any time, to liquidate, and wind up, each of the Partnership 

and the LLCs, and will receive all of their assets, less the payment of any liabilities 

by the entity being wound up. 

7 Section 3(c)(7)(A) of the Company Act excepts an issuer from the definition of 

investment company provided that its outstanding securities are owned exclusively 

by persons who are qualified purchasers at the time they acquired the securities, 

and which is not making and does not presently propose to make a public offering of 

its securities. You represent that NGP is a qualified purchaser within the meaning 

of section 2(a)(51)(a)(iv) of the Company Act. You do not ask for our views, and we 

provide none, with respect to the status of the Partnership under sections 3 and 7 of 

the Company Act and with respect to the status of NGP as a qualified purchaser 

under section 2(a)(51) of the Company Act. 

8 In addition, you represent that because the Partnership and the LLCs are 

essentially pass-through vehicles, NGP will undertake to make the records of each 

of the Partnership, GP-LLC and LP-LLC available for inspection by the 

Commission staff and, if requested, furnish copies of those records to the staff. 

3
 

You also represent that the conduit structure will not impose duplicative 

costs, fees or expenses on shareholders in NGP; neither the LLCs nor the 

Partnership will pay any investment advisory, administration or custody fees in 

connection with the management of the LLCs or Partnership; and neither the LLCs 

nor the Partnership will charge a sales load or transfer agency fees in connection 

with NGP’s ownership of the LLCs and the Partnership.9 You also represent that 

that neither the LLCs nor the Partnership will be operated so as to permit NGP to

circumvent the provisions of the Company Act.10 You also represent that NGP will 

make available significant managerial assistance to the Texas Portfolio Companies 

to the extent required by section 2(a)(48)(B) of the Company Act. 

You state that NGP’s proposed conduit structure could conflict with certain 

provisions of the Company Act. In particular, you are concerned that the proposed 

arrangement might violate section 55(a) and section 58 of the Company Act, which 

impose limitations on a BDC’s investments that are designed to ensure, in essence,

that a BDC will direct a significant portion of its capital to small operating 

companies. In addition, you request guidance under the Exchange Act relating to 

the financial statements of NGP and its conduit entities. 

ANALYSIS 

1. Section 55 

Section 55(a) of the Company Act states that it shall be unlawful for a BDC: 

to acquire any assets (other than those described in [sections 55(a)(1)-(7)]) 

unless, at the time the acquisition is made, assets described in [sections 

55(a)(1)-(6)] represent at least 70 per centum of the value of its total assets 

(other than assets described in [section 55(a)(7)]).11 

You state that, under the proposed arrangement, NGP’s Section 55(a) Ratio 

will be less than 70% because the LLC interests are not assets described in sections 

55(a)(1)-(6). Thus, NGP would lack the flexibility to invest in the wide range of 

9 You also state that the Adviser will not receive a fee for managing the LLCs or the

Partnership other than the fee it will receive from NGP. 

10 See section 48(a) of the Company Act. 

11 For purposes of this letter, the 70 per centum test laid out in Section 55(a) is 

referred to as the “Section 55(a) Ratio.” This requirement “ensures that the 

business development company will invest in operating companies rather than 

investing in other financial institutions.” See H.R. Rep. No. 96-1341 (1980), 

reprinted in 1980 U.S.C.C.A.N. 4800, 4811. 

4
 

securities in which other BDCs may invest unless it is able to treat the interests in 

the Texas Portfolio Companies that will be held by the Partnership as if they were 

held directly by NGP.12 You represent that the Texas Portfolio Companies are each 

small and mid-sized companies that meet the definition of “eligible portfolio 

company” under section 2(a)(46) of the Company Act and that NGP has acquired the 

investment securities it holds in each Texas Portfolio Company directly from the 

issuers of such securities. You argue that NGP should be able to treat the interests 

in the Texas Portfolio Companies that will be held by the Partnership as if they 

were held directly by NGP for purposes of calculating NGP’s Section 55(a) Ratio 

because the LLCs and the Partnership would be mere conduits for NGP’s 

investments in the Texas Portfolio Companies. You contend that this approach

would be consistent with the Congressional goals underlying section 55(a) because 

NGP would continue to provide capital to the class of companies in which Congress 

intended BDCs to invest, i.e., the Texas Portfolio Companies. We agree. 

Based upon the facts and representations contained in your letter, including 

your representation that the Texas Portfolio Companies are each small and midsized companies that meet the definition of “eligible portfolio company” under 

section 2(a)(46) of the Company Act and that NGP has acquired the investment 

securities it holds in each Texas Portfolio Company directly from the issuers of such 

securities, we would not recommend enforcement action to the Commission against 

NGP under section 55(a) of the Company Act if NGP calculates the Section 55(a) 

Ratio by treating the securities of the Texas Portfolio Companies as its direct 

holdings. 

Please note that our position is with respect to enforcement action only, and 

does not express any legal conclusion on the issues presented. Different facts or 

representations may require a different conclusion. 

2. Section 58 

You express concern that NGP’s investment in the LLCs might cause NGP to 

cease to be a BDC. Section 58 of the Company Act states that no BDC “shall, unless 

authorized by the vote of a majority of its outstanding voting securities..., change 

the nature of its business so as to cease to be” a BDC. Section 2(a)(48)(B) of the

Company Act sets forth the nature of a BDC’s business by defining a BDC, in 

pertinent part, as an issuer that is operated for the purpose of making investments 

12 The Section 55(a) Ratio permits a BDC to acquire assets that are not described in 

sections 55(a)(1)-(7) when at least 70% of its total assets are in assets described in 

sections 55(a)(1)-(6) to “contribute to and increase [a BDC’s] ability to provide the 

types of financing which the bill is designed to stimulate.” See H.R. Rep. No. 96-

1341 (1980), reprinted in 1980 U.S.C.C.A.N. 4800, 4822. 

5
 

in the securities described in section 55(a)(1)-(3) of the Company Act, and which 

makes available significant managerial assistance to companies which are treated 

by such BDC as satisfying the 70 percent of the value of its total assets condition of 

section 55. As a result, you contend that a BDC that ceases to be operated for the 

purpose of making investments in securities described in section 55(a)(1)-(3) 

arguably has changed the nature of its business so as to cease to be a BDC. 

You are concerned that NGP could be viewed as changing the nature of its 

business so as to cease to be a BDC as defined in section 2(a)(48) upon NGP’s 

acquisition of the LLC interests. If so, NGP would violate section 58 of the 

Company Act unless it first obtained shareholder authorization. 

You argue that NGP should be able to treat the interests in the Texas 

Portfolio Companies that will be held by the Partnership as if they were held 

directly by NGP for purposes of determining NGP’s compliance with section 58 of 

the Company Act because the LLCs and the Partnership would be mere conduits for 

NGP’s investments in the Texas Portfolio Companies. You contend that NGP would 

continue to meet section 58 if it were permitted to count these investments as its 

direct holdings. 

 Based upon the facts and representations contained in your letter, we agree 

that for purposes of section 58 of the Company Act, NGP would not have changed 

the nature of its business so as to cease to be a BDC by owning the LLC interests. 

Please note that our position is based on the facts and representations made in your 

letter and that any different facts or representations may require a different 

conclusion. 

3. Sections 13 and 15(d) of the Exchange Act 

Finally, you contend that NGP should be entitled to consolidate the financial 

statements of the LLCs and the Partnership with its own financial statements, so 

that investors in NGP will have transparency of NGP’s direct and indirect 

investments. Section 15(d) of the Exchange Act requires every issuer that has filed 

a registration statement that becomes effective under the Securities Act of 1933 to 

make certain filings with the Commission as required by section 13 of the Exchange 

Act. Section 13(a) of the Exchange Act requires every issuer of a security registered 

under section 12 of the Exchange Act to make certain filings with the Commission

(“Registered Issuer”), in accordance with the rules and regulations prescribed by the 

Commission. The rules and regulations of the Commission require Registered 

Issuers to file financial statements with the Commission that adhere to rule 6-01 of 

regulation S-X under the Exchange Act.13 Rule 6-01 of regulation S-X requires that 

Rule 13a-1 under the Exchange Act requires Registered Issuers to file annual 

reports on form 10-K. The form 10-K requires Registered Issuers to file financial 

6
 


13 
financial statements filed with the Commission on behalf of registered investment 

companies must be in compliance with rules 6-01 to 6-10 of regulation S-X. Rule 6-

03 of regulation S-X prohibits a registered investment company from consolidating 

its financial statements with non-investment companies. 

You recognize that the proposed consolidation is inconsistent with wording of 

regulation S-X under the Exchange Act. You contend, however, that treating the

LLCs and the Partnership as investment companies in order to consolidate their 

financial statements with NGP’s financial statements is the best way to reflect the 

conduit structure. We agree. 

Based upon the unique facts and circumstances outlined in your letter, we

would not recommend enforcement action to the Commission against NGP under 

sections 13 or 15(d) of the Exchange Act, or the rules thereunder, if NGP treats the 

LLCs and the Partnership as investment companies with respect to NGP’s financial 

statements. Please note that our position is with respect to enforcement action 

only, and does not express any legal conclusion on the issues presented. Different 

facts or representations may require a different conclusion. 

Kenneth C. Fang

Senior Counsel 

Shannon Conaty

Senior Counsel 

statements in accordance with regulation S-X. Rule 13a-13 under the Exchange Act 

requires Registered Issuers to file quarterly reports on form 10-Q for each of the 

first three quarters of its fiscal year in accordance with article 10 of regulation S-X.

Rule 10-01 of regulation S-X requires that the interim financial statements 

generally comply with the other sections of regulation S-X. 

7
 

ATTORNEYS AND COUNSELORS AUSTIN DALLAS 

FORT WORTH 

JOHN T. UNGER 

OF COUNSEL 

Direct D~al:(7131993-4645 

THREE ALLEN CENTER 

333 CLAY STREET. SUITE 3300 

HOUSTON, TEXAS 77002-4499 

(713) 654-81 11 

FAX (713) 654-1871 

HOUSTON 

NEW YORK 

ALGIERS 

LONDON 

MEXICO CITY 

www.lklaw.com MONTERREY 

PARIS 

RIO DE JANElRO 

December 26 ,2007 

Mr. Douglas J. Scheidt 

Associate Director and Chief Counsel 

Division of Investment Management 

Securities and Exchange Commission 

100 F Street, N.E. 

Washington, D.C. 20549 

Re: NGP Capital Resources Company, Inc. 

Dear Mr. Scheidt: 

We are writing on behalf of NGP Capital Resources Company, a Maryland corporation ("NGP"), 

which has elected to be a business development company under the Investment Company Act of 

1940 (the "Company Act") and completed an initial public offering of its shares in November 

2004, with gross proceeds of approximately $261,000,000. We respectfully request your 

assurance that the Division (a) will not recommend enforcement action to the Securities and 

Exchange Commission (the "Commission") against NGP under Section 55(a) of the Company 

Act if, as more fully described below, NGP acquires certain assets other than those assets 

described in clauses (1) to (7) of Section 55(a) of the Company Act when NGP's ratio calculated 

in accordance with Section %(a) of the Company Act is below 70%, (b) concurs with our view 

that, for purposes of Sections 2(a)(48) and 58 of the Company Act, NGP will not have changed 

the nature of its business so as to cease to be a business development company by owning 

limited liability company interests, as more fully described below, and (c) will not recommend 

enforcement action to the Commission against NGP under Sections 13 or 15(d) of the Securities 

Exchange Act of 1934 (the "Exchange Act"), or the rules thereunder, if NGP treats the passive 

intermediary entities in the three-tier conduit structure more fully described below as investment 

companies with respect to NGP's financial statements. 

Factual Background NGP is a Maryland corporation that has elected to be regulated as a business development 
Mr. Douglas J. Scheidt 

July 5,2007 Page 2 

The State of Texas has historically imposed an annual franchise tax on corporations and limited 

liability companies equal to 4.5 percent of the corporation's or limited liability company's net 

taxable earned surplus, whch was generally equivalent to reportable federal taxable income 

apportioned or allocated to Texas. Notably limited partnerships were not subject to Texas 

franchise tax, which is why NGP proposed establishing the subsidiary limited partnership 

structure. In May 2006 the Texas Legislature adopted a bill' that significantly reformed the 

Texas franchise tax provisions under Chapter 171of the Texas Tax Code. As reformed, the 

Texas franchise tax is now commonly referred to as the "Texas margin tax" and applies 

generally to all entities with limited liability protection, including limited partnerships, unless an 

exception applies as discussed below. The Texas margin tax statute is effective January 1,2008. 

The first annual return and payment under the Texas margin tax will be due May 15,2008, and 

will be based on 2007 revenues for calendar year taxpayers. The Texas margin tax is equal to 

1.O% of a taxable entity's taxable margin, which is generally equivalent to the entity's gross 

revenues on a combined goup2 basis, less certain limited deductions3, that is apportioned or 

allocated to Texas. 

NGP's offices are located in Texas and it is likely that a substantial number of eligible portfolio 

companies in which it invests will be domiciled in Texas. NGP expects to generate substantial 

revenues as a result of its capital gains and investment income earned on its portfolio 

investments. It is likely that a significant amount of this revenue will be subject to the Texas 

margin tax because a substantial number of NGP's portfolio investments will be in securities in 

which the payors (i) are incorporated or organized in Texas (in the case of corporations or 

LLCs); or (ii) conduct day-to-day operations in Texas (in the case of partnerships) ("Texas Portfolio ~om~anies").~ Whle open-end investment companies are exempt from the margin tax,) 

closed-end investment companies, including BDCs, are not. 

The revised margin tax statute includes an exemption for certain passive en ti tie^.^ Based upon 

advice of tax counsel, NGP believes that it can reduce by 99.9% its Texas margin tax on income 

and capital gains derived from holding its investments in the Texas Portfolio Companies by 

utilizing the structure described below in order to take advantage of the passive entity exemption 

and the apportionment formula established by the revised margin tax statute applicable to 

combined groups. The proposed structure is a lawful method of tax planning under Texas law for 

1 See Tex. H.B. 3, 7gth Leg., 3d C.S. (2006), as modified by Tex. H.B. 3928,80fi Leg. R.S. (2007). 

The Texas margin tax requires "combined group" reporting. Taxable entities are treated as a single taxable entity if 

they are (a) owned more than 50%

directly or indirectly

by one or more common owners and (b) engaged in a 
Mr. Douglas J. Scheidt 

December 26,2007 Page 3 

both operating companies and closed-end investment companies. This firm provided NGP with 

its opinion dated July 1 3,2007, that the structure is a lawful method of tax planning under 

Texas law for margin tax purposes. 

In order to take advantage of the passive entity exemption and apportionment formula, NGP is 

required to utilize a subsidiary limited partnership structure. To be exempt from Texas margin 

tax, a passive entity must meet the following requirements: (a) the entity must be organized as a 

general or limited partnership and (b) during the period on which the margin tax is based, the 

entity's federal gross income must consist of at least 90% of certain types of income, which 

includes: interest, royalties, dividends, and gains from sales of sec~rities.~ 

Under NGP's subsidiary limited partnership structure, NGP would establish two wholly-owned 

limited liability companies, one organized under the laws of the State of Texas ("GP-LLC") and 

one organized under the laws of the State of Nevada ("LP-LLC" and together with GP-LLC, the 

LLCs). GP-LLC serves as sole general partner of a Texas limited partnership (the 

"Partnership") and owns a 0.1% interest in the Partnership. LP-LLC serves as the sole limited 

partner of the Partnership, and owns a 99.9% interest in the LP. The only purpose of the LLCs is 

to act as the general and limited partners of the Partnership and neither of the LLCs will engage 

in any business other than holding their respective interests in the Partnership. The Partnership will not admit any partners other than the LLCs and will issue securities only to the L.LCs. 

Neither of the LLCs will admit any person as a member other than NGP and neither will issue 

securities to any person other than NG-P. Accordingly, NGP will hold the sole ownership 

interests in the LLCs. 

As the sole member of the LLCs, NGP and no other person would control the LLCs and the 

Partnership. As NGP is a "qualified purchaser" as defined in Section 2(a)5 1 (A)(a)(iv) of the 

Company Act, each of the LLCs falls within the exception from the definition of investment company that is contained in Section 3(c)(7) of the Company ~ct .8 

The sole purpose of the Partnership is to serve as a vehicle for NGP's investments in the Texas Portfolio Companies. The Partnership will not engage in any other investment activity and will 

invest only in the Texas Portfolio Companies. The investments in the Texas Portfolio 

Companies acquired by the Partnership are intended to be "Eligible Assets" as described in 

paragraphs (1) through (5) of Section 55(a) of the Company Act. NGP will fund the Partnership 

by contributing the investments in Texas Portfolio Companies that it already holds to the LLCs, 

which in turn will contribute those investments to the Partnership and, in the future, by 
Mr. Douglas J. Scheidt 

December 26,2007 

Page 4 

Partnership. The LLCs and the Partnership will be managed by the Adviser under supervision of 

NGP's board of directors. All investments will be made in accordance with NGP's stated 

investment objective, policies, and restrictions. NGP will use its control of the LLCs and 

Partnership to cause the Partnership and LLCs to pass through all income, gain, and losses on the 

Texas Portfolio Companies to NGP. NGP will be able, at any time, to liquidate, and wind up, 

each of the Partnership and the LLCs' and will receive all of its assets, less the payment of any liabilities of the entity being wound up. 

The subsidiary limited partnership structure will not impose any duplicative costs, fees, or 

expenses on shareholders of NGP; neither the LLCs nor the Partnership will pay any investment 

advisory, administration, or custody fees in connection with the management of the LLCs or the 

Partnership or will charge any sales load or transfer agency fees in connection with NGP's 

ownership of the LLCs and the Partnership. The Adviser will not receive a fee for managing the 

LLCs or the Partnership other than the fee it will receive from NGP. Neither the LLCs nor the 

Partnership will be operated so as to permit NGP to avoid complying with the terms of the 

Company Act. 

NGP will make available significant managerial assistance to the Texas Portfolio Companies to 

the extent required pursuant to Section 2(a)(48)(B) of the Company ~ct~. NGP will not acquire 

any non-Eligible Assets if its Section 55(a) Ratio (as defined below), calculated by treating 

Texas Portfolio Companies as if they were held directly by NGP, is below 70%. NGP will 

consolidate the financial statements of the LLCs and the Partnership with its own financial 

statements, so that NGP's shareholders will have transparency of NGP's &rect and indirect 

investments. 

In addition, because the Partnership and the LLCs are essentially pass-through vehicles, NGP 

undertakes to make available to the Commission staff the records of each of the Partnership, GPLLC, and LP-LLC and, if requested, will furnish copies of those records to the staff. 

Discussion 

Although NGP's proposed subsidiary limited partnership structure is a lawful method of Texas 

margin tax planning under Texas state law, the arrangement could conflict with a number of provisions of the Company Act. In particular, NGP is concerned that the proposed arrangement 

might conflict with Section %(a) and Section 58 of the Company Act, which impose limitations 

on a BDC's investments that are designed to ensure, in essence, that a BDC will direct a 
Mr. Douglas J. Scheidt 

December 26,2007 

Page 5 

Section 55 

Section 55(a) of the Company Act limits the ability of a BDC to acquire investments that do not 

fall within the parameters set forth in that section. In particular, Section 55(a) prohibits a BDC 

from acquiring any asset, other than Eligible Assets, unless the ratio of Eligible Assets to total 

assets (net of certain assets) equals 70% or greater at the time of the acquisition of the asset (the 

"Section 55(a) ~atio")." Thus, if a BDCYs Section 55(a) Ratio is below 70%, it is prohibited 

from purchasing non-Eligible Assets. 

Paragraphs (1) through (5) of Section 55(a) in identifying securities that constitute Eligible 

Assets reference that such securities must be issued by an "eligible portfolio company." Section 

2(a)(46)(B) states that an eligible portfolio company may be neither an investment company 

(other than a wholly-owned SBIC) nor a company which would be an investment company 

except for the exclusion from the definition of investment company in Section 3(c). 

As noted above, since the LLCs and the Partnership own investment securities, they would be 

investment companies except for the exclusion from the definition of investment company in 

Section 3(c)(7) of the Company ~ct." Consequently, they would not be "eligible portfolio 

10 Section 55(a) states that it shall be unlawful for a BDC: 

to acquire any assets (other than those described in [sections 55(a)(i)-(7)]) unless, at the time the acquisition 

is made, assets described in [sections 55(a)(1)-(6)] represent at least 70 per centum of the value of its assets 

other than assets described in [section 55(a)(7)]. 

" Pursuant to Section 2(a)(46) an "eligible portfolio company" means any issuer which-- 

A. is organized under the laws of, and has its principal place of business in, any State or States; 

B. is neither an investment company as defined in section 3 (other than a small business investment 

company which is licensed by the Small Business Administration to operate under the Small 

Business Investment Act of 1958 and whlch is a wholly-owned subsidiary of the business 

development company) nor a company which would be an investment company except for the 

exclusion from the definition of investment company in section 3(c); and 

C. satisfies one of the following: 

(i) it does not have any class of securities with respect to which a member of a 

national securities exchange

broker

or dealer may extend or maintain credit to or for a customer 
Mr. Douglas J. Scheidt 

December 26,2007 Page 6 

companies" and an investment in them would not be an Eligible Asset, but rather would fall 

within the 30% non-qualifying investment basket. 

The legislative history of the Small Business Investment Incentive Act of 1980 states, "This requirement [Section 2(a)(46(B)] will ensure that the business development company will invest 

in operating companies rather than in financial institutions and certain other types of companies 

enumerated in Section 3(c). For example, an eligible portfolio company could not be a broker, 

bank or insurance company." S. Report 2990, 96th Cong., 2d Sess. at 15 (1980). The House 

report contains a similar statement. H.R. Rep No. 1341, 96'h cong., 2d Sess. at 29 (1980). 

Based on its location and investment objective related to energy investments, NGP has an 

preference to invest in Texas Portfolio Companies and it is likely that such investments could 

exceed 30% of NGP's total assets. If these investments were transferred to the Partnership, 

NGP7s Section 55(a) Ratio would be under the 70% requirement because the LLC interests are 

non-Eligible Assets. Thus, NGP will be constrained in its ability to purchase non-Eligible Assets 

and will lack the flexibility to invest in the wide range of securities in which other BDCs may 

invest.12 Or, to the extent that NGP makes investments in Texas Portfolio Companies through 

the Eligible Asset basket, NGP will be subject to the Texas margin tax on such investments. 

We do not believe that the requirement of Section 2(a)(46)(B) should be construed as applicable 

to NGP's investment in the LLCs and the Partnership because they would merely be alter egos of 

NGP and conduits through which NGP would make investments in Texas Portfolio Companies, 

which would be operating companies. We believe that this approach would be consistent with the Congressional goals underlying Section 55(a) because NGP would continue to provide 

capital to the class of companies in which Congress intended BDCs to invest, i.e., Texas 

Portfolio Companies. 

Section 58 

Section 58 of the Company Act states that no BDC "shall, unless authorized by vote of its 

outstanding voting securities ...,change the nature of its business so as to cease to be "a BDC." 

Section 2(a)(48)(B) of the Company Act establishes the nature of a BDC's business by defining 

a BDC, in pertinent part, as an issuer that is operated for the purpose of making investments in 

securities described in Section 55(a)(l) through (3) of the Company Act, and which makes 

available significant managerial assistance with respect to the issuers of those securities. As a 

result, a BDC that ceases to be operated for the purpose of making investments in securities 
Mr. Douglas J. Scheidt 

December 26,2007 Page 7 

described in Section 55(a)(l) through (3) may be deemed to have changed the nature of its 

business so as to cease to be a BDC. 

The Division of Investment Management has expressed the view that Section 58 of the Company 

Act requires a BDC to obtain the approval of its stockholders for a change of its business 

purpose if more than half of its total assets (the "50% test") are not invested in the types of 

securities designed to meet its business purpose, in accordance with Sections 2(a)(48) and 

55(a)(l)-(3) of the Company Act, within the earlier of (i) two years after termination or 

completion of sales or (ii) two years after commencement of its initial public offeling.l3 

NGP currently meets the 50% test. NGP anticipates that the value of its investment in the LLCs 

may exceed 50% of its total assets and, as the LLCs are not eligible portfolio companies, the 

LLC interest are not securities that are described in Section 55(a)(l) through (3). 

If the 50% test is applied to the subsidiary limited partnership structure, NGP may be deemed to 

have changed the nature of its business so as to cease to be a BDC as defined in Section 2(a)(48). 

If so, NGP would violate Section 58 of the Company Act unless it first obtained stockholder 

authorization. 

We believe that NGP should be able to treat the investments in the Texas Portfolio Companies 

that will be held by the Partnership as if they were held directly by NGP for purposes of 

determining NGP's compliance with the 50% test because the LLCs and the Partnership would 

be mere conduits for NGP's investments in the Texas Portfolio Companies. NGP would continue 

to satisfy the requirements of the 50% test if it were permitted to count investments held by the 

Partnership as its direct holdings. 

Sections 13 and 15(d) of the Exchange Act. 

As noted above, NGP intends to consolidate the financial statements of the LLCs and the 

Partnership with its own financial statements, so that NGP's shareholders will have transparency 

of NGP's direct and indirect investments. NGP believes that consolidation of the financial 

statements of the LLCs and the Partnership with NGPs is the best way to reflect the conduit 

structure. 

Section 15(d) of the Exchange Act requires every issuer that has filed a registration statement 

that becomes effective under the Securities Act to make certain filings with the Commission as 

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Mr. Douglas J. Scheidt 

December 26,2007 Page 8 

Regulation S-X under the Exchange ~ct." Rule 6-01 of Regulation S-X requires that financial 

statements filed with the Commission on behalf of registered investment companies15 must be in 

compliance with Rules 6-01 to 6-10 of Regulation S-X. Rule 6-03 of Regulation S-X prohibits a 

registered investment company from consolidating its financial statements with non-investment 

companies. 

NGP recognizes that the proposed consolidation may be inconsistent with the wording of Rule 6- 

03(c) of Regulation S-X under the Exchange Act. However, NGP believes that treating the LLCs 

and the Partnership as investment companies in order to consolidate their financial statements 

with NGPs is the best way to reflect the conduit structure. 

Conclusion We respectfully request that the Staff confirm that (a) it will not recommend enforcement action 

to the Commission (i) under Section 55(a) of the Company Act against NGP if NGP acquires 

investments in Texas Portfolio Companies indirectly through the Partnership and the LLCs, or 

(ii) under Sections 13 or 15(d) of the Exchange Act, or the rules thereunder, against NGP if 

NGP treats the LLCs and the Partnership as investment companies with respect to NGP's 

financial statements, and (b) for purposes of Section 2(a)(48) and 55 of the Company Act, NGP 

may calculate its compliance with the 50% test by treating the investments in the Texas 

Portfolio Companies held by the Partnership as its direct holdings. 

If you have any questions regarding this request, or if you need any additional information, 

please call me at 713-993-4645. Thank you for your consideration of this request. 

Very truly yours,