Item 5: Fees and Compensation
A. Description of Compensation
The compensation paid to Capitala by Capitala BDC is set forth in the management agreement established
between the two entities and consists of two components— a base management fee and an incentive fee.
Capitala will receive an annual base management fee based on Capitala BDC’s gross assets, as well as an
incentive fee based on its performance. The base management fee is calculated at an annual rate of 1.75%
of Capitala BDC’s gross assets, which is comprised of Capitala BDC’s total assets as reflected on its
balance sheet and includes any borrowings for investment purposes. Although Capitala BDC does not
anticipate making significant investments in derivative financial instruments, the fair value of any such
investments, which will not necessarily equal their notional value, will be included in the calculation of
Capitala BDC’s gross assets.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and
equals 20.0% of Capitala BDC’s “pre-incentive fee net investment income” for the immediately preceding
quarter, subject to a 2.0% preferred return, or “hurdle,” and a “catch up” feature. The second part is
determined and payable in arrears as of the end of each calendar year (or upon termination of the
management agreement) in an amount equal to 20.0% of Capitala BDC’s realized capital gains, if any, on
a cumulative basis from inception through the end of each calendar year, computed net of all realized
capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any
previously paid capital gain incentive fees. Capitala may, in its sole discretion, elect to waive some, or
all, of the incentive fee from time to time.
The compensation paid to Capitala by each of the CSP Funds it advises is negotiated with the investors in
the relevant CSP Fund and, as a result, varies from one CSP Fund to the next. Management fees payable
by those CSP Funds that are licensed SBICs are further subject to SBA approval.
We have negotiated with investors in our licensed SBIC funds the ability to charge management fees up
to the maximum amounts allowed by SBA policy, which generally permits SBICs such as our funds to
charge management fees at a rate of (i) 2% per annum of the amount of capital commitments made to the
SBIC fund (to the extent such commitments qualify as “Regulatory Capital” of the SBIC fund under the
SBIC Act) plus assumed leverage obtained by the SBIC funds for the “Initial Investment Period” as
defined in the SBIC Act and (ii) 2% per annum of the capital (including actual leverage, but excluding
write offs) invested by the fund in active portfolio companies thereafter. See Guidelines Concerning
Allowable Management Expenses for Leveraged SBIC – released in December 2003.
Management fees payable by the CSP Funds vary. For some, the fee is a percentage of total capital
commitments during the first several years of the term of the fund – generally the period during which it
is expected that the fund will be making new investments – and a percentage of invested capital thereafter.
Others, however, are a percentage of invested capital throughout the term of the fund, and the fee base
may also include certain actual or assumed leverage, as negotiated with investors. Fund III, as fund of
funds primarily invested in Fund IV, does not charge a management fee.
Capitala BDC’s management and incentive fees are paid quarterly in arrears. The CSP Funds management
fees are generally payable quarterly in advance. The Clients also reimburse Capitala and its affiliates for
certain expenses advanced by them on behalf of them. These expense reimbursements are disclosed to and
negotiated with investors in the relevant offering documents and are in additional to the management
advisory fees.
In addition, Capitala or its affiliates will receive commitment fees, certain administrative agent fees,
monitoring and directors’ fees and organization, financing, divestment and other similar fees in connection
with portfolio investments of a CSP Fund as compensation for financial advisory or similar services
provided to its portfolio companies. Such fees are not earned on all investments originated by a CSP Fund
and are depending on the terms negotiated between Capitala and the portfolio company and the need for
such advisory or similar services by the portfolio company. For some of the CSP Funds, all or a portion
of such fees relating to investments by that fund offset the management fee otherwise payable with respect
to that fund.
Capitala may, but is not required to, waive all or any portion of any management fees otherwise payable
to it by a CSP Fund, and Capitala and its affiliates have a history of granting fee waivers. Clients should
not assume, however, that Capitala will in the future waive all or any portions of any management fees
that may be due and owing to Capitala.
See Item 6 below for a discussion of performance fees that may be earned by Capitala and its affiliates
with respect to the CSP Funds.
Where Capitala provides other investment advisory services, such as underwriting of investments and deal
sourcing, to other private investment firms, the compensation (if any) to be paid for such services is
separately and specifically negotiated with the Client and may include an economic interest in the Client
or a portion of the management fees paid to that private investment firm by its own funds.
B. Fee Collection Process
Fees are paid to Capitala by Capitala BDC and the CSP Funds as set forth in the governing documents for
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