Exhibit 10.6


 


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 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:


 




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		(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
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 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.


 




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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.


 




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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 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:	/s/ Leonard M. Tannenbaum 
	 	 	Name:	Leonard M. Tannenbaum
	 	 	Title:	Chief Executive Officer
	 	 	 
	 	FIFTH STREET MANAGEMENT LLC
	 	 	 
	 	By:	/s/ Bernard D. Berman 
	 	 	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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