News Column

FS ENERGY & POWER FUND - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts)

August 13, 2014

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us" and "our" refer to FS Energy and Power Fund.



Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to: our future operating results;



our business prospects and the prospects of the companies in which we

may invest; the impact of the investments that we expect to make;



the ability of our portfolio companies to achieve their objectives;

our current and expected financings and investments;



the adequacy of our cash resources, financing sources and working

capital;



the timing and amount of cash flows, distributions and dividends, if

any, from our portfolio companies;



our contractual arrangements and relationships with third parties;

actual and potential conflicts of interest with FS Advisor, FB Income Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FS Global



Advisor, LLC, FS Investment Corporation, FS Investment Corporation II,

FS Investment Corporation III, FS Global Credit Opportunities Fund,

GSO or any of their affiliates;



the dependence of our future success on the general economy and its

effect on the industries in which we may invest; our use of financial leverage;



the ability of FS Advisor to locate suitable investments for us and to

monitor and administer our investments;



the ability of FS Advisor or its affiliates to attract and retain

highly talented professionals; our ability to maintain our qualification as a RIC and as a BDC; the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; the effect of changes to tax legislation and our tax position; and the tax status of the enterprises in which we may invest. In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our 47



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actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:

changes in the economy; risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and



future changes in laws or regulations and conditions in our operating

areas.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders are advised to consult any additional disclosures that we may make directly to shareholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Overview We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced investment operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who were not affiliated with us or FS Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization. Our investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under the investment advisory and administrative services agreement, we have agreed to pay FS Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FS Advisor has engaged GSO to act as our investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor according to guidelines set by FS Advisor. Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies. We consider Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power, including those companies that provide equipment or services to companies engaged in any of the foregoing. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change. Our investment objectives are to generate current income and long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk. Direct Originations: We intend to leverage our relationship with GSO and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not expect to make equity investments (other than income-oriented equity investments) independent of having an existing credit 48



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relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

Opportunistic: We seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an Energy industry sub-sector being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include both event driven investments and anchor orders. In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market's apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company's financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments. We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, Energy industry sub-sector or financial sponsor, and the broader investment experiences of FS Advisor and GSO. Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio. Our portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from dealers or other investors in the secondary market, we expect to invest in primary market transactions and directly originated investments, as this will provide us with the ability to tailor investments to best match a project's or company's needs with our investment objectives. Our portfolio may also be comprised of select income-oriented preferred or common equity interests, which refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current income and long-term capital appreciation. These income-oriented preferred or common equity interests may include interests in master limited partnerships. In connection with certain of our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. 49



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Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on total return swap, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments, net unrealized appreciation or depreciation on total return swap and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on total return swap is the net monthly settlement payments received on the TRS. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized appreciation or depreciation on total return swap is the net change in the fair value of the TRS. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. In future periods, we do not expect our revenues to include net realized gain or loss on total return swap or net unrealized appreciation or depreciation on total return swap as a result of the termination of our TRS on May 24, 2013. We may, however, elect to utilize a total return swap in the future. We principally generate revenues in the form of interest income on the debt investments we hold. We also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned. Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FS Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FS Advisor is responsible for compensating our investment sub-adviser. We reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See "-Related Party Transactions" for additional information regarding the reimbursements payable to FS Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2013.



In addition, we have contracted with State Street to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FS

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Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.



Expense Reimbursement

Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to shareholders will be paid from offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders. Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our shareholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter. Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our shareholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to common shares for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to common shares represented by "other operating expenses" during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. "Other operating expenses" means our total "operating expenses" (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies. 51



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We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters. During the six months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. As of June 30, 2014 and December 31, 2013, we had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed by Franklin Square Holdings may become subject to repayment by us in the future. During the six months ended June 30, 2014 and 2013, we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the six months ended June 30, 2013, we paid $1,083 in expense recoupments to Franklin Square Holdings. As of June 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.



Portfolio Investment Activity for the Three and Six Months Ended June 30, 2014 and for the Year Ended December 31, 2013

During the six months ended June 30, 2014, we made investments in portfolio companies totaling $1,059,647. During the same period, we sold investments for proceeds of $192,754 and received principal repayments of $267,682. As of June 30, 2014, our investment portfolio, with a total fair value of $2,954,968, consisted of interests in 120 portfolio companies (29% in first lien senior secured loans, 31% in second lien senior secured loans, 6% in senior secured bonds, 29% in subordinated debt and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $221.8 million. As of June 30, 2014, the investments in our portfolio were purchased at a weighted average price of 99.5% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 62.4% of our portfolio based on the fair value of our investments) was B3 based upon the ratings scale employed by Moody's Investors Service, Inc., or Moody's, and our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), was 8.8% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to shareholders. Based on our regular weekly cash distribution rate of $0.013625 per share as of June 30, 2014 and our public offering price of $10.95 per share as of such date, the annualized distribution rate to shareholders as of June 30, 2014 was 6.47%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements. During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,295,602. During the same period, we sold investments for proceeds of $521,048 and received 52



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principal repayments of $214,625. As of December 31, 2013, our investment portfolio, with a total fair value of $2,300,201, consisted of interests in 104 portfolio companies (27% in first lien senior secured loans, 30% in second lien senior secured loans, 4% in senior secured bonds, 34% in subordinated debt and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $185.8 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 99.5% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 63.2% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale, and our estimated gross annual portfolio yield, prior to leverage, was 8.8% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2013. The portfolio yield does not represent an actual investment return to shareholders. Based on our regular weekly cash distribution rate of $0.012675 per share as of December 31, 2013 and our public offering price of $10.80 per share as of such date, the annualized distribution rate to shareholders as of December 31, 2013 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements. Total Portfolio Activity



The following tables present certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2014:

For the Three Months Ended For the Six



Months Ended

Net Investment Activity June 30, 2014 June 30,



2014

Purchases $ 714,676 $



1,059,647

Sales and Redemptions (356,453 )



(460,436 )

Net Portfolio Activity $ 358,223 $ 599,211 For the Three Months Ended For the Six Months Ended June 30, 2014 June 30, 2014 New Investment Activity by Asset Class Purchases Percentage Purchases Percentage Senior Secured Loans-First Lien $ 123,482 17 % $ 300,140 28 % Senior Secured Loans-Second Lien 351,726 49 % 365,115 35 % Senior Secured Bonds 53,996 8 % 116,066 11 % Subordinated Debt 173,400 24 % 244,591 23 % Equity/Other 12,072 2 % 33,735 3 % Total $ 714,676 100 % $ 1,059,647 100 % 53



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The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014 (Unaudited)



December 31, 2013

Amortized Percentage Amortized Percentage Cost(1) Fair Value of Portfolio Cost(1) Fair Value of Portfolio Senior Secured Loans-First Lien $ 837,310$ 854,665 29 % $ 624,327$ 634,919 27 % Senior Secured Loans-Second Lien 899,236 910,104 31 % 673,512 683,723 30 % Senior Secured Bonds 167,689 171,557 6 % 79,553 82,484 4 % Subordinated Debt 824,150 864,908 29 % 767,083 789,834 34 % Equity/Other 137,618 153,734 5 % 105,479 109,241 5 % Total $ 2,866,003$ 2,954,968 100 % $ 2,249,954$ 2,300,201 100 %



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(1)

Amortized cost represents the original cost adjusted for the amortization

of premiums and/or accretion of discounts, as applicable, on investments.

The following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2014 and December 31, 2013:

June 30, 2014December 31, 2013 Number of Portfolio Companies 120



104

% Variable Rate (based on fair value) 60.4 % 60.5 % % Fixed Rate (based on fair value) 34.4 % 34.7 % % Income Producing Equity or Other Investments (based on fair value) 2.9 % 3.9 % % Non-Income Producing Equity or Other Investments (based on fair value) 2.3 % 0.9 % Average Annual EBITDA of Portfolio Companies $ 221,846 $



185,816

Weighted Average Purchase Price of Investments (as a % of par or stated value) 99.5 % 99.5 % Weighted Average Credit Rating of Investments that were Rated B3



B3

% of Investments on Non-Accrual -



-

Gross Portfolio Yield Prior to Leverage (based on amortized cost) 8.8 % 8.8 % Gross Portfolio Yield Prior to Leverage (based on amortized cost)-Excluding Non-Income Producing Assets 8.9 % 8.9 % Direct Originations



The following tables present certain selected information regarding our direct originations for the three and six months ended June 30, 2014:

For the Three Months For the Six Months Ended Ended Net Direct Originations June 30, 2014 June 30, 2014 Total Commitments (including Unfunded Commitments) $ 187,622 $ 466,760 Exited Investments (including partial paydowns) (112,158 ) (116,971 ) Net Direct Originations $ 75,464 $ 349,789 54



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Table of Contents For the Three Months Ended For the Six Months Ended June 30, 2014 June 30, 2014 New Direct Originations by Asset Class (including Unfunded Commitment Commitment Commitments) Amount Percentage Amount Percentage Senior Secured Loans-First Lien $ 15,000 8 % $ 152,636 33 % Senior Secured Loans-Second Lien 140,000 75 % 221,010 47 % Senior Secured Bonds 24,750 13 % 66,073 14 % Equity/Other 7,872 4 % 27,041 6 % Total $ 187,622 100 % $ 466,760 100 % For the Three For the Six Months Ended Months Ended June 30, 2014 June 30, 2014 Average New Direct Origination Commitment Amount $ 46,905 $



42,433

Weighted Average Maturity for New Direct Originations 9/26/18



3/2/19

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period 9.0 % 9.6 % Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period 8.5 %



8.6 %

The following table presents certain selected information regarding our direct originations as of June 30, 2014 and December 31, 2013:

Characteristics of All Direct Originations held June 30, in Portfolio

2014 December 31, 2013 Number of Portfolio Companies 17



11

Average Annual EBITDA of Portfolio Companies $ 28,502 $

42,800

Average Leverage Through Tranche of Portfolio Companies-Excluding Equity/Other Securities 5.1x



3.9x

% of Investments on Non-Accrual -



-

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations 9.9 % 10.0 % Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period-Excluding Non-Income Producing Assets 9.4 % 10.1 % Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations-Excluding Non-Income Producing Assets 10.5 % 10.3 % 55



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Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Portfolio Composition by Percentage Percentage Strategy Fair Value of Portfolio Fair Value of Portfolio Direct Originations $ 967,690 33 % $ 577,357 25 % Opportunistic 692,754 23 % 648,496 28 % Broadly Syndicated/Other 1,294,524 44 % 1,074,348 47 % Total $ 2,954,968 100 % $ 2,300,201 100 %



The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2014 and December 31, 2013:

June 30, 2014 (Unaudited) December 31, 2013 Percentage Percentage Industry Classification Fair Value of Portfolio Fair Value of Portfolio Upstream $ 1,479,639 50 % $ 1,112,686 48 % Midstream 268,579 9 % 288,414 13 % Downstream 4,279 0 % 4,256 0 % Power 218,528 8 % 159,433 7 % Service & Equipment 983,943 33 % 735,412 32 % Total $ 2,954,968 100 % $ 2,300,201 100 % As of June 30, 2014, we did not "control" and were not an "affiliated person" of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an "affiliated person" of a portfolio company if we owned 5% or more of its voting securities. Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, we had two senior secured loan investments with aggregate unfunded commitments of $56,357 and three equity/other investments with aggregate unfunded commitments of $16,722. As of June 30, 2014, these unfunded equity/other investments were BL Sand Hills Unit, L.P., net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest and Synergy Offshore LLC. As of December 31, 2013, we had three senior secured loan investments with aggregate unfunded commitments of $62,149 and five equity/other investments with aggregate unfunded commitments of $24,558. As of December 31, 2013, these unfunded equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P., net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest, San Pedro Development, LLC and Synergy Offshore LLC. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.



Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our 56



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portfolio. FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment Rating Summary Description 1 Investment exceeding expectations and/or capital gain expected. 2 Performing investment generally executing in accordance with the portfolio company's business plan-full return of principal and interest expected. 3 Performing investment requiring closer monitoring. 4 Underperforming investment-some loss of interest or dividend possible, but still expecting a positive return on investment. 5 Underperforming investment with expected loss of interest and some principal. The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Percentage Percentage Investment Rating Fair Value of Portfolio Fair Value of Portfolio 1 $ 78,257 3 % $ 76,865 3 % 2 2,769,164 94 % 2,160,052 94 % 3 107,547 3 % 63,284 3 % 4 - - - - 5 - - - - Total $ 2,954,968 100 % $ 2,300,201 100 % The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.



Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

Revenues

We generated investment income of $72,007 and $24,172 for the three months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues represent $64,206 and $23,239 of cash income earned as well as $7,801 and $933 in non-cash portions relating to accretion of discount, PIK interest and accrual of limited partnership income for the three months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated investments in our portfolio increases.



Expenses

Our total expenses were $34,977 and $8,601 for the three months ended June 30, 2014 and 2013, respectively. Our expenses include base management fees attributed to FS Advisor of $14,678 and

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$6,654 for the three months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FS Advisor of $1,008 and $544 for the three months ended June 30, 2014 and 2013, respectively.

FS Advisor is eligible to receive incentive fees based on our performance. During the three months ended June 30, 2014, we accrued subordinated incentive fees on income of $10,013 based on the performance of our portfolio. We did not accrue any subordinated incentive fees on income during the three months ended June 30, 2013. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $3,015 based on the performance of our portfolio. During the three months ended June 30, 2013, we reversed $1,621 of capital gains incentive fees previously accrued by us based on the performance of our portfolio. We recorded interest expense of $4,096 and $1,415 for the three months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities. For the three months ended June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $288 and $168, respectively, and fees and expenses incurred with our share transfer agent totaled $660 and $475, respectively. Fees for our board of trustees were $135 and $199 for the three months ended June 30, 2014 and 2013, respectively. Our other general and administrative expenses totaled $1,033 and $767 for the three months ended June 30, 2014 and 2013, respectively, and consisted of the following: Three Months Ended June 30, 2014 2013



Expenses associated with our independent audit and related fees

$ 111$ 89 Compensation of our chief compliance officer 40 45 Legal fees 225 203 Printing fees 52 263 Insurance expense 57 41 Other 548 126 Total $ 1,033$ 767 We generally expect our total expenses related to our ongoing operations to decrease as a percentage of our average net assets because of the anticipated growth in the size of our asset base. During the three months ended June 30, 2014 and 2013, the ratio of our total expenses to our average net assets was 1.64% and 0.90% respectively. During the three months ended June 30, 2014 and 2013, our ratio of total expenses to average net assets included $4,096 and $1,415, respectively, related to interest expense, $13,028 and $(1,621), respectively, related to accruals for (or reversals of previously accrued) incentive fees and $51 and $0, respectively, related to accruals for income taxes. Without such expenses, our ratio of total expenses to average net assets would have been 0.83% and 0.92% for the three months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.



Expense Reimbursement

During the three months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings, and we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the three months ended June 30, 2013, we paid $99 in expense recoupments to Franklin Square Holdings. For a discussion of the expense reimbursement agreement, see "-Overview-Expense Reimbursement." 58



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Net Investment Income

Our net investment income totaled $37,030 ($0.17 per share) and $15,571 ($0.16 per share) for the three months ended June 30, 2014 and 2013, respectively. The increase in net investment income for the three months ended June 30, 2014 was primarily driven by the growth of our portfolio over the past year and an increase in the amount of income received from directly originated and opportunistic investments. However, our net investment income on a per share basis remained relatively unchanged, as these benefits were offset by increases in accruals for incentive fees during the period.



Net Realized Gains or Losses

We sold investments and received principal repayments of $109,225 and $247,228, respectively, during the three months ended June 30, 2014, from which we realized a net gain of $2,411. We realized a net gain of $31 from settlements on foreign currency during the three months ended June 30, 2014. We sold investments and received principal repayments of $211,018 and $101,563, respectively, during the three months ended June 30, 2013, from which we realized a net gain of $3,760. During the three months ended June 30, 2013, we earned $9,817 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains.



Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency

For the three months ended June 30, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments totaled $12,697 and $(15,946), respectively, and the net change in unrealized gain (loss) on foreign currency was $(50) and $(25), respectively. The net change in unrealized appreciation (depreciation) on our TRS for the three months ended June 30, 2013 was $(5,731). The change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2014 was primarily driven by the performance of our directly originated and opportunistic investments. The change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended June 30, 2013 was primarily driven by a general widening of credit spreads during the second quarter of 2013 and the termination of our TRS, which converted unrealized gains as of March 31, 2013 into realized gains.



Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended June 30, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was $52,119 ($0.24 per share) and $7,446 ($0.07 per share), respectively.

Comparison of the Six Months Ended June 30, 2014 and 2013

Revenues

We generated investment income of $128,563 and $45,083 for the six months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues represent $116,416 and $43,751 of cash income earned as well as $12,147 and $1,332 in non-cash portions relating to accretion of discount, PIK interest and accrual of limited partnership income for the six months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated investments in our portfolio increases. 59



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Expenses

Our total expenses were $65,245 and $20,553 for the six months ended June 30, 2014 and 2013, respectively. Our expenses include base management fees attributed to FS Advisor of $27,545 and $11,365 for the six months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FS Advisor of $1,943 and $997 for the six months ended June 30, 2014 and 2013, respectively. FS Advisor is eligible to receive incentive fees based on our performance. During the six months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $14,623 and $753, respectively, based on the performance of our portfolio. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $8,580 and $1,989, respectively, based on the performance of our portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and $2,022, respectively, was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See "-Critical Accounting Policies-Capital Gains Incentive Fee." We recorded interest expense of $8,433 and $2,657 for the six months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities. For the six months ended June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $554 and $308, respectively, and fees and expenses incurred with our share transfer agent totaled $1,307 and $875, respectively. Fees for our board of trustees were $416 and $399 for the six months ended June 30, 2014 and 2013, respectively. Our other general and administrative expenses totaled $1,737 and $1,210 for the six months ended June 30, 2014 and 2013, respectively, and consisted of the following: Six Months Ended June 30, 2014 2013



Expenses associated with our independent audit and related fees

$ 205$ 164 Compensation of our chief compliance officer 60 55 Legal fees 468 403 Printing fees 141 277 Insurance expense 113 70 Other 750 241 Total $ 1,737$ 1,210 We generally expect our total expenses related to our ongoing operations to decrease as a percentage of our average net assets because of the anticipated growth in the size of our asset base. During the six months ended June 30, 2014 and 2013, the ratio of our total expenses to our average net assets was 3.29% and 2.46% respectively. During the six months ended June 30, 2014 and 2013, our ratio of total expenses to average net assets included $8,433 and $2,657, respectively, related to interest expense, $23,203 and $2,742, respectively, related to accruals for incentive fees and $107 and $0, respectively, related to accruals for income taxes. Without such expenses, our ratio of total expenses to average net assets would have been 1.69% and 1.81% for the six months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors. 60



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Expense Reimbursement

During the six months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed by Franklin Square Holdings may become subject to repayment by us in the future. During the six months ended June 30, 2014 and 2013, we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the six months ended June 30, 2013, we paid $1,083 in expense recoupments to Franklin Square Holdings. As of June 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see "-Overview-Expense Reimbursement."



Net Investment Income

Our net investment income totaled $63,318 ($0.31 per share) and $24,530 ($0.28 per share) for the six months ended June 30, 2014 and 2013, respectively. The change in net investment income on a per share basis for the six months ended June 30, 2014 was primarily driven by an increase in the amount of income received from directly originated and opportunistic investments, which was offset to some extent by increases in accruals for incentive fees during the period. Net Realized Gains or Losses We sold investments and received principal repayments of $192,754 and $267,682, respectively, during the six months ended June 30, 2014, from which we realized a net gain of $4,691. We realized a net loss of $507 from settlements on foreign currency during the six months ended June 30, 2014. We sold investments and received principal repayments of $212,828 and $135,645, respectively, during the six months ended June 30, 2013, from which we realized a net gain of $3,421. During the six months ended June 30, 2013, we earned $12,736 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net gain of $10 from settlements on foreign currency.



Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency

For the six months ended June 30, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments totaled $38,718 and $(3,079), respectively, and the net change in unrealized gain (loss) on foreign currency was $31 and $(30), respectively. The net change in unrealized appreciation (depreciation) on our TRS for the six months ended June 30, 2013 was $(3,141). The change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2014 was primarily driven by a general tightening of credit spreads and by the performance of our directly originated and opportunistic investments. The change in unrealized appreciation (depreciation) on our investments and TRS during the six months ended June 30, 2013 was primarily driven by a general widening of credit spreads during the second quarter of 2013 and the termination of our TRS, which converted unrealized gains as of December 31, 2012 into realized gains.



Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended June 30, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was $106,251 ($0.52 per share) and $34,447 ($0.39 per share), respectively.

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Financial Condition, Liquidity and Capital Resources

As of June 30, 2014, we had $142,571 in cash, which is held in a custodial account, and $155,000 in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of June 30, 2014: Type of Amount Amount Facility Facility Rate Outstanding Available Maturity Date BNP Prime Facility Brokerage L + 1.10 % $ 145,000$ 55,000 March 27, 2015 (1) Citibank Credit Facility Revolving L + 2.50 % $ 175,000 - May 24, 2015 Deutsche Bank Credit Facility Revolving L + 1.80 % $ 240,000$ 100,000 June 11, 2015 Natixis Credit Facility Revolving CP + 2.25% (2) $ 150,000 - July 11, 2023



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(1)

The BNP facility generally is terminable upon 270 days' notice by either

party. As of June 30, 2014, neither Berwyn Funding nor BNP had provided

notice of its intent to terminate the facility.

(2)

Prior to March 2014, borrowings under the Natixis credit facility accrued

interest at a rate equal to three-month LIBOR plus 2.40% per annum. In

March 2014, borrowings under the Natixis credit facility began to accrue

interest at a rate equal to the applicable commercial paper rate plus 2.25%

per annum.

For additional information regarding our outstanding financing facilities as of June 30, 2014, see Note 8 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q. During the six months ended June 30, 2014, we sold 60,600,780 common shares for gross proceeds of $648,113 at an average price per share of $10.69. The gross proceeds received during the six months ended June 30, 2014 include reinvested shareholder distributions of $48,357, for which we issued 4,940,721 common shares. During the six months ended June 30, 2014, we also incurred offering costs of $3,131 in connection with the sale of our common shares, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $55,288 for the six months ended June 30, 2014. These sales commissions and fees include $10,646 retained by the dealer manager, FS2, which is one of our affiliates. Since commencing our continuous public offering and through July 29, 2014, we have sold 242,924,123 common shares (as adjusted for share distributions) for gross proceeds of $2,536,600. As of July 29, 2014, we have raised total gross proceeds of $2,556,804, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated with GSO in a private placement conducted in April 2011. As of July 29, 2014, we have sold an aggregate of 3,557,918 common shares (as adjusted for share distributions) for aggregate gross proceeds of $32,143 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011. We generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of our common shares. We accept subscriptions on a continuous basis and issue common shares at weekly closings. Shares are issued at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.



Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments

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maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

To provide our shareholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.



The following table provides information concerning our repurchases of common shares pursuant to our share repurchase program during the six months ended June 30, 2014 and 2013:

Percentage of Shares



Aggregate

For the Tendered Repurchase Consideration Three Months Repurchase Shares That Were Price for Repurchased Ended Date Repurchased Repurchased Per Share Shares Fiscal 2013 December 31, 2012 January 2, 2013 24,249 100 % $ 9.405 $ 228 March 31, 2013 April 1, 2013 82,689 100 % $ 9.540 $ 789 Fiscal 2014 December 31, 2013 January 2, 2014 174,181 100 % $ 9.720 $ 1,693 March 31, 2014 April 2, 2014 158,723 100 % $ 9.810 $ 1,557



On July 2, 2014, we repurchased 401,302 common shares (representing 100% of common shares tendered for repurchase) at $9.90 per share for aggregate consideration totaling $3,973.

Capital Contribution by FS Advisor and GSO

In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase 22,444 common shares (as adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and dealer manager fees. The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share distributions) for aggregate proceeds of $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of July 29, 2014, we have sold an aggregate of 3,557,918 common shares (as adjusted for share distributions) for aggregate gross proceeds of $32,143 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.



RIC Status and Distributions

We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our "investment company taxable income," as defined by the Code, each 63



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year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our shareholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes. We declared our first distribution on July 21, 2011. We authorize and declare ordinary cash distributions on a weekly basis, and pay such distributions on a monthly or quarterly basis, in each case subject to our board of trustees' discretion and applicable legal restrictions. We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions will begin to accrue on the date we accept such shareholder's subscription for our common shares. From time to time, we may also pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FS Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our shareholders. No portion of the distributions paid during the six months ended June 30, 2014 and 2013 represented a return of capital. We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless shareholders elect to receive their distributions in additional common shares under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. shareholder. The following table reflects the cash distributions per share that we have declared and paid on our common shares during the six months ended June 30, 2014 and 2013: Distribution For the Three Months Ended Per Share Amount Fiscal 2013 March 31, 2013 $ 0.1617$ 12,496 June 30, 2013 $ 0.1634$ 16,686 Fiscal 2014 March 31, 2014 $ 0.1524$ 28,423 June 30, 2014 $ 0.1680$ 36,323 On June 11, 2014, our board of trustees determined to increase the amount of the regular weekly cash distributions payable to shareholders of record from $0.012793 per share to $0.013625 per share and declared regular weekly cash distributions for July 2014 through September 2014. On August 6, 2014, our board of trustees declared regular weekly cash distributions for October 2014 through December 2014. These distributions have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by our board of trustees in the amount of $0.013625 per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees. 64



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We have adopted an "opt in" distribution reinvestment plan for our shareholders. As a result, if we make a distribution, our shareholders will receive distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a shareholder's ability to participate in the distribution reinvestment plan. We may fund our cash distributions to shareholders from any sources of funds legally available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. For a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by us within three years. The purpose of this arrangement was to ensure that no portion of our distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the six months ended June 30, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that shareholders may otherwise have received during the six months ended June 30, 2013. During the six months ended June 30, 2014, we did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common shares during the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 Distribution Distribution Source of Distribution Amount Percentage Amount Percentage Offering proceeds $ - - $ - - Borrowings - - - - Net investment income(1) 64,746 100 % 29,182 100 % Short-term capital gains proceeds from the sale of assets - - - - Long-term capital gains proceeds from the sale of assets - - - - Non-capital gains proceeds from the sale of assets - - - - Distributions on account of limited partnership interest - - - - Expense reimbursement from sponsor - - - - Total $ 64,746 100 % $ 29,182 100 %



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(1)

During the six months ended June 30, 2014 and 2013, 90.6% and 97.0%,

respectively, of our gross investment income was attributable to cash

income earned, 4.6% and 3.0%, respectively, was attributable to non-cash

accretion of discount and 4.8% and 0.0%, respectively, was attributable to

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Our net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $66,634 and $29,543, respectively. As of June 30, 2014 and December 31, 2013, we had $21,184 and $10,898, respectively, of undistributed ordinary income and net realized gains on a tax basis. See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including information regarding share distributions declared on our common shares and a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the six months ended June 30, 2014 and 2013. Critical Accounting Policies Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.



Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of trustees. In connection with that determination, FS Advisor provides our board of trustees with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services. 66



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Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.



With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:



our quarterly valuation process begins with FS Advisor's management

team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable;





preliminary valuation conclusions are then documented and discussed

with our valuation committee; our valuation committee reviews the preliminary valuation and FS



Advisor's management team, together with our independent valuation

firm, if applicable, responds and supplements the preliminary

valuation to reflect any comments provided by the valuation committee;

and our board of trustees discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FS Advisor, the valuation committee and any third-party valuation firm, if applicable. Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of trustees may use independent third-party pricing or valuation services. However, our board of trustees is not required to determine fair value in accordance with the valuation provided by any single source, and retains the discretion to use any relevant data, including information obtained from FS Advisor or any independent third-party valuation or pricing service, that it deems to be reliable in determining fair value under the circumstances. Below is a description of factors that our board of trustees may consider when valuing our debt and equity investments. Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of trustees may consider include the borrower's ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments. For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used. 67



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Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of trustees, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items. Our board of trustees may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and weaknesses and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the size of portfolio companies relative to comparable firms, as well as such other factors as our board of trustees, in consultation with any third-party valuation firm, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of trustees will subsequently value these warrants or other equity securities received at fair value. The fair values of our investments are determined in good faith by our board of trustees. Our board of trustees is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our investments as of June 30, 2014 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Fourteen senior secured loan investments, one senior secured bond investment and one subordinated debt investment were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One subordinated debt investment, which was newly-issued and purchased near June 30, 2014, was valued at cost, as our board of trustees determined that the cost of such investment was the best indication of its fair value. Our investments as of December 31, 2013 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Six senior secured loan investments and two subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call 68



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features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan investment, one subordinated debt investment and two equity/other investments, all of which were newly-issued and purchased near December 31, 2013, were valued at cost, as our board of trustees determined that the cost of each such investment was the best indication of its fair value. We periodically benchmark the bid and ask prices we receive from the third-party pricing service against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing service or independent dealers or where our board of trustees otherwise determines that the use of such other method is appropriate. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.



Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.



Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized and the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.



Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year

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(or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FS Advisor if our entire portfolio were liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. In addition, we historically treated all net settlement payments received by us pursuant to our TRS (which was terminated on May 24, 2013) as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the Staff informed us that it is their interpretation of the applicable language in the Advisers Act that we should "look through" the TRS in calculating our capital gains incentive fee. Under this "look through" methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FS Advisor with respect to realized gains. FS Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a "look through" basis under which we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FS Advisor with respect to the portion of the net settlement payments received by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a "look through" basis. As of June 30, 2013, the aggregate capital gains incentive fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP were less than the fees which would have been payable in accordance with the "look through" methodology.



Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our 70



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pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended June 30, 2014 and 2013, we did not incur any interest or penalties.



Contractual Obligations

We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FS Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. For the three months ended June 30, 2014 and 2013, we incurred $14,678 and $6,654, respectively, in base management fees and $1,008 and $544, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the six months ended June 30, 2014 and 2013, we incurred $27,545 and $11,365, respectively, in base management fees and $1,943 and $997, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $10,013 and $0, respectively, based on the performance of our portfolio. During the six months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $14,623 and $753, respectively, based on the performance of our portfolio and paid FS Advisor $11,396 and $753, respectively, in respect of such fees. As of June 30, 2014, a subordinated incentive fee on income of $10,013 was payable to FS Advisor. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $3,015 based on the performance of our portfolio. During the three months ended June 30, 2013, we reversed $1,621 of capital gains incentive fees previously accrued. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $8,580 and $1,989, respectively, based on the performance of our portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and $2,022, respectively, was based on realized gains. We paid FS Advisor $2,857 and $953, respectively, in capital gains incentive fees during the six months ended June 30, 2014 and 2013. As of June 30, 2014, we had accrued $19,573 in capital gains incentive fees, of which $18,552 was based on unrealized gains and $1,021 was based on realized gains. 71



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A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the BNP facility, the Citibank credit facility, the Deutsche Bank credit facility and the Natixis credit facility at June 30, 2014 is as follows: Payments Due By Period Less than More than Total 1 year 1-3 years 3-5 years 5 years BNP Facility(1) $ 145,000$ 145,000 - - - Citibank Credit Facility(2) $ 175,000$ 43,750$ 131,250 - - Deutsche Bank Credit Facility(3) $ 240,000$ 240,000 - - - Natixis Credit Facility(4) $ 150,000 - - - $ 150,000



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(1)

At June 30, 2014, $55,000 remained unused under the BNP facility. The BNP

facility generally is terminable upon 270 days' notice by either party. As

of June 30, 2014, neither Berwyn Funding nor BNP had provided notice of its

intent to terminate the facility.

(2)

At June 30, 2014, no amounts remained unused under the Citibank credit

facility. All amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 24, 2015. Amounts due on the facility will begin to amortize on November 24, 2014.



(3)

At June 30, 2014, $100,000 remained unused under the Deutsche Bank credit

facility. All amounts borrowed under the facility will mature, and all

accrued and unpaid interest thereunder will be due and payable, on June 11,

2015. (4) At June 30, 2014, no amounts remained unused under the Natixis credit facility. All amounts borrowed under the facility will mature, and all



accrued and unpaid interest thereunder will be due and payable, on July 11,

2023.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

None.

Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of our investment operations. Base management fees are paid on a quarterly basis in arrears. The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of our "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on 72



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net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See "-Critical Accounting Policies-Capital Gains Incentive Fee" for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee. We reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FS Advisor's actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FS Advisor is required to allocate the cost of such services to us based on factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board of trustees then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of trustees compares the total amount paid to FS Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. Franklin Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On July 18, 2011, we satisfied the minimum offering requirement. During the six months ended June 30, 2014 and 2013, Franklin Square Holdings did not fund any of our offering and organization costs, and we did not pay any reimbursements to FS Advisor and its affiliates for offering and organization costs previously funded. The dealer manager for our continuous public offering is FS2, which is one of our affiliates. Under the dealer manager agreement among us, FS Advisor and FS2, FS2 is entitled to receive sales commissions and dealer manager fees in connection with the sale of common shares in our continuous public offering, all or a portion of which may be re-allowed to selected broker-dealers. 73



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The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six months ended June 30, 2014 and 2013:

Three Months Six Months Ended Ended June 30, June 30, Related Party Source Agreement Description 2014 2013 2014 2013 FS Investment Advisory Base Management $ 14,678$ 6,654$ 27,545$ 11,365 Advisor and Administrative Fee(1) Services Agreement FS Investment Advisory Capital Gains $ 3,015$ (1,621 )$ 8,580$ 1,989 Advisor and Administrative Incentive Fee(2) Services Agreement FS Investment Advisory Subordinated $ 10,013 $ - $ 14,623$ 753 Advisor and Administrative Incentive Fee on Services Agreement Income(3) FS Investment Advisory Administrative $ 1,008$ 544$ 1,943$ 997 Advisor and Administrative Services Services Agreement Expenses(4) FS2 Dealer Manager Dealer Manager $ 5,608$ 4,747$ 10,646$ 8,922 Agreement Fee(5)



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(1)

During the six months ended June 30, 2014 and 2013, $23,618 and $8,233,

respectively, in base management fees were paid to FS Advisor. As of

June 30, 2014, $14,678 in base management fees were payable to FS Advisor.

(2)

During the six months ended June 30, 2014 and 2013, we accrued capital

gains incentive fees of $8,580 and $1,989, respectively, based on the

performance of our portfolio, of which $7,559 and $(33), respectively, was

based on unrealized gains (or a decline in unrealized gains) and $1,021 and

$2,022, respectively, was based on realized gains. No such fees are

actually payable by us with respect to unrealized gains unless and until

those gains are actually realized. We paid FS Advisor $2,857 and $953 in capital gains incentive fees during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, we had accrued capital gains



incentive fees of $19,573, of which $18,552 was based on unrealized gains

and $1,021 was based on realized gains. (3) During the six months ended June 30, 2014 and 2013, $11,396 and $753, respectively, of subordinated incentive fees on income were paid to FS Advisor. As of June 30, 2014, a subordinated incentive fee on income of $10,013 was payable to FS Advisor. (4) During the six months ended June 30, 2014 and 2013, $1,794 and $857,



respectively, of the accrued administrative services expenses related to

the allocation of costs of administrative personnel for services rendered

to us by FS Advisor and the remainder related to other reimbursable

expenses. We paid $900 and $757, respectively, in administrative services

expenses to FS Advisor during the six months ended June 30, 2014 and 2013.

(5)

Represents aggregate dealer manager fees retained by FS2 and not re-allowed

to selected broker-dealers.

See Note 4 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our related party transactions and relationships, including potential conflicts of interest, our exemptive relief order and our expense reimbursement arrangement with Franklin Square Holdings.



Recent Developments

During the period from July 1, 2014 to July 29, 2014, we sold 10,673,968 common shares for gross proceeds of $116,447 at an average price per share of $10.91.



On July 1, 2014, we increased our public offering price from $10.95 to $11.00 per share, effective as of our July 2, 2014 weekly closing.


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