SECOND AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT BETWEEN FIFTH STREET FINANCE CORP. AND FIFTH STREET MANAGEMENT LLC
Exhibit 10.5
SECOND AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT
BETWEEN
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:
| (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: | Xxxxxxx X. Xxxxxxxxxx | |||
| Title: | Chief Executive Officer | |||
| FIFTH STREET MANAGEMENT LLC |
||||
| By: | ||||
| Name: | Xxxxxxx X. Xxxxxx | |||
| 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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