1414932--12/11/2008--Fifth_Street_Finance

related topics

{investment, property, distribution}

{tax, income, asset}

{loan, real, estate}

{debt, indebtedness, cash}

{stock, price, operating}

{control, financial, internal}

{acquisition, growth, future}

{regulation, change, law}

Changes in interest rates may affect our cost of capital and net investment income. We have a limited operating history. We currently have a limited number of investments in our investment portfolio. As a result, a loss on one or more of those investments would have a more adverse effect on our company than the effect such loss would have on a company with a larger and more diverse investment portfolio. A significant portion of our investment portfolio is and will continue to be recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is and will continue to be uncertainty as to the value of our portfolio investments. Our ability to achieve our investment objective depends on our investment adviser s ability to support our investment process; if our investment adviser were to lose any of its principals, our ability to achieve our investment objective could be significantly harmed. Our investment adviser has no prior experience managing a business development company or a RIC. Our business model depends to a significant extent upon strong referral relationships with private equity sponsors, and the inability of the principals of our investment adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business. We may face increasing competition for investment opportunities, which could reduce returns and result in losses. Our incentive fee may induce our investment adviser to make speculative investments. If we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Because we intend to distribute substantially all of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired. Unfavorable economic conditions or other factors may affect our ability to borrow for investment purposes, and may therefore adversely affect our ability to achieve our investment objective. Our ability to enter into transactions with our affiliates is restricted. There are significant potential conflicts of interest which could adversely impact our investment returns. The incentive fee we pay to our investment adviser in respect of capital gains may be effectively greater than 20%. The involvement of our investment adviser s investment professionals in our valuation process may create conflicts of interest. A failure on our part to maintain our qualification as a business development company would significantly reduce our operating flexibility. Regulations governing our operation as a business development company and RIC affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth. We may experience fluctuations in our quarterly results. Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse. We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or do not satisfy the annual distribution requirement. We may not be able to pay you distributions, our distributions may not grow over time and a portion of our distributions may be a return of capital. We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. Efforts to comply with Section 404 of the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock. Risks Relating to Our Investments Our investments in portfolio companies may be risky, and we could lose all or part of our investment. An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies. If we make unsecured investments, those investments might not generate sufficient cash flow to service their debt obligations to us. If we invest in the securities and obligations of distressed and bankrupt issuers, we might not receive interest or other payments. The lack of liquidity in our investments may adversely affect our business. We may not have the funds or ability to make additional investments in our portfolio companies. Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies. The disposition of our investments may result in contingent liabilities. There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims. Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us. We generally will not control our portfolio companies. Defaults by our portfolio companies will harm our operating results. We may not realize gains from our equity investments. Risks Relating to Our Common Stock Shares of closed-end investment companies, including business development companies, may trade at a discount to their net asset value. The market price of our common stock may fluctuate significantly.

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1414932--12/11/2008--Fifth_Street_Finance_Corp