As filed with the Securities and Exchange Commission on August 28, 2006

Securities Act Registration No. 333-      

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form N-2

 

 

Tortoise Capital Resources Corporation

 

10801 Mastin Boulevard, Suite 222

Overland Park, Kansas 66210

(913) 981-1020

 

AGENT FOR SERVICE

 

David J. Schulte

10801 Mastin Boulevard, Suite 222

Overland Park, Kansas 66210

 

Copies of Communications to:

 

 

 

Approximate Date of Proposed Public Offering:  As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.  o

 

It is proposed that this filing will become effective (check appropriate box):

 

o  when declared effective pursuant to Section 8(c).

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to Completion

Preliminary Prospectus dated August 28, 2006

 

PROSPECTUS

 

          Shares

 

 

Tortoise Capital Resources Corporation

 

Common Stock

 

 

 

 

We invest primarily in privately-held and micro-cap public companies focused on the midstream and downstream segments, and to a lesser extent the upstream segment, of the U.S. energy infrastructure sector. Our investment objective is to provide stockholders with current income and capital appreciation. We focus our investments on unsecured, subordinated debt securities and equity securities that will generally be expected to pay us interest or dividends on a current basis. We seek to obtain enhanced returns through warrants or other equity conversion features and from growth in dividends in our equity investments. Since the completion of our private placement of approximately $46.3 million of common stock and warrants in January 2006, we have invested a total of $22.5 million in three portfolio companies in the U.S. energy infrastructure sector.

We are managed by Tortoise Capital Advisors, L.L.C., a registered investment advisor specializing in the energy infrastructure sector. As of July 31, 2006, Tortoise Capital Advisors, L.L.C. managed investments of approximately $1.8 billion in the energy infrastructure sector, including the assets of three publicly traded closed-end management investment companies focused on the energy infrastructure sector.

We expect the public offering price of our common shares to be between $      and $      per share. We intend to apply for listing of our common shares on the New York Stock Exchange under the symbol “TTO.” Currently, no public market exists for our common shares.

We are an externally managed, non-diversified closed-end management investment company that intends to elect to be regulated as a business development company under the Investment Company Act of 1940 and intends to elect to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended, effective as of December 1, 2006.

Investing in our common shares involves risks, including the risk of leverage, that are described in the “Risk Factors” section of this prospectus beginning on page 15.

Shares of closed-end investment companies have in the past frequently traded at a discount to their net asset value. If our common shares trade at a discount to net asset value, it may increase the risk of loss for purchasers in this offering. Purchasers in this offering will experience immediate dilution. See “Dilution.”

 

 

 

 

 

 

The underwriters may also purchase up to an additional           common shares from us at the public offering price, less the underwriting discount (sales load), within 30 days from the date of this prospectus to cover overallotments. If the underwriters exercise this option in full, the total public offering price will be $     , the total underwriting discount (sales load) paid by us will be $     , and total proceeds, before expenses, to us will be $     .

Please read this prospectus before investing, and keep it for future reference. The prospectus contains important information about us that a prospective investor should know before investing in our common shares.

After the completion of this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information will be available free of charge by contacting us at 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210 or by telephone at          or on our website at www.tortoiseadvisors.com/tcrc.cfm. The Securities and Exchange Commission also maintains a website at www.sec.gov that contains such information.

Neither the Securities and Exchange Commission nor any state securities commission have approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect that our common shares will be ready for delivery to purchasers on or about          , 2006.

 

 

 

 

Merrill Lynch & Co.

 

 

 

 

 

The date of this prospectus is          , 2006.

 

TABLE OF CONTENTS

 

 

 

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information or to make any representations not contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

PROSPECTUS SUMMARY

Company (Segment)		Principal Business		Funded Investment		Minimum Yield
Eagle Rock Pipeline, L.P. (Midstream)		Gatherer and processor of natural gas in north and east Texas		$12.5 million in LP Interests			7.8	%(1)(2)
Mowood, LLC (Downstream)		Local natural gas distribution with Department of Defense contract through 2014		$1.0 million in LLC Units $4.5 million in unsecured subordinated debt			N/A 12.0	%
Legacy Reserves LP (Upstream)		Oil and natural gas exploitation and development in the Permian Basin		$4.5 million in LP Interests			9.6	%(2)
		Total Investments		$22.5 million

(1)	In the event an initial public offering has not occurred on or prior to September 30, 2007, the minimum distribution yield will be 8.5% commencing on October 1, 2007 and continuing until the occurrence of the initial public offering.
(2)	Actual distributions to us are based on each company’s available cash flow. Distributions can exceed the minimum distribution yield and are subject to arrearages if below such minimum yield.

	•	Strong Supply and Demand Fundamentals.  The U.S. is the largest consumer of crude oil and natural gas products, the third largest producer of crude oil and the second largest producer of natural gas products in the world. The United States Department of Energy’s Energy Information Administration, or EIA, projects that domestic natural gas and refined petroleum products consumption will increase annually by 0.8% and 1.1%, respectively, through 2030.
	•	Substantial Capital Requirements.  We believe, based on industry sources, that approximately $20 billion of capital will be required by the midstream segment of the U.S. energy infrastructure sector during 2006 and that additional capital expenditures will occur in the future. We also believe that existing downstream infrastructure will require new capital investment to maintain an aging asset base, as well as to upgrade the asset base to respond to the evolution of supply and environmental regulations.
	•	Substantial Asset Ownership Realignment.  We believe that in the midstream and downstream segments of the U.S. energy infrastructure sector, the acquisition and divestiture market has averaged approximately $28 billion of annual transactions between 2001 and 2005 and that such activity, particularly in the midstream segment, will continue. We also believe that the substantial number of domestic companies in the downstream segment of the U.S. energy infrastructure sector provides for attractive consolidation opportunities.
	•	Renewable Energy Resources Opportunities.  We believe that the demand for project financing relating to renewable energy resources is expected to be significant and will provide investment opportunities consistent with our investment objective.

	•	Substantial Asset Ownership Realignment.  We believe that in the upstream segment of the U.S. energy infrastructure sector, the property acquisition and divestiture market has averaged approximately $31 billion of annual transactions between 2001 and 2005 and that the level of activity will remain consistent with historical levels for the foreseeable future.
	•	Substantial Number of Small and Middle Market Companies.  We believe that there are more than 900 private domestic exploration and production businesses and more than 140 publicly-listed domestic exploration and production companies.

	•	Debt Portion of Energy Finance Market is Underserved by Many Capital Providers.  We believe that many lenders have, in recent years, de-emphasized their service and product offerings to small and middle market energy companies in favor of lending to large corporate clients and managing capital markets transactions. We believe, in addition, that many capital

		providers lack the necessary technical expertise to evaluate the quality of the underlying assets of small and middle market private companies and micro-cap public companies in the energy infrastructure sector and lack a network of relationships with such companies.

	•	Increased Demand Among Small and Middle Market Private Companies for Capital.  We believe many private and micro-cap public companies have faced increased difficulty accessing the capital markets due to a continuing preference by investors for issuances in larger companies with more liquid securities. Such difficulties have been magnified in asset-focused and capital intensive industries such as the energy infrastructure sector. We believe that the U.S. energy infrastructure sector’s high level of projected capital expenditures and continuing acquisition and divestiture activity will provide us with numerous attractive investment opportunities.
	•	Investment Activity of Private Equity Capital Sponsors.  We believe there is a large pool of uninvested private equity capital available for private and micro-cap public companies, including those involved in the U.S. energy infrastructure sector. Given the anticipated positive long-term supply and demand dynamics of the energy industry and the current and expected public market valuations for companies involved in certain sectors of the energy industry, private equity capital has been increasingly attracted to the U.S. energy infrastructure sector. In particular, we believe that the public market valuations of many MLPs will continue to attract private equity capital focused on aggregating smaller U.S. energy infrastructure assets in order to meet the minimum size requirements for a public entity. We expect private equity firms will seek to leverage their investments by combining capital with senior secured loans and mezzanine debt from other sources such as ourselves.
	•	Attractive Companies with Limited Access to Other Capital.  We believe there are, and will continue to be, attractive companies that will benefit from private equity investments prior to a public offering of their equity, whether as an MLP or otherwise. We also believe that there are a number of companies in the midstream and downstream segments of the U.S. energy infrastructure sector with the same stable cash flow characteristics as those being acquired by MLPs or funded by private equity capital in anticipation of contribution to an MLP. We believe that many such companies are not being acquired by MLPs or attracting private equity capital because they do not produce income that qualifies for inclusion in an MLP pursuant to the Code, are perceived by such investors as too small, or are in areas of the midstream energy infrastructure segment in which most MLPs do not have specific expertise. We believe that these companies represent attractive investment candidates for us.

	•	Existing Investment Platform and Focus on the Energy Infrastructure Sector.  We believe that our Advisor’s current investment platform provides us with significant advantages in sourcing, evaluating, executing and managing investments. As of July 31, 2006, our Advisor managed investments of approximately $1.8 billion in the energy infrastructure sector, including the assets of three publicly traded closed-end management investment companies focused on the energy infrastructure sector. Our Advisor created the first publicly traded closed-end management company focused primarily on investing in MLPs involved in the energy infrastructure sector, and its aggregate managed capital is among the largest of those closed-end management company advisors focused on the energy infrastructure sector.
	•	Experienced Management Team.  The members of our Advisor’s investment committee have an average of over 20 years of financial investment experience. Our Advisor’s four senior investment professionals are responsible for the negotiation, structuring and managing of our investments and have almost 70 years of combined experience in energy, leveraged finance and private equity investing. We believe that the members of our Advisor’s investment committee

		and the Advisor’s senior investment professionals have developed strong reputations in the capital markets, particularly in the energy infrastructure sector, that we believe affords us a competitive advantage in identifying and investing in energy infrastructure companies.

	•	Disciplined Investment Philosophy.  In making its investment decisions, our Advisor intends to continue the disciplined investment approach that it has used since its founding. That investment approach emphasizes current income with the potential for enhanced returns through capital appreciation, low volatility and minimization of downside risk. Our Advisor’s investment process involves an assessment of the overall attractiveness of the specific subsector of the energy infrastructure sector in which a company is involved, the prospective portfolio company’s specific competitive position within that subsector, potential commodity price, supply and demand and regulatory concerns, the stability and potential growth of the prospective portfolio company’s cash flows, the prospective portfolio company’s management track record and incentive structure and our Advisor’s ability to structure an attractive investment.
	•	Flexible Transaction Structuring.  We are not subject to many of the regulatory limitations that govern traditional lending institutions such as commercial banks. As a result, we can be flexible in structuring investments and selecting the types of securities in which we invest. Our Advisor’s senior investment professionals have substantial experience in structuring investments expected to balance the needs of energy infrastructure companies with appropriate risk control.
	•	Extended Investment Horizon.  Unlike private equity and venture capital funds, we are not subject to standard periodic capital return requirements. These provisions often force private equity and venture capital funds to seek returns on their investments through mergers, public equity offerings or other liquidity events more quickly than may otherwise be desirable, potentially resulting in both a lower overall return to investors and an adverse impact on their portfolio companies. We believe our flexibility to make investments with a long-term view and without the capital return requirements of traditional private investment funds enhances our ability to generate attractive returns on invested capital.

	•	Long-Life Assets with Stable Cash Flows and Limited Commodity Price Sensitivity.  We anticipate that most of our investments will be made in companies with assets having the potential to generate stable cash flows over long periods of time. We intend to invest a portion of our assets in companies that own and operate assets with long useful lives and that generate cash flows by providing critical services primarily to the producers or end-users of energy. We expect to limit the direct exposure to energy commodity price risk in our portfolio. We intend to target companies that have a majority of their cash flows generated by contractual obligations.
	•	Experienced Management Teams with Energy Infrastructure Focus.  We target investments in companies with management teams that have a track record of success and that often have substantial knowledge and focus in particular segments of the energy infrastructure sector or with certain types of assets. We expect that our management team’s extensive experience and network of business relationships in the energy infrastructure sector will allow us to identify and attract portfolio company management teams that meet these criteria.
	•	Fixed Asset-Intensive Investments.  We anticipate that most of our investments will be made in companies with a relatively significant base of fixed assets that we believe will provide for reduced downside risk compared to making investments in companies with lower relative fixed asset levels. As fixed asset-intensive companies typically have less variable cost requirements, we expect they will generate attractive cash flow growth even with limited demand-driven or supply-driven growth.

	•	Limited Technological Risk.  We do not intend to target investment opportunities involving the application of new technologies or significant geological, drilling or development risk.
	•	Exit Opportunities.  We focus our investments on prospective portfolio companies that we believe will generate a steady stream of cash flow to repay our loans or pay us equity dividends, as well as reinvest in their respective businesses. We expect that such internally generated cash flow will lead to the payment of dividends or interest on, and the repayment of the principal of, our investments in portfolio companies and will be a key means by which we exit from our investments over time. In addition, we seek to invest in companies whose business models and expected future cash flows offer attractive exit possibilities. These companies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial public offering of common stock or other capital markets transactions. We believe our Advisor’s investment experience will help us identify such companies.

 

THE OFFERING

Common shares offered by us		of our common shares, excluding           of our common shares issuable pursuant to the overallotment option granted to the underwriters.
Common shares outstanding after this offering		of our common shares, excluding           of our common shares issuable pursuant to the overallotment option granted to the underwriters and 772,124 shares issuable pursuant to outstanding warrants. See ‘‘Description of Capital Stock.”
Proposed NYSE symbol		“TTO”
Use of proceeds		We intend to use the net proceeds of this offering to fund investments in prospective portfolio companies in accordance with our investment objectives and the strategies described in this prospectus and for general corporate purposes. We expect to invest the proceeds of this offering within nine months; however, it could take a longer time to invest substantially all of the net proceeds, depending on the availability of appropriate investment opportunities and market conditions. Pending such investments, we expect to invest the net proceeds primarily in cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment. See ‘‘Use of Proceeds.”
Regulatory status		We intend to elect to be regulated as a BDC under the 1940 Act and intend to elect to be treated as a RIC under the Code, effective as of December 1, 2006.
Dividends		We intend to distribute quarterly dividends to our stockholders out of assets legally available for distribution. The amount of our quarterly dividends will be determined by our board of directors. On August 4, 2006, our board of directors declared a $0.05 per common share special dividend and a $0.09 per common share quarterly dividend. Both dividends are payable to our current stockholders on September 1, 2006. See “Dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Determining Dividends Distributed to Stockholders.”
Taxation		Since our incorporation, we have been taxed as a general business corporation under Subchapter C of the Code. We intend to elect to be treated, for federal income tax purposes, as a RIC, effective as of December 1, 2006. As a RIC, we generally will not pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends although, if we use taxable subsidiaries to invest in non-traded limited partnerships, such taxable subsidiaries will pay corporate-level federal income taxes. We may also be required to pay corporate-level federal income taxes on gains built into our assets as of the effective date of our RIC election. See “Certain U.S. Federal Income Tax Considerations — Intended Election to be Taxed as a RIC.” To obtain and maintain the federal income tax benefits of RIC status, we must meet specified source-of-income and asset diversification

		requirements and distribute annually an amount equal to at least 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of assets legally available for distribution. See “Dividends.”
Investment advisor		Tortoise Capital Advisors, a Delaware limited liability company and registered investment advisor, serves as our investment advisor. See “Portfolio Management,” “Management” and “Advisor.”
Fees		Pursuant to our investment advisory agreement, we pay our Advisor a fee consisting of two components — a base management fee and an incentive fee. The base management fee is paid quarterly in arrears and is equal to 0.375% (1.5% annualized) of our total assets (including any assets purchased with any borrowed funds) at the end of such quarter.
		The incentive fee consists of two parts. The first part, the investment income fee, is calculated and payable quarterly in arrears and will equal 15% of the excess, if any, of our net investment income for the quarter over a quarterly hurdle rate equal to 2% (8% annualized) of our net assets. No investment income fee will be paid or earned until December 8, 2006.
		The second part of the incentive fee, the capital gains fee, will be determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date), and will equal (i) 15% of (a) our net realized capital gains on a cumulative basis from December 8, 2005 to December 31, 2006 and thereafter during each subsequent calendar year, less (b) any unrealized capital depreciation at the end of such calendar year, less (ii) the aggregate amount of all capital gains fees paid to our Advisor in prior years. Our Advisor will use at least 25% of any capital gains fees received from us at any time on or prior to December 8, 2007 to purchase our common shares in the open market. See “Advisor — Investment Advisory Agreement,” which also contains a discussion of our expenses.
Sub-advisor		Kenmont serves as our sub-advisor. Kenmont is a Houston, Texas based registered investment advisor with experience investing in privately-held and public companies in the U.S. energy and power sectors. See “Advisor — Sub-Advisor Arrangement.”
Leverage		We may borrow funds to make additional investments, and we may grant a security interest in our assets to a lender in connection with any such borrowings, including any borrowings by any of our subsidiaries. We may use this practice, which is known as “leverage,” to attempt to increase returns to our stockholders. However, leverage involves significant risks. See “Risk Factors.” With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we may employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing.

Dividend reinvestment plan		We intend to have a dividend reinvestment plan for our stockholders that will be effective after completion of this offering. Our plan will be an “opt out” dividend reinvestment plan. As a result, if we declare a dividend after the plan is effective, stockholders’ cash dividends will be automatically reinvested in additional common shares, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive dividends in the form of common shares will generally be subject to the same federal, state and local tax consequences as stockholders who elect to receive their dividends in cash. See “Dividend Reinvestment Plan” and “Certain U.S. Federal Income Tax Considerations — Taxation of U.S. Stockholders.”
Trading at a discount		Shares of closed-end investment companies frequently trade at a discount to their net asset value. The possibility that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. Our net asset value immediately following this offering will reflect reductions resulting from the underwriting discount (sales load) and the amount of the offering expenses paid. This risk may have a greater effect on investors expecting to sell their shares soon after completion of this offering. We cannot predict whether our shares will trade above, at, or below net asset value.
Anti-takeover provisions		Our board of directors is divided into three classes of directors serving staggered three-year terms. This structure is intended to provide us with a greater likelihood of continuity of management, which may be necessary for us to realize the full value of our investments. A staggered board of directors also may deter hostile takeovers or proxy contests, as may certain provisions of Maryland law, our Charter or Bylaws or other measures adopted by us. See “Certain Provisions of Our Charter and Bylaws and the Maryland General Corporation Law.”
Risk factors		Investing in our common shares involves certain risks relating to our structure and our investment objective that you should consider before deciding whether to invest in our common shares. In addition, we expect that our portfolio will consist primarily of securities issued by privately-held energy infrastructure companies. These investments may involve a high degree of business and financial risk, and they are generally illiquid. Our portfolio companies typically will require additional outside capital beyond our investment in order to succeed. A large number of entities compete for the same kind of investment opportunities as we seek. We may borrow funds to make our investments in portfolio companies. As a result, we would be exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings magnify the potential for gain and loss on amounts invested and, therefore increase the risks associated with investing in our common shares. Also, we are subject to certain risks associated with valuing our portfolio, changing interest rates, accessing additional capital, fluctuating quarterly results and operating in a regulated environment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding whether to invest in our common shares.

Available information		We have filed with the Securities and Exchange Commission, or SEC, a registration statement on Form N-2, including any amendments thereto and related exhibits, under the Securities Act of 1933, which we refer to as the Securities Act, with respect to our common shares offered by this prospectus. The registration statement contains additional information about us and our common shares being offered by this prospectus.
		After completion of this offering, our common shares will be registered under the Securities Exchange Act of 1934, which we refer to as the Exchange Act, and we will be required to file reports, proxy statements and other information with the SEC. This information will be available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, at http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, that file documents electronically with the SEC.

 

The following table is intended to assist you in understanding the various costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary.

 

 

 

 

 

 

Example

 

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common shares. These amounts are based upon payment of an assumed 7.0% sales load (the sales load paid with respect to our common shares sold in this offering) and our payment of annual operating expenses at the levels set forth in the table above.

 

 

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or lesser than those shown. Moreover, while the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan may receive common shares valued at the market price in effect at that time. This price may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.

 

The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in this prospectus. Financial information for the period from December 8, 2005 to May 31, 2006 presented below and for the fiscal quarters ended February 28, 2006 and May 31, 2006 have been derived from our unaudited financial statements included elsewhere herein. The historical data is not necessarily indicative of results to be expected for any future period.

 

 

 

 

The matters discussed in this prospectus, as well as in future oral and written statements by our management, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain levels of return, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus include statements as to:

 

 

For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this prospectus, please see the discussion under “Risk Factors.” You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this prospectus.

 

An investment in our common shares should not constitute a complete investment program for any investor and involves a high degree of risk. Due to the uncertainty in our investments, there can be no assurance that we will achieve our investment objective. You should carefully consider the risks described below before making an investment decision.

 

Risks Related to Our Operations

 

We are a new company with limited operating history.

 

We were incorporated in Maryland on September 8, 2005. We completed our private placement of common shares and warrants on January 9, 2006. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objective and that the value of an investment in our common shares could decline substantially.

 

Our Advisor has a limited operating history and will serve as investment advisor to other funds, which may create conflicts of interest not in the best interest of us or our stockholders.

 

Our Advisor was formed in October 2002 to provide portfolio management services to institutional and high-net worth investors seeking professional management of their energy infrastructure investments. Our Advisor has been managing investments in portfolios of MLPs and other issuers in the energy infrastructure sector since that time, including management of the investments of TYG since February 7, 2004, TYY since May 31, 2005 and TYN since October 31, 2005. From time to time the Advisor may pursue areas of investments in which the Advisor has more limited experience.

 

We, TYG, TYY and TYN have the same investment advisor, rely on some of the same personnel and will use the same investment committee. Our Advisor’s services under the investment advisory agreement are not exclusive, and it is free to furnish the same or similar services to other entities, including businesses that may directly or indirectly compete with us so long as its services to us are not impaired by the provision of such services to others. In addition, the publicly traded funds and private accounts managed by our Advisor may make investments similar to investments that we may pursue. Although we currently are not generally targeting similar investment opportunities as other entities advised by our Advisor, this may change in the future. Accordingly, our Advisor and the members of its investment committee may have obligations to other investors, the fulfillment of which might not be in the best interests of us or our stockholders, and it is possible that our Advisor might allocate investment opportunities to other entities, and thus might divert attractive investment opportunities away from us. However, our Advisor intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, and in accordance with our written allocation policies and procedures, so that we will not be disadvantaged in relation to any other client.

 

In addition, three of the five members of our investment committee are affiliates of, but not employees of, our Advisor, and each has other significant responsibilities with Fountain Capital, and which conducts businesses and activities of its own in which our Advisor has no economic interest. If these separate activities become significantly greater or have greater profit potential than our Advisor’s activities, there could be material competition for the efforts of these members of the investment committee.

 

We are dependent upon our Advisor’s key personnel for our future success.

 

We depend on the diligence, expertise and business relationships of the senior management of our Advisor. The Advisor’s senior investment professionals and senior management will evaluate, negotiate, structure, close and monitor our investments. Our future success will depend on the continued service of the senior management team of our Advisor. The departure of one or more senior investment professionals of our Advisor, and particularly Terry Matlack, Abel Mojica III, Ed Russell or David Schulte could have a material adverse effect on our ability to achieve our investment objective and on the value of our common shares and warrants. We will rely on certain employees of the Advisor, especially Messrs. Matlack and Schulte, who will

be devoting significant amounts of their time to non-Company related activities of the Advisor. To the extent Mssrs. Matlack or Schulte and other employees of the Advisor who are not committed exclusively to us are unable to, or do not, devote sufficient amounts of their time and energy to our affairs, our performance may suffer.

 

The incentive fee payable to our Advisor may create conflicting incentives.

 

The incentive fee payable by us to our Advisor may create an incentive for our Advisor to make investments on our behalf that are riskier or more speculative than would be the case in the absence of such a compensation arrangement. Because a portion of the incentive fee payable to our Advisor is calculated as a percentage of the amount of our net investment income that exceeds a hurdle rate, our Advisor may imprudently use leverage to increase the return on our investments. Under some circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common shares. In addition, our Advisor will receive an incentive fee based, in part, upon net realized capital gains on our investments. Unlike the portion of the incentive fee based on net investment income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, our Advisor may have an incentive to pursue investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative or long term securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns or longer return cycles.

 

We may be required to pay an incentive fee even in a fiscal quarter in which we have incurred a loss. For example, if we have pre-incentive fee net investment income above the hurdle rate and realized capital losses, we will be required to pay the investment income portion of the incentive fee.

 

The investment income portion of the incentive fee payable by us will be computed and paid on income that may include interest that has been accrued but not yet received in cash, and the collection of which is uncertain or deferred. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the investment income portion of the incentive fee will become uncollectible. Our Advisor will not be required to reimburse us for any such incentive fee payments.

 

There is no assurance that we will become a RIC, and our Advisor has no experience in managing a BDC and has limited experience managing a RIC.

 

Although we intend to elect to be treated as a RIC under the Code effective as of December 1, 2006, we will not, at least initially, be a RIC. There is no assurance that we will become a RIC. We have no operating results under either the BDC or RIC regulatory frameworks that can demonstrate either their effect on our business or our ability to manage our business within these frameworks. In addition, our Advisor has no experience in establishing or managing a BDC and has limited experience managing a RIC. Our Advisor has no experience serving as investment advisor to a BDC. Additionally, the time required to establish or maintain a BDC or RIC could distract our Advisor from its other duties. See “Certain U.S. Federal Income Tax Considerations” and “Regulation.”

 

Because we intend to distribute substantially all of our income to our stockholders upon our intended 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 and execute our business plan will be impaired.

 

In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and realized net capital gains except for certain net long-term capital gains recognized after we become a RIC, which we intend to retain, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our stockholders.

Our business will require a substantial amount of capital in addition to the proceeds of this offering if we are to grow. We may acquire additional capital from the issuance of securities senior to our common shares, including borrowings or other indebtedness or the issuance of additional securities. However, we may not be able to raise additional capital in the future on favorable terms or at all. Following our intended election to be regulated as a BDC, we may issue debt securities, other instruments of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. Our ability to pay dividends or issue additional senior securities is restricted if our asset coverage ratio is not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous. As a result of issuing senior securities, we will also be exposed to typical risks associated with leverage, including increased risk of loss. If we issue preferred securities which will rank “senior” to our common shares in our capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than those of our common shares, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for securityholders or otherwise be in our best interest.

 

To the extent our ability to issue debt or other senior securities is constrained, we will depend on issuances of additional common shares to finance our operations. As a BDC, we generally will not be able to issue additional common shares at a price below net asset value without first obtaining required approvals of our stockholders and our independent directors which could constrain our ability to issue additional equity. If we raise additional funds by issuing more of our common shares or senior securities convertible into, or exchangeable for, our common shares, the percentage ownership of our stockholders at that time would decrease, and you may experience dilution.

 

We will continue to be subject to corporate level income tax if we are unable to qualify as a RIC and as a result of our expected use of taxable subsidiaries if we do qualify as a RIC.

 

To qualify as a RIC, by the end of our first taxable year as a RIC we must eliminate any “earnings and profits” accumulated while we were taxed as a general business corporation. We intend to accomplish this by paying to our stockholders one or more cash dividends representing substantially all of our accumulated earnings and profits, if any, for the period from our inception through the date on which our intended RIC election becomes effective. We will need to manage our cash or have access to cash to enable us to pay such dividend or dividends. A delay in our RIC election increases the likelihood that we will hold assets with “built-in gains” as of the effective date of our RIC election. See “Certain U.S. Federal Income Tax Considerations — Intended Election to be Taxed as a RIC.”

 

Following our intended election to be treated as a RIC, we will have to meet certain income source, asset diversification and annual distribution requirements to maintain our status as a RIC and to obtain the benefits of RIC status.

 

To satisfy the annual distribution requirement, we will have to distribute to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We might have difficulty satisfying the distribution requirement because in certain cases we may have to recognize income for tax purposes before or without receiving cash representing such income. Certain features of the debt instruments that we may hold, such as contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term, will cause such instruments to generate “original issue discount” for tax purposes. We will be required to recognize for tax purposes original issue discount as ordinary income prior to the receipt of cash representing such income. In addition, any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants we receive. This also will generally result in original issue discount. It is possible

that original issue discount arising from these warrants may be significant and these warrants may not produce distributable cash for us at the same time as we would be required to make distributions with respect to the related original issue discount. We may be required to include in income for tax purposes certain other amounts that we may not receive in cash. If we do not have sufficient distributable cash, we may have to sell some of our assets at times not considered advantageous, raise additional debt or equity capital, or reduce new investment originations to meet the distribution requirement. In addition, due to the asset coverage test applicable to us after an election to be regulated as a BDC, we may be limited in our ability to make distributions. Also, restrictions and provisions in any future credit facilities or debt securities may limit our ability to make distributions. If we are limited in our ability to make distributions or are unable to obtain cash from other sources to satisfy the distribution requirement, we may fail to obtain the benefits of RIC status.

 

To satisfy the asset diversification requirement we will have to diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50% of the value of our assets consists of cash, cash items, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of (a) one issuer, (b) two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same similar or related trades or business or (c) one or more qualified publicly traded partnerships.

 

Equity securities issued by certain non-traded limited partnerships in which we may invest may not produce qualifying income for purposes of determining our compliance with the 90% gross income test applicable to RICs. As a result, we expect to form one or more wholly owned taxable subsidiaries to make and hold certain investments in accordance with our investment objective. The dividends received from such taxable subsidiaries will be qualifying income for purposes of the 90% gross income test. In general, the amount of cash received from such wholly owned subsidiaries will equal the amount of cash received from the limited partnerships as reduced by income taxes paid by such subsidiaries.

 

Although we intend that any investment in such taxable subsidiaries and non-traded limited partnerships will be within the 25% limit set forth above, it is possible that the IRS will not respect our determinations that certain taxable subsidiaries and non-traded limited partnerships are not engaged in the same or similar trades or businesses or related trades or businesses. If any such controlled entities are determined to be engaged in related trades or businesses, our ownership in them would be aggregated, possibly causing a violation of the 25% limit set forth above. Failure to meet the diversification tests may result in our having to quickly dispose of certain investments or raise additional capital at times we would not consider advantageous in order to prevent the loss of RIC status. Since most of our investments will be illiquid, such dispositions, even if possible, may not be made at prices advantageous to us and could result in substantial losses.

 

If we fail to maintain our qualification as a RIC for any reason, we would become subject to corporate level income taxes on all of our income, regardless of whether or not the income was distributed. Even if we were able to maintain our qualification as a RIC, we generally would be subject to a corporate level tax on income we do not distribute. Moreover, if we are a RIC and do not distribute at least 98% of our income, we generally would be subject to a 4% excise tax on certain undistributed income. Any such corporate level federal income tax or excise tax would not be deductible by us or our stockholders and would reduce the funds otherwise available to us for use in our operations or for distribution to our stockholders. See “Certain U.S. Federal Income Tax Considerations — Taxation as a RIC.”

 

As a BDC, we will be subject to limitations on our ability to engage in certain transactions with affiliates.

 

As a result of our intended election to be regulated as a BDC, we will be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent directors or the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent directors.

The 1940 Act also prohibits “joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person, or entering into joint transactions with such person, absent the prior approval of the SEC. Our Advisor and TYG have previously applied to the SEC for exemptive relief to permit TYG, TYY, TYN and other clients of our Advisor, including us, to co-invest in negotiated private placements of securities. Unless and until such an exemptive order is obtained, we will not co-invest with affiliates in negotiated private placement transactions.

 

If our investments are deemed not to be qualifying assets, we could lose our status as a BDC or be precluded from investing according to our current business plan.

 

Following our intended election to be regulated as a BDC, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make such an investment, these acquired assets cannot be treated as qualifying assets. This result is dictated by the definition of “eligible portfolio company” under the 1940 Act, which in part looks to whether a company has outstanding marginable securities.

 

Amendments promulgated in 1998 by the Federal Reserve expanded the definition of a marginable security under the Federal Reserve’s margin rules to include any non-equity security. Thus, any debt securities issued by any entity are marginable securities under the Federal Reserve’s current margin rules. As a result, the staff of the SEC has raised the question as to whether a private company that has outstanding debt securities would qualify as an “eligible portfolio company” under the 1940 Act.

 

Until the question raised by the staff of the SEC pertaining to the Federal Reserve’s 1998 change to its margin rules has been addressed by legislative, administrative or judicial action, we intend to treat as qualifying assets only those debt and equity securities that are issued by a private company that, based on our interpretation, has no marginable securities outstanding at the time we purchase such securities or those that otherwise qualify as an “eligible portfolio company” under the 1940 Act.

 

The SEC has issued proposed rules to correct the unintended consequence of the Federal Reserve’s 1998 margin rule amendments of apparently limiting the investment opportunities of BDCs. In general, the SEC’s proposed rules would define an eligible portfolio company as any company that does not have securities listed on a national securities exchange or association. We do not believe that these proposed rules, if adopted, will have a material adverse effect on our operations.

 

If there were a court ruling or regulatory decision that conflicts with our interpretations, our status as a BDC may be jeopardized or we may be precluded from investing in the manner described in this prospectus, either of which would have a material adverse effect on our business, financial condition and results of operations. Such a ruling or decision also may require that we dispose of investments, which could have a material adverse effect on us and our stockholders, because even if we were successful in finding a buyer, we may have difficulty in finding a buyer to purchase such investments on favorable terms or in a sufficient time frame.

 

We may choose to invest a portion of our portfolio in investments that may be considered highly speculative and that could negatively impact our ability to pay dividends and cause you to lose part of your investment.

 

The 1940 Act permits a BDC to invest up to 30% of its assets in investments that do not meet the test for “qualifying assets.” Such investments may be made by us with the expectation of achieving a higher rate of return or increased cash flow with a portion of our portfolio and may fall outside of our targeted investment criteria. These investments may be made even though they may expose us to greater risks than our other investments and may consequently expose our portfolio to more significant losses than may arise from our other investments. We may invest up to 30% of our total assets in assets that are non qualifying assets in among other things, high yield bonds, bridge loans, distressed debt, commercial loans, private equity, securities

of public companies or secondary market purchases of securities of target portfolio companies. Such investments could impact negatively our ability to pay you dividends and cause you to lose part of your investment.

 

If we incur debt, it could increase the risk of investing in us.

 

We may incur debt to increase our ability to make investments. Lenders from whom we may borrow money or holders of our debt securities will have fixed dollar claims on our assets that are superior to the claims of our stockholders, and we may grant a security interest in our assets in connection with our debt. In the case of a liquidation event, those lenders or note holders would receive proceeds before our stockholders. In addition, debt, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common shares to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common shares to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on our common shares. Our ability to service any debt that we incur will depend largely on our financial performance and the performance of our portfolio companies and will be subject to prevailing economic conditions and competitive pressures.

 

We operate in a highly competitive market for investment opportunities.

 

We compete with public and private funds, commercial and investment banks and commercial financing companies to make the types of investments that we plan to make in the U.S. energy infrastructure sector. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, allowing them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act would impose on us as a result of our election to be regulated as a BDC and that we will be required to comply with in order to qualify as a RIC.

 

We may not be able to invest the proceeds of this offering as quickly as expected in the energy infrastructure sector, and our interim investments will generate lower rates of return.

 

We anticipate that it may take nine months to invest substantially all of the net proceeds of this offering in securities meeting our investment objective. Pending investment, we expect the proceeds of this offering will be invested in cash, cash equivalents, U.S. government securities and other high quality debt instruments that mature within one year or less from the date of investment. As our temporary investments may generate lower projected returns than our core investment strategy, we may experience lower returns during this period and may not be able to pay dividends during this period comparable to the dividends that we may be able to pay when the net proceeds of this offering are fully invested in securities meeting our investment objective. See “Use of Proceeds.”

 

We may allocate the net proceeds from this offering in ways with which you may not agree.

 

We will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from this offering in ways with which investors may not agree or for purposes other than those contemplated at the time of this offering or that are not consistent with our targeted investment characteristics.

We have not identified specific investments in which to invest all of the proceeds of this offering.

 

As of the date of this prospectus, we have not entered into definitive agreements for any specific investments in which to invest the net proceeds of this offering. As a result, you will not be able to evaluate the manner in which we invest or the economic merits of any investments we make with the net proceeds of this offering prior to your purchase of common shares in this offering.

 

Our quarterly results may fluctuate.

 

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rates payable on the debt investments or the dividend rates on the equity investments we make, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses and the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

 

Our portfolio may be concentrated in a limited number of portfolio companies.

 

We currently have investments in a limited number of portfolio companies. One or two of our portfolio companies may constitute a significant percentage of our total portfolio. An inherent risk associated with this investment concentration is that we may be adversely affected if one or two of our investments perform poorly or if we need to write down the value of any one investment. Financial difficulty on the part of any single portfolio company will expose us to a greater risk of loss than would be the case if we were a “diversified” company holding numerous investments.

 

Our anticipated investments in privately-held companies present certain challenges, including the lack of available information about these companies and a greater inability to liquidate our investments in an advantageous manner.

 

We primarily make investments in privately-held companies. Generally, little public information will exist about these companies, and we will be required to rely on the ability of our Advisor to obtain adequate information to evaluate the potential risks and returns involved in investing in these companies. If our Advisor is unable to obtain all material information about these companies, including with respect to operational, regulatory, environmental, litigation and managerial risks, our Advisor may not make a fully-informed investment decision, and we may lose some or all of the money invested in these companies. In addition, our Advisor may inappropriately value the prospects of an investment, causing us to overpay for such investment and fail to receive an expected or projected return on its investment. Substantially all of these securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell such investments at advantageous times and prices or in a timely manner. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously have recorded our investments. We also may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or one of our affiliates have material non-public information regarding such portfolio company.

 

Most of our portfolio investments are and will continue to be recorded at fair value as determined in good faith by our board of directors. As a result, there is and will continue to be uncertainty as to the value of our portfolio investments.

 

Most of our investments are and will be in the form of securities or loans that are not publicly traded. The fair value of these investments may not be readily determinable. We will value these investments quarterly at fair value as determined in good faith by our board of directors. We expect that our board of directors may retain an independent valuation firm, as requested from time to time by the independent directors, to help them in making fair value determinations. The types of factors that may be considered in fair value pricing of an investment include the nature and realizable value of any collateral, the portfolio company’s earnings and

ability to make payments, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations are inherently uncertain, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. As a result, we may not be able to dispose of our holdings at a price equal to or greater than the determined fair value, which could have a negative impact our net asset value.

 

Unrealized decreases in the value of investments in our portfolio may impact the value of our common shares and may reduce our income for distribution.

 

As a result of our becoming a regulated investment company, we will be required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our board of directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our investment portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the loans whose market values or fair values decreased. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.

 

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control that portfolio company.

 

When we make minority equity investments or invest in debt, we will be subject to the risk that a portfolio company may make business decisions with which we may disagree, and that the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our investments.

 

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

 

Portfolio companies in which we intend to invest usually will have, or may be permitted to incur, debt that ranks senior to, or equally with, our investments, including debt investments. As a result, payments on such securities may have to be made before we receive any payments on our investments. For example, these debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. In the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying its senior creditors, a portfolio company may not have any remaining assets to use to repay its obligation to us. In the case of debt ranking equally with our investments, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

We expect our debt investments will generally be unsecured and even if we make a secured loan, if the assets securing a loan we make decrease in value, we may not have sufficient collateral to cover losses.

 

We believe our portfolio companies generally will be able to repay our debt investments from their available capital, from future capital-raising transactions or from cash flow from operations. We expect generally that our debt investments that we make will be unsecured. However, in the event we take a security interest in the available assets of a portfolio company, there is a risk that the collateral securing our investment may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, a deterioration in a portfolio company’s financial

condition and prospects, including its inability to raise additional capital, may be accompanied by a deterioration in the value of the collateral for the investment. Moreover, we may not have a first lien position on the collateral. Consequently, the fact that investment is secured does not guarantee that we will receive principal and interest payments according to the investment’s terms or that we will be able to collect on the investment should we be forced to enforce our remedies. In addition, a portion of the assets securing our investment may be in the form of intellectual property, if any, inventory and equipment and, to a lesser extent, cash and accounts receivable. Intellectual property, if any, that is securing our investment could lose value if, among other things, the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires. Inventory may not be adequate to secure our investment if our valuation of the inventory at the time we made the loan was not accurate or if there is a reduction in the demand for the inventory. Similarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technology or advances in new equipment that render the particular equipment obsolete or of limited value or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability to recover principal in a foreclosure.

 

If our investments do not meet our performance expectations, you may not receive distributions.

 

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See “Regulation.” Also, restrictions and provisions in any future credit facilities and debt securities may limit our ability to make distributions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including failure to obtain, or possible loss of, the federal income tax benefits allowable to RICs. See “Certain U.S. Federal Income Tax Considerations — Taxation as a RIC.” We cannot assure you that you will receive distributions at a particular level or at all.

 

The lack of liquidity in our investments may adversely affect our business, and if we need to sell any of our investments, we may not be able to do so at a favorable price. As a result, we may suffer losses.

 

We generally expect to invest in debt securities with terms of 5 to 10 years and hold such investments until maturity, and we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We expect to invest in companies whose securities are not publicly-traded, and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our intended election to be regulated as a BDC and as a RIC, we may have to dispose of investments if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

 

We will be exposed to risks associated with changes in interest rates.

 

Generally, when market interest rates rise, the values of debt securities decline, and vice versa. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing us to reinvest in lower yielding securities. This is known as call or prepayment risk. Lower grade securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem a lower grade obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer.

We may not have the funds to make additional investments in our portfolio companies.

 

After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected yield on the investment.

 

It is likely that the terms of any long-term or revolving credit facility we may enter into in the future could constrain our ability to grow our business.

 

While there can be no assurance that we will be able to borrow from banks or other financial institutions, we expect that we will at some time in the future obtain a long-term or revolving credit facility. We expect such a facility to contain customary default provisions, such as a minimum net worth amount, a profitability test, and a restriction on changing our business and loan quality standards. An event of default under any credit facility would likely result, among other things, in termination of the availability of further funds under that facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under our facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our expected status as a RIC.

 

If a wholly-owned subsidiary of ours becomes licensed by the SBA, we, and that subsidiary, will be subject to SBA regulations.

 

We are currently seeking qualification as a small business investment company (“SBIC”) for a to-be-formed wholly-owned subsidiary which will be regulated by the U.S. Small Business Administration (“SBA”). Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $18 million and an average annual fully taxed net income not exceeding $6 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 20% of its investment activity to those entities that have a tangible net worth not exceeding $6 million and an average fully taxed net income not exceeding $2 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in the equity securities of such businesses, and provide them with consulting and advisory services. Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA staff to determine its compliance with the relevant SBA regulations. Failure to comply with the SBA regulations could result in the loss of the SBIC license and the resulting inability to participate in the SBA-sponsored debenture program. The SBA also imposes a limit on the maximum amount that may be borrowed by any single SBIC. The SBA prohibits, without prior SBA approval, a “change of control” of a SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC.

 

Changes in laws or regulations or in the interpretations of laws or regulations could significantly affect our operations and cost of doing business.

 

We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, we may have to incur significant expenses in order to comply, or we may have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, or fail to obtain licenses that may become

necessary for the conduct of our business, we may be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.

 

Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy, which could have a significant and adverse effect on our business and reputation.

 

We are evaluating our internal controls over financial reporting. We plan to design enhanced processes and controls to address any issues that might be identified. As a result, we expect to incur significant additional expenses in the near term, which will negatively impact our financial performance and our ability to make distributions. This process also will result in a diversion of management’s time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations and may not be able to ensure that the process is effective or that the internal controls are or will be effective in a timely manner. Beginning with our fiscal year ending November 30, 2007, our management will be required to report on our internal controls over financial reporting pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder. We will then be required to review on an annual basis our internal controls over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal controls over financial reporting. There can be no assurance that we will successfully identify and resolve all issues required to be disclosed prior to becoming a public company or that our quarterly reviews will not identify additional material weaknesses.

 

Risks Related to an Investment in the U.S. Energy Infrastructure Sector

 

Our portfolio is and will continue to be concentrated in the energy infrastructure sector, which will subject us to more risks than if we were broadly diversified.

 

We invest primarily in privately-held and micro-cap public companies in the U.S. energy infrastructure sector. Because we are specifically focused on the energy infrastructure sector, investments in our common shares may present more risks than if we were broadly diversified over numerous sectors of the economy. Therefore, a downturn in the U.S. energy infrastructure sector would have a larger impact on us than on an investment company that does not concentrate in one sector of the economy. The energy infrastructure sector can be significantly affected by the supply of and demand for specific products and services, the supply and demand for crude oil, natural gas, and other energy commodities, the price of crude oil, natural gas, and other energy commodities, exploration, production and other capital expenditures, government regulation, world and regional events and economic conditions. At times, the performance of securities of companies in the energy infrastructure sector may lag the performance of securities of companies in other sectors or the broader market as a whole.

 

The portfolio companies in which we invest are subject to variations in the supply and demand of various energy commodities.

 

A decrease in the production of natural gas, natural gas liquids, crude oil, coal, refined petroleum products or other energy commodities, or a decrease in the volume of such commodities available for transportation, mining, processing, storage or distribution, may adversely impact the financial performance of companies in the energy infrastructure sector. Production declines and volume decreases could be caused by various factors, including catastrophic events affecting production, depletion of resources, labor difficulties, political events, OPEC actions, environmental proceedings, increased regulations, equipment failures and unexpected maintenance problems, failure to obtain necessary permits, unscheduled outages, unanticipated expenses, inability to successfully carry out new construction or acquisitions, import supply disruption, increased competition from alternative energy sources or related commodity prices. Alternatively, a sustained decline in demand for such commodities could also adversely affect the financial performance of companies in the energy infrastructure sector. Factors that could lead to a decline in demand include economic recession or other adverse economic conditions, higher fuel taxes or governmental regulations, increases in fuel economy, consumer shifts to the use of alternative fuel sources, changes in commodity prices or weather.

Many companies in the energy infrastructure sector are subject to the risk that they, or their customers, will be unable to replace depleted reserves of energy commodities.

 

Many companies in the energy infrastructure sector are either engaged in the production of natural gas, natural gas liquids, crude oil, refined petroleum products or coal, or are engaged in transporting, storing, distributing and processing these items on behalf of producers. To maintain or grow their revenues, many customers of these companies need to maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources, through acquisitions, or through long-term contracts to acquire reserves. The financial performance of companies in the energy infrastructure sector may be adversely affected if the companies to whom they provide service are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline.

 

Our portfolio companies are and will be subject to extensive regulation because of their participation in the energy infrastructure sector.

 

Companies in the energy infrastructure sector are subject to significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future that likely would increase compliance costs and may adversely affect the financial performance of companies in the energy infrastructure sector and the value of our investments in those companies.

 

Our portfolio companies are and will be subject to the risk of fluctuations in commodity prices.

 

The operations and financial performance of companies in the energy infrastructure sector may be directly affected by energy commodity prices, especially those companies in the energy infrastructure sector owning the underlying energy commodity. Commodity prices fluctuate for several reasons, including changes in market and economic conditions, the impact of weather on demand or supply, levels of domestic production and imported commodities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively impact the performance of companies in the energy infrastructure sector that are solely involved in the transportation, processing, storing, distribution or marketing of commodities. Volatility of commodity prices may also make it more difficult for companies in the energy infrastructure sector to raise capital to the extent the market perceives that their performance may be tied directly or indirectly to commodity prices. Historically, energy commodity prices have been cyclical and exhibited significant volatility.

 

Our portfolio companies are and will be subject to the risk of extreme weather patterns.

 

Extreme weather patterns, such as hurricane Ivan in 2004 and hurricanes Katrina and Rita in 2005, could result in significant volatility in the supply of energy and power. This volatility may create fluctuations in commodity prices and earnings of companies in the energy infrastructure sector. Moreover, any extreme weather patterns, such as hurricanes Katrina and Rita, could adversely impact the assets and valuation of our portfolio companies.

 

Acts of terrorism may adversely affect us.

 

The value of our common shares and our investments could be significantly and negatively impacted as a result of terrorist activities, such as the terrorist attacks on the World Trade Center on September 11, 2001; war, such as the war in Iraq and its aftermath; and other geopolitical events, including upheaval in the Middle East or other energy producing regions. The U.S. government has issued warnings that energy assets, specifically those related to pipeline infrastructure, production facilities and transmission and distribution

facilities, might be specific targets of terrorist activity. Such events have led, and in the future may lead, to short-term market volatility and may have long-term effects on the U.S. economy and markets. Such events may also adversely affect our business and financial condition.

 

Risks Related to this Offering

 

The price of our common shares may be volatile and may decrease substantially.

 

The trading price of our common shares following this offering may fluctuate substantially. The price of the common shares that will prevail in the market after this offering may be higher or lower than the price you pay and the liquidity of our common shares may be limited, in each case depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:

 

 

Investing in our common shares may involve an above average degree of risk.

 

The investments we make may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common shares may not be suitable for investors with lower risk tolerance.

 

Prior to this offering, there has been no public market for our common shares, and we cannot assure you that the market price of our common shares will not decline following the offering.

 

Before this offering, there was no public trading market for our common shares, and we cannot assure you that one will develop or be sustained after this offering. We cannot predict the prices at which our common shares will trade. The initial public offering price for our common shares will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which it will trade after this offering or to any other established criteria of our value. Shares of companies offered in an initial public offering often trade at a discount to the initial offering price due to underwriting discounts (sales loads) and related offering expenses. In addition, shares of closed-end investment companies have in the past frequently traded at discounts to their net asset values and our stock may also be discounted in the market.

This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common shares will trade above, at or below our net asset value. The risk of loss associated with this characteristic of closed-end investment companies may be greater for investors expecting to sell common shares purchased in this offering soon after the offering. In addition, if our common shares trade below their net asset value, we will generally not be able to issue additional common shares at their market price without first obtaining the approval of our stockholder and our independent directors to such issuance.

 

Provisions of the Maryland General Corporation Law and our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common shares.

 

The Maryland General Corporation Law and our charter and bylaws contain provisions that may have the effect of discouraging, delaying or making difficult a change in control of our company or the removal of our incumbent directors. We will be covered by the Business Combination Act of the Maryland General Corporation Law to the extent that such statute is not superseded by applicable requirements of the 1940 Act. However, our board of directors has adopted a resolution exempting us from the Business Combination Act any business combination between us and any person to the extent that such business combination receives the prior approval of our board, including a majority of our directors who are not interested persons as defined in the 1940 Act.

 

Under our charter, our board of directors is divided into three classes serving staggered terms, which will make it more difficult for a hostile bidder to acquire control of us. In addition, our board of directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. See “Description of Capital Stock.” Subject to compliance with the 1940 Act, our board of directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. The existence of these provisions, among others, may have a negative impact on the price of our common shares and may discourage third party bids for ownership of our company. These provisions may prevent any premiums being offered to you for shares of our common shares.

 

If a substantial number of our common shares becomes available for sale and are sold in a short period of time, the market price of our common shares could decline.

 

If our stockholders sell substantial amounts of our common shares in the public market following this offering, the market price of our common shares could decrease. Upon completion of this offering we will have           common shares outstanding. Of these shares, the shares sold in this offering will be freely tradeable. We and our executive officers and directors will be subject to agreements with the underwriters that restrict our and their ability to transfer our stock for a period of 180 days from the date of this prospectus. The 180-day restricted period will be automatically extended if (1) during the last 17 days of the 180-day restricted period the Company issues an earning release to material news or a material event relating to the Company occurs or (2) prior to the expiration of the 180-day restricted period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the 180-day restricted period, in which case the restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. Our other current stockholders will be subject to agreements that restrict their ability to transfer our stock for a period of 90 days from the date of this offering, subject to limited exceptions, including our filing of a registration statement. See “Shares Eligible for Future Resale” and “Underwriting.” After the lock-up agreements expire, an aggregate of additional common shares will be eligible for sale in the public market in accordance with Rule 144 under the Securities Act. See “Shares Eligible for Future Sale.”

 

If you purchase our common shares in this offering, you will experience immediate dilution.

 

If you purchase our common shares in this offering, you will experience immediate dilution of $      per share because the price that you pay will be greater than the pro forma net asset value per share of

the shares you acquire. This dilution is in large part due to the expenses incurred by us in connection with the consummation of this offering and the fact that our earlier investors paid, on average, less than the initial public offering price per share when they purchased their shares.

 

There will be dilution of the value of our common shares when the warrants are exercised.

 

As a result of our private placement completed in January 2006, 772,124 warrants were sold, permitting the holders thereof to acquire a like number of our common shares upon payment of the exercise price. The warrants we have sold represent the right to purchase, in the aggregate,  % of our common shares upon completion of this offering. These warrants will become exercisable upon the completion of this offering of our common shares. The issuance of additional common shares upon the exercise of the warrants, if the warrants are exercised at a time when the exercise price is less than the net asset value per share of our common shares, will have a dilutive effect on the value of our common shares sold in this offering.

 

We intend to elect to be regulated as a BDC under the 1940 Act. Since our incorporation, we have been taxed as a general business corporation under Subchapter C of the Code. We intend to elect to be treated as a RIC under Subchapter M of the Code effective as of December 1, 2006. There can be no assurance that we will be successful in becoming a BDC or a RIC.

 

Our intended elections to be regulated as a BDC and to be treated as a RIC will require certain actions and effect a number of changes to our activities and policies.

 

Investment Reporting

 

In accordance with the requirements of Article 6 of Regulation S-X, we will report all of our investments, including loans, at market value or, for investments that do not have a readily available market value, their “fair value” as determined in good faith by our board of directors. Subsequent changes in these values will be reported through our consolidated statement of operations under the caption of “unrealized appreciation (depreciation) on investments.” See “Determination of Net Asset Value.”

 

Income Tax

 

We intend to elect to be treated as a RIC under Subchapter M of the Code effective as of December 1, 2006. This election should reduce or eliminate the federal corporate-level income tax we will be required to pay after the effective date of such election. So long as we meet certain minimum distribution, source-of-income and asset diversification requirements, we generally will be required to pay federal income taxes only on the portion of our taxable income we do not distribute (actually or constructively) and certain built-in gains. However, if we use taxable subsidiaries to invest in non-traded limited partnerships, such taxable subsidiaries will pay federal income taxes on their respective taxable incomes. From the completion of this offering through the end of our current tax year, we will continue to be taxed as a general business corporation under Subchapter C of the Code. Any capital gains we recognize after completion of this offering and prior to the effective date of our intended election to be taxed as a RIC will, when distributed to you, be taxed as ordinary income and not as capital gains, as would have been the case had we been taxed as a RIC as of the date of this offering. Our current tax year will end on November 30, 2006 unless we adopt a fiscal tax year ending before that date in order to elect to be treated as a RIC prior to December 1, 2006. See “Certain U.S. Federal Income Tax Considerations.”

 

In addition, by the end of our first taxable year as a RIC, we also must eliminate any “earnings and profits” accumulated while we were taxable as a general business corporation. We intend to accomplish this by paying to our stockholders one or more cash dividends representing substantially all of our accumulated earnings and profits, if any, for the period from our inception through the date on which our intended RIC election becomes effective. The amount of these dividends will be based on a number of factors, including our results of operations through the date on which our intended RIC election becomes effective. We will need to manage our cash or have access to cash to enable us to pay such dividend or dividends. Any dividend of accumulated earnings and profits would be taxable to U.S. stockholders in the manner described under “Certain U.S. Federal Income Tax Considerations — Current Federal Income Taxation of the Company.”

 

Dividend Policy

 

As a general business corporation taxed under Subchapter C of the Code, we have not made distributions to our stockholders, but have instead retained all of our income, including capital gains. On August 4, 2006, our board of directors declared a $0.05 per common share special dividend and a $0.09 per common share quarterly dividend. Both dividends are payable to our current stockholders on September 1, 2006. We intend to pay quarterly dividends. Following our intended election to be treated as a RIC under the Code, we intend to distribute to our stockholders all or substantially all of our income, except for certain realized net long-term capital gains.

After the effective date of our intended RIC election, we intend to make deemed distributions to our stockholders of any retained net long-term capital gains. If this happens, you will be treated as if you received an actual distribution of the capital gains and reinvested the net after-tax proceeds in us. You also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we pay on the retained net long-term capital gains deemed distributed. See “Dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Determining Dividends Distributed to Stockholders.”

 

Warrants

 

Our outstanding warrants are exercisable upon the completion of this offering, subject to a lock-up period with respect to common shares received upon exercise of warrants of 90 calendar days immediately following this offering. Each warrant will entitle the holder thereof to purchase one common share at the exercise price per common share of the greater of (i) $15.00 per common share or (ii) the net asset value of our common shares on the date of our election to become a BDC. All warrants will expire on the day before the sixth anniversary of this offering. No fractional warrant shares will be issued upon exercise of the warrants. We will pay to the holder of the warrant at the time of exercise an amount in cash equal to the current market value of any such fractional warrant shares.

 

Exemptive Relief

 

In connection with this offering and our intended election to be regulated as a BDC, we expect to file a request with the SEC for exemptive relief to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to BDCs. Although we cannot provide any assurance that we will receive any such exemptive relief, we expect to request that the SEC allow us to exclude any indebtedness issued to the SBA by a to-be-formed wholly-owned subsidiary for which we are seeking qualification as a SBIC, from the 200% asset coverage requirements applicable to us.

 

Our Advisor and TYG have applied to the SEC for exemptive relief to permit TYG, TYY, TYN, us and our and their respective affiliates to make such investments. Unless and until we obtain an exemptive order, we will not co-invest with our affiliates in negotiated private placement transactions. We cannot guarantee that the requested relief will be granted by the SEC. Unless and until we obtain an exemptive order, our Advisor will not co-invest its proprietary accounts or other clients’ assets in negotiated private transactions in which we invest. Until we receive exemptive relief, our Advisor will observe a policy for allocating opportunities among its clients that takes into account the amount of each client’s available cash and its investment objectives. As a result of one or more of these situations, we may not be able to invest as much as we otherwise would in certain investments or may not be able to liquidate a position as quickly.

 

The net proceeds of this offering will be approximately $           after deducting the underwriting discount (sales load) and estimated offering expenses of $           paid by us. We will use the net proceeds to make investments in accordance with our investment objective and to pay our operating expenses. We anticipate that substantially all of the net proceeds of this offering will be used, as described above, within nine months but in no event longer than two years. We have not allocated any portion of the net proceeds of this offering to any particular investment.

 

Pending investment, we expect the net proceeds of this offering will initially be invested in cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment.

 

 

On August 4, 2006, our board of directors declared a $0.05 per common share special dividend and a $0.09 per common share quarterly dividend. The special dividend was declared for the period from our inception through our second fiscal quarter and the quarterly dividend was declared for our third fiscal quarter. Both dividends are payable to our current stockholders on September 1, 2006. We intend to distribute quarterly dividends to our stockholders out of assets legally available for distribution. The amount of our future quarterly distributions will be determined by our board of directors.

 

Following our intended RIC election, we intend to distribute to our stockholders with respect to each taxable year at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, in order to avoid certain excise taxes to which we will be subject once we have elected to be treated as a RIC, we expect to distribute (or be deemed to distribute) during each calendar year an amount at least equal to the sum of (i) 98% of our ordinary income for the calendar year, (ii) 98% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses, if any, subject to certain adjustments) for the one-year period ending on October 31 of that calendar year (or possibly November 30, if we so elect), and (iii) any ordinary income and capital gain net income for preceding years that were not distributed during such years. If we become a RIC, we will not be subject to excise taxes on amounts on which we pay corporate income tax (such as retained net capital gains). We intend to have an “opt out” dividend reinvestment plan following the completion of this offering. As a result, after the plan is effective, unless a stockholder opts out, distributions will be reinvested in our common shares pursuant to our dividend reinvestment plan. See “Certain U.S. Federal Income Tax Considerations” and “Dividend Reinvestment Plan.”

 

As a result of our intended election to be regulated as a BDC, we will be prohibited from paying dividends if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act. Dividends also may be limited by the terms of any of our borrowings. It is our objective to invest our assets and structure our borrowings so as to permit stable and consistently growing dividends. However, there can be no assurances that we will achieve that objective or that our results will permit the payment of any cash dividends. For a more detailed discussion, see “Regulation.” See also “Certain U.S. Federal Income Tax Considerations — Taxation as a RIC.”

 

The following table sets forth (i) our actual capitalization as of May 31, 2006 and (ii) our capitalization as adjusted to reflect the effects of the sale of our common shares in this offering at an assumed public offering price of $           per share, after deducting the underwriting discounts (sales load) and offering expenses payable by us. You should read this table together with “Use of Proceeds” and our statement of assets and liabilities included elsewhere in this prospectus.

 

 

 

Our net asset value as of May 31, 2006 was approximately $42.6 million, or $13.80 per common share. Net asset value per share represents the amount of our total assets minus our total liabilities, divided by the 3,088,596 common shares that were outstanding on May 31, 2006, excluding the effect of any warrants.

 

After giving effect to the sale of           common shares in this offering at the initial public offering price of $      per share and after deducting the sales load and estimated offering expenses payable by us, our net asset value as of May 31, 2006 would have been approximately $           million, or $      per share. This represents an immediate increase in net asset value of $      per share to our existing stockholders and an immediate dilution of $      per share to new investors who purchase common shares in the offering at the assumed initial public offering price. The following table shows this immediate per share dilution:

 

 

The following table summarizes, as of May 31, 2006, the number of common shares purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing common shares in this offering, at the initial public offering price of $      per share and before deducting the sales load and estimated offering expenses payable by us. This table does not assume the exercise of any outstanding warrants or the exercise of the underwriters’ overallotment option.

 

 

To the extent the underwriters’ overallotment option is exercised, or any outstanding warrants are exercised, there will be further reduction in the percentage of our common shares held by new investors.

 

The following table summarizes, as of May 31, 2006, the same information set forth in the table above, except, that the table below assumes the exercise of all outstanding warrants at the price of $      per share and the full exercise of the underwriters’ overallotment option.

 

 

The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus.

 

Overview

 

We invest primarily in privately-held and micro-cap public companies (companies with a market capitalization of less than $100,000,000) focused on the midstream and downstream segments, and to a lesser extent the upstream segment, of the U.S. energy infrastructure sector. We believe companies in the energy infrastructure sector generally produce stable cash flows as a result of their fee-based revenues and have limited direct commodity price risk. Our investment objective is to provide stockholders with current income and capital appreciation. We focus our investments on unsecured, subordinated debt securities and equity securities that will generally be expected to pay us interest or dividends on a current basis. We seek to obtain capital appreciation through warrants or other equity conversion features and from growth in dividends in our equity investments.

 

We intend to elect to be regulated as a BDC under the 1940 Act and intend to elect to be treated as a RIC under the Code effective as of December 1, 2006. Following our intended elections to be regulated as a BDC and to be treated as a RIC, we will be subject to numerous regulations and restrictions. Prior to the effective date of our election to be treated as a RIC, we have been and will be taxed as a general business corporation under the Code.

 

Critical Accounting Policies

 

The financial statements included in this prospectus are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments. While our critical accounting policies are discussed below, Note 2 in the notes to our financial statements included in this prospectus provides more detailed disclosure of all of our significant accounting policies.

 

Valuation of Portfolio Investments

 

The Company intends to invest primarily in illiquid securities that generally will be subject to restrictions on resale, will have no established trading market and will be valued on a quarterly basis. Fair value is intended to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced liquidation or sale. Because of the inherent uncertainty of valuation, the fair values of such investments, which will be determined in accordance with procedures approved by the Company’s Board of Directors, may differ materially from the values that would have been used had a ready market existed for the investments. See “Determination of Net Asset Value.”

 

Interest and Fee Income Recognition

 

Interest income will be recorded on an accrual basis to the extent that such amounts are expected to be collected. When investing in instruments with an original issue discount or payment-in-kind interest, the Company will accrue interest income during the life of the investment, even though the Company will not necessarily be receiving cash as the interest is accrued. Commitment and facility fees generally will be recognized as income over the life of the underlying loan, whereas due diligence, structuring, transaction

service, consulting and management service fees for services rendered to portfolio companies generally will be recognized as income when services are rendered.

 

Dividends to Stockholders

 

The character of dividends paid during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes.

 

Portfolio and Investment Activity

 

We were formed as a Maryland corporation on September 8, 2005, commenced business operations December 8, 2005 and completed our private placement of common shares and warrants on January 9, 2006. As of May 31, 2006, our investment portfolio included private equity investments in two portfolio companies representing approximately $17.0 million of invested capital. As of July 31, 2006, our investment portfolio totaled $22.5 million, including private equity investments in three portfolio companies representing approximately $18.0 million and a subordinated debt investment in one of those portfolio companies representing $4.5 million.

 

In addition, as of May 31, 2006, we had extended non-binding term sheets to two prospective new portfolio companies representing approximately $10.0 million of debt investments. These investments are subject to finalization of our due diligence and approval process, as well as negotiation of definitive agreements with each prospective portfolio company and, as a result, may not result in completed investments. See “Portfolio Companies.”

 

Our investments are expected to range between $5 million and $15 million per investment, although investment sizes may be smaller or larger than this targeted range. We currently expect our debt investments generally to have a term of five to ten years and to bear interest at either a fixed or floating rate.

 

Results of Operations

 

Distributions Received from Investments

 

We generate revenues in the form of interest payable on the debt investments that we hold, and in the form of capital gains and dividends on dividend-paying equity securities, warrants, options, or other equity interests that we have acquired in our portfolio companies. We currently intend to structure our debt investments to provide for quarterly interest payments. In addition to the cash yields received on our loans, in some instances, our loans may also include any of the following: end of term payments, exit fees, balloon payment fees or prepayment fees, any of which may be required to be included in income prior to receipt. In some cases we may structure debt investments to provide that interest is not payable in cash, or not entirely in cash, but is instead payable in securities of the issuer or is added to the principal of the debt. The amortization of principal on our debt investments may be deferred until maturity. We intend to acquire equity securities that pay cash dividends on a recurring or customized basis. We also expect to generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees.

 

After our formation on September 8, 2005, we completed our private placement of common shares and warrants on January 9, 2006. As a result, there is no period with which to compare our results of operations for the period from September 8, 2005 through November 30, 2005 or the fiscal quarter ended May 31, 2006.

 

Total distributions received from our investments for the period from inception to May 31, 2006 were $751,001. All of this amount was received from short term investments held pending our anticipated investments in portfolio companies. We expect to generate additional investment income as we invest the net proceeds of this offering in U.S. energy infrastructure companies.

Expenses

 

As an externally managed investment company, our operating expenses consist primarily of the advisory fee, other administrative operating expenses and income taxes. Expenses during the period from December 8, 2005 through May 31, 2006 totaled $486,018. This amount consisted mainly of advisory fees of $306,163, professional fees of $83,597, director’s fees of $43,743 and other general and administrative expenses. The tax expense during the period from December 8, 2005 through May 31, 2006 totaled $95,955.

 

Determining Dividends Distributed to Stockholders

 

Our portfolio generates cash flow to us in the form of interest, dividends, and gain, loss and return of capital. When our board of directors determines the amount of any dividend we expect to pay our stockholders, it will review amounts generated by our investments, less our total expenses. The total amounts generated by our investments consists of both total income and return of capital, as we expect to invest in some entities generating distributions to us that include a return of capital component for accounting and tax purposes on our books. The total income received from our investments includes the amount received by us as cash distributions from equity investments, paid-in-kind distributions, and dividend and interest payments. Our total expenses includes current or anticipated operating expenses, and total leverage costs, if any.

 

On August 4, 2006, our board of directors declared a $0.05 per common share special dividend and a $0.09 per common share quarterly dividend. The special dividend was declared for the period from our inception through our second fiscal quarter and the quarterly dividend was declared for our third fiscal quarter. Both dividends are payable to our current stockholders on September 1, 2006. Our Board of Directors will review the dividend rate quarterly, and may adjust the quarterly dividend throughout the year. See “Dividends.”

 

Taxation of our Distributions

 

We invest a portion of our portfolio in partnerships and limited liability companies (whether directly or indirectly through taxable subsidiaries), which generally have larger distributions of cash than the accounting income which they generate. Accordingly, the distributions we receive typically include a return of capital component for accounting and tax purposes. Dividends declared and paid by us in any year generally will differ from our taxable income for that year, as such dividends may include the distribution of current year taxable income or returns of capital.

 

We are currently taxed as a general business corporation for federal income tax purposes, but we intend to elect to be treated as a RIC effective as of December 1, 2006. As long as we qualify as a RIC, we will not be taxed on our net ordinary income or our realized net capital gains, to the extent that such taxable income and gains are distributed to stockholders on a timely basis. We may be required, however, to pay federal income taxes on any unrealized net built-in gains in the assets held by us during the period in which we were not (or in which we fail to qualify as) a RIC that are recognized within the 10-year period following the effective date of our intended RIC election, unless we either make a special election to pay corporate-level tax on such built-in gain at the time of our RIC election or an exception applies. See “Certain U.S. Federal Income Tax Considerations — Intended Election to be Taxed as a RIC.” We intend to take all steps necessary to qualify for the federal tax benefits allowable to RICs. Unless a stockholder elects otherwise, following completion of this offering, our dividends will be reinvested in additional common shares through our dividend reinvestment plan. See “Dividend Reinvestment Plan.”

 

By the end of our first taxable year as a RIC, we also must eliminate any earnings and profits accumulated while we were taxable as a general business corporation. We intend to accomplish this by paying to our stockholders one or more cash dividends representing substantially all of our accumulated earnings and profits, if any, for the period from our inception through the date on which our intended RIC election becomes effective. The amount of these dividends will be based on a number of factors, including our results of operations through the date on which our intended RIC election becomes effective. We will need to manage our cash or have access to cash to enable us to pay such dividend or dividends. Any dividend of accumulated earnings and profits would be taxable to U.S. stockholders in the manner described above under “Certain U.S.

Federal Income Tax Considerations.” These dividends, if any, would be in addition to the dividends we intend to pay of at least 90% of our investment company taxable income to satisfy the Annual Distribution Requirements.

 

While we are a RIC, we generally intend to retain any realized net long-term capital gains in excess of realized net short-term capital losses and to deem such net long-term capital gain as distributed to our stockholders. We then will pay taxes on such retained net long-term capital gain that is deemed distributed, and expect such tax payment to generally give rise to a credit that our U.S. individual stockholders can use against their U.S. federal income tax obligations or that may be refunded to the extent it exceeds the U.S. stockholder’s liability for federal income tax. We believe that reinvesting gains inside our company will enable us to grow our dividends to our stockholders, which will offer them an opportunity for an attractive total return. We may, in the future, make actual distributions to our stockholders of some or all of such net long-term capital gains. See “Certain U.S. Federal Income Tax Considerations.” There can be no assurance that we will qualify for treatment as a RIC or be able to maintain RIC status.

 

Liquidity and Capital Resources

 

At the completion of our private placement in January 2006, we were capitalized with approximately $46.3 million of gross proceeds ($42.5 million of net proceeds) from the sale of 3,088,596 units. Each unit consisted of four of our common shares and one warrant to purchase one common share. Since the completion of the private placement, we have invested a total of $22.5 million in three portfolio companies and paid expenses related to our private placement of $549,372. As of August 24, 2006, we had extended term sheets to two prospective portfolio companies representing approximately $10.0 million of prospective investments. After we have used the net proceeds of our private placement and this offering, we expect to raise additional capital to support our future growth through future equity offerings, issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act.

 

Borrowings

 

In the future we may fund a portion of our investments through borrowings from banks or other lenders, issuing debt securities, or by creating a wholly-owned subsidiary that issues debentures to the SBA through an SBA program. On March 31, 2006, an application to be licensed by the SBA as a SBIC under Section 301(c) of the Small Business Investment Company Act of 1958 was filed on behalf of our to-be-formed wholly-owned subsidiary. If we are able to obtain financing under such program, we will be subject to regulation and oversight by the SBA, including requirements that we maintain certain minimum financial ratios, that our subsidiary invest in portfolio companies that do not exceed certain average net income or net worth guidelines established by the SBA, and other covenants imposed by the SBA. There can be no assurances that we will be able to incur debt on terms acceptable to us, obtain a SBIC license or be able to participate in the SBA-sponsored debenture program. See “Risk Factors — If a wholly-owned subsidiary of ours becomes licensed by the SBA, we, and that subsidiary, will be subject to SBA regulations.” We do not expect to incur indebtedness until the proceeds of this offering have been substantially invested in securities that meet our investment objective, although we may incur indebtedness earlier under the SBA-sponsored debenture program.

 

Contractual Obligations

 

We have entered into an investment advisory agreement with our Advisor pursuant to which our Advisor has agreed to: (i) serve as our investment advisor in exchange for the consideration set forth therein; (ii) furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and to provide on our behalf managerial assistance to certain of our portfolio companies; and (iii) grant us a non-exclusive royalty-free license to use the “Tortoise” name and other intellectual property. See “Advisor — Investment Advisory Agreement.”

 

Payments under the investment advisory agreement in future periods will consist of: (i) a base management fee based on a percentage of the value of our managed assets, and (ii) an incentive fee, based on

our investment income and our net capital gains. Our Advisor has waived the portion of the incentive fee based on investment income until December 8, 2006. Our Advisor, and not us, pays the compensation and allocable routine overhead expenses of all investment professionals of its staff. We pay our Advisor an amount equal to our allocable portion of overhead and certain other expenses incurred by our Advisor in performing its obligations under the investment advisory agreement. No payments are due with respect to the license granted to us under the investment advisory agreement. See “Advisor — Investment Advisory Agreement — Management Fees.”

 

The investment advisory agreement may be terminated: (i) by us without penalty upon not more than 60 days written notice to the Advisor, or (ii) by the Advisor without penalty upon not less than 60 days written notice to us.

 

Our Advisor has also entered into a sub-advisory agreement with Kenmont. Kenmont is an investment advisor with experience investing in privately-held and public companies in the U.S. energy and power sectors. Kenmont provides additional contacts and enhances the number and range of potential investment opportunities in which we have the opportunity to invest. Kenmont Special Opportunities Master Fund LP purchased 666,666 of our common shares and 166,666 of our warrants in our private placement. Pursuant to the sub-advisory agreement with Kenmont, Kenmont (i) assists in identifying potential investment opportunities, subject to the right of Kenmont to first show investment opportunities that it identifies to other funds or accounts for which Kenmont is the primary advisor, (ii) assists, as requested by our Advisor but subject to a limit of 20 hours per month, in the analysis of investment opportunities, and (iii) if requested by our Advisor, will assist in hiring an additional investment professional for the Advisor who will be located in Houston, Texas and for whom Kenmont will make office space available. Kenmont does not make any investment decisions on our behalf, but will recommend potential investments to, and assist in the investment analysis undertaken by, our Advisor. Our Advisor compensates Kenmont for the services it provides to us. Our Advisor indemnifies and holds us harmless from any obligation to pay or reimburse Kenmont for any fees or expenses incurred by Kenmont in providing such services to us. Kenmont will be indemnified by the Advisor for certain claims related to the services it provides and obligations assumed under the sub-advisory agreement. In addition to any termination rights we may have under the 1940 Act, the sub-advisory agreement between the Advisor and Kenmont may be terminated by our Advisor in limited circumstances.

 

Other than the investment advisory agreement with our Advisor, we do not have any off-balance sheet arrangement that has or is reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Quantitative and Qualitative Disclosure About Market Risk

 

Our business activities contain elements of market risk. We consider changes in interest rates to be our principal market risk. We consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income is affected by changes in various interest rates, including LIBOR and prime rates. As of July 31, 2006, approximately 20% of our investment portfolio bore interest at fixed rates.

 

We invest primarily in privately-held and micro-cap public companies focused on the midstream and downstream segments, and to a lesser extent the upstream segment, of the U.S. energy infrastructure sector. We believe companies in the energy infrastructure generally produce stable cash flows as a result of their fee-based revenue and limited direct commodity price risk. Our investment objective is to provide stockholders with current income and capital appreciation. We focus our investments on unsecured, subordinated debt securities and equity securities that will generally be expected to pay us interest or dividends on a current basis. We expect to make certain investments through taxable subsidiaries in order to comply with certain federal income tax rules. We seek to obtain enhanced returns through warrants or other equity conversion features and from growth in dividends in our equity investments.

 

Companies in the midstream and downstream segments of the energy infrastructure sector engage in the business of transporting, processing, storing, distributing, or marketing natural gas, natural gas liquids, coal, crude oil, refined petroleum products and renewable energy resources. Companies in the upstream segment of the energy infrastructure sector engage in exploring, developing, managing, or producing such commodities. Our investments are expected to range between $5 million and $15 million per investment, although investment sizes may be smaller or larger than this targeted range.

 

We raised approximately $46.3 million of gross proceeds ($42.5 million of net proceeds) in a private placement of common shares and warrants completed in January 2006. Since the completion of that private placement, we have invested a total of $22.5 million in three companies in the U.S. energy infrastructure sector. Of the $22.5 million, we have invested $18.0 million in the midstream and downstream segments of the U.S. energy infrastructure sector and $4.5 million in the upstream segment of the U.S. energy infrastructure sector.

 

The following table summarizes our investments in portfolio companies as of August 24, 2006.

 

 

 

In addition, as of August 24, 2006, we had extended non-binding term sheets to two prospective new portfolio companies representing approximately $10.0 million of prospective investments. These prospective investments are currently expected to be in the form of debt instruments and are both in the midstream and downstream segments of the energy infrastructure sector. We currently expect to fund the investments described in these non-binding agreements using a portion of the remaining proceeds from our private placement. The consummation of each investment will depend upon satisfactory completion of our due

diligence investigation of the prospective portfolio company, our confirmation and acceptance of the investment terms, structure and financial covenants, the execution and delivery of final binding agreements in a form mutually satisfactory to the parties, the absence of any material adverse change and the receipt of any necessary consents. At this time, the final forms of our investments remain subject to additional negotiations with these companies.

 

We are an externally managed, non-diversified closed end investment company that intends to elect to be regulated as a BDC under the 1940 Act and intends to elect to be treated as a RIC under the Code effective as of December 1, 2006. Following our intended elections to be regulated as a BDC and to be treated as a RIC, we will be subject to numerous regulations and restrictions. Prior to the effective date of our election to be treated as a RIC, we have been and will be taxed as a general business corporation under the Code. There can be no assurance that we will be successful in becoming a RIC.

 

Our Advisor

 

We are managed by Tortoise Capital Advisors, a registered investment advisor specializing in the energy infrastructure sector. As of July 31, 2006, our Advisor managed investments of approximately $1.8 billion in the energy infrastructure, including the assets of three publicly traded closed-end management investment companies focused on the energy infrastructure sector. Our Advisor’s aggregate managed capital is among the largest of investment advisors managing closed-end management companies focused on the energy infrastructure sector. Our Advisor created TYG, the first publicly traded closed-end management company focused primarily on investing in MLPs in the energy infrastructure sector. Our Advisor also manages TYY, a publicly traded closed-end management company focused primarily on investing in MLPs and their affiliates in the energy infrastructure sector, and TYN, a publicly traded closed-end management company focused primarily on energy infrastructure investments in public companies in the United States and in Canada. The members of our Advisor’s investment committee have an average of 20 years of financial investment experience.

 

Our Advisor is controlled by KCEP and Fountain Capital.

 

Our Advisor has 20 full time employees. Four of our Advisor’s senior investment professionals are responsible for the origination, negotiation, structuring and managing of our investments. These four senior investment professionals have almost 70 years of combined experience in energy, leveraged finance and private equity investing. Each of our Advisor’s investment decisions will be reviewed and approved by its investment committee, which also acts as the investment committee for TYG, TYY and TYN.

 

Our Advisor has retained Kenmont as a sub-advisor. Kenmont is a Houston, Texas based registered investment advisor with experience investing in privately-held and public companies in the U.S. energy and power sectors. Kenmont provides additional contacts to us and enhances our number and range of potential investment opportunities. The principals of Kenmont have collectively created and managed private equity portfolios in excess of $1.5 billion and have over 50 years of experience working for investment banks, commercial banks, accounting firms, operating companies and money management firms. Our Advisor compensates Kenmont for the services it provides to us. Our Advisor also indemnifies and holds us harmless from any obligation to pay or reimburse Kenmont for any fees or expenses incurred by Kemont in providing such services to us. An affiliate of Kenmont is expected to own approximately     % of the Company’s outstanding common shares upon completion of this offering. See “Advisor — Sub-Advisor Arrangement.”

 

U.S. Energy Infrastructure Sector Focus

 

We pursue our investment objective by investing principally in a portfolio of privately-held and micro-cap public companies in the U.S. energy infrastructure sector. The energy infrastructure sector can be broadly categorized as follows:

 

 

 

We focus our investments in the midstream and downstream segments, and to a lesser extent the upstream segment, of the U.S. energy infrastructure sector. We also intend to diversify our investments among asset types and geographic regions within the U.S. energy infrastructure sector.

 

We believe that the midstream segment of the U.S. energy infrastructure sector will provide attractive investment opportunities as a result of the following factors:

 

 

We believe the downstream segment of the U.S. energy infrastructure sector also will provide attractive investment opportunities as a result of the following factors:

 

 

 

Although not part of our core focus, we believe the upstream segment of the U.S. energy infrastructure sector will benefit from strong long-term demand fundamentals and will provide attractive investment opportunities as a result of the following factors:

 

 

Market Opportunity

 

We believe the environment for investing in privately-held and micro-cap public companies in the U.S. energy infrastructure sector is attractive for the following reasons:

 

 

 

Competitive Advantages

 

We believe that we are uniquely suited to meet the financing needs of the U.S. energy infrastructure sector for the following reasons:

 

 

 

Targeted Investment Characteristics

 

We anticipate that our targeted investments will have the following characteristics:

 

 

Investment Overview

 

Our portfolio primarily is, and we expect it to continue to be, comprised of debt and equity securities acquired through individual investments of approximately $5 million to $15 million in privately-held and micro-cap public companies in the U.S. energy infrastructure sector. It is anticipated that any publicly-traded companies in which we invest will have a market capitalization of less than $100 million.

 

Investment Selection

 

Our Advisor uses an investment selection process modeled after the investment selection process utilized by our Advisor in connection with the publicly traded closed-end funds it manages, TYG, TYY and TYN. Four of our Advisor’s senior investment professionals, Messrs. Matlack, Mojica, Russell and Schulte, will be responsible for the negotiation, structuring and managing of our investments, and will operate under the oversight of our Advisor’s investment committee.

 

Target Portfolio Company Characteristics

 

We have identified several quantitative, qualitative and relative value criteria that we believe are important in identifying and investing in prospective portfolio companies. While these criteria provide general guidelines for our investment decisions, we caution you that not all of these criteria may be met by each prospective portfolio company in which we choose to invest. Generally, we intend to utilize our access to information generated by our Advisor’s investment professionals to identify prospective portfolio companies and to structure investments efficiently and effectively.

 

Midstream and Downstream Segment Focus

 

We focus on prospective companies in the midstream and downstream segments, and to a lesser extent the upstream segment, of the U.S. energy infrastructure sector.

 

Qualified Management Team

 

We generally require that our portfolio companies have an experienced management team with a verifiable track record in the relevant product or service industry. We will seek companies with management teams having strong technical, financial, managerial and operational capabilities, established appropriate governance policies, and proper incentives to induce management to succeed and act in concert with our interests as investors, including having meaningful equity investments.

 

Current Yield Plus Growth Potential

 

We focus on prospective portfolio companies with a distinct value orientation in which we can invest at relatively low multiples of operating cash flow, that generate a current cash return at the time of investment and that possess good prospects for growth. Typically, we would not expect to invest in start-up companies or companies having speculative business plans.

Distributions Received from Investments

 

We generate revenues in the form of interest payable on the debt investments that we hold, and in the form of capital gains and dividends on dividend-paying equity securities, warrants, options, or other equity interests that we have acquired in our portfolio companies. We currently intend to structure our debt investments to provide for quarterly or other periodic interest payments. In addition to the cash yields received on our investments, in some instances, our investments may also include any of the following: end of term payments, exit fees, balloon payment fees or prepayment fees, any of which may be required to be included in income prior to receipt. In some cases we may structure debt investments to provide that interest is not payable in cash, or not entirely in cash, but is instead payable in securities of the issuer or is added to the principal of the debt. The amortization of principal on our debt investments may be deferred until maturity. We also intend to acquire equity securities that pay cash dividends on a recurring or customized basis. We also expect to generate revenue in the form of commitment, origination, structuring, or diligence fees, fees for providing managerial assistance, and possibly consulting fees.

 

Strong Competitive Position

 

We focus on prospective portfolio companies that have developed strong market positions within their respective markets and that are well positioned to capitalize on growth opportunities. We seek to invest in companies that demonstrate competitive advantages that should help to protect their market position and profitability.

 

Sensitivity Analyses

 

We generally perform sensitivity analyses to determine the effects of changes in market conditions on any proposed investment. These sensitivity analyses may include, among other things, simulations of changes in energy commodity prices, changes in interest rates, changes in economic activity and other events that would affect the performance of our investment. In general, we will not commit to any proposed investment that will not provide at least a minimum return under any of these analyses and, in particular, the sensitivity analysis relating to changes in energy commodity prices.

 

Investment Process and Due Diligence

 

Although our Advisor uses research provided by third parties when available, primary emphasis is placed on proprietary analysis and valuation models conducted and maintained by our Advisor’s in-house investment professionals.

 

In conducting due diligence, our Advisor uses available public information and information obtained from its relationships with former and current management teams, vendors and suppliers to prospective portfolio companies, investment bankers, consultants and other advisors.

 

The due diligence process followed by our Advisor’s investment professionals is highly detailed and structured. Our Advisor exercises discipline with respect to company valuation and institutes appropriate structural protections in our investment agreements. After our Advisor’s investment professionals undertake initial due diligence of a prospective portfolio company, our Advisor’s investment committee will approve the initiation of more extensive due diligence by our Advisor’s investment professionals. At the conclusion of the diligence process, our Advisor’s investment committee is informed of critical findings and conclusions. The due diligence process typically includes:

 

 

 

Additional due diligence with respect to any investment may be conducted on our behalf by our legal counsel and accountants, as well as by other outside advisors and consultants, as appropriate.

 

Upon the conclusion of the due diligence process, our Advisor’s investment professionals present a detailed investment proposal to our Advisor’s investment committee. The Advisor’s four senior investment professionals have almost 70 years of combined experience in energy, leveraged finance and private equity investing. The members of our Advisor’s investment committee have an average of over 20 years of financial investment experience. All decisions to invest in a portfolio company must be approved by the unanimous decision of our Advisor’s investment committee.

 

Investment Structure and Types of Investments

 

Once our Advisor’s investment committee has determined that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers, including other senior and junior debt and equity capital providers, if any, to structure an investment. We negotiate among these parties to agree on how our investment is expected to perform relative to the other capital in the portfolio company’s capital structure. We may invest up to 30% of our total assets in assets that are non qualifying assets in among other things, high yield bonds, bridge loans, distressed debt, commercial loans, private equity, securities of public companies or secondary market purchases of securities of target portfolio companies.

 

The types of securities in which we may invest include, but are not limited to, the following:

 

Debt Investments

 

Our debt investments may be secured or unsecured. In general, our debt investments will not be control-oriented investments and we may acquire debt securities as a part of a group of investors in which we are not the lead investor. We anticipate structuring a significant amount of our debt investments as mezzanine loans. Mezzanine loans typically are unsecured, and usually rank subordinate in priority of payment to senior debt, such as senior bank debt, but senior to common and preferred equity, in a borrowers’ capital structure. We expect to invest in a range of debt investments generally having a term of five to ten years and bearing interest at either a fixed or floating rate. These loans typically will have interest-only payments in the early years, with amortization of principal deferred to the later years of the term of the loan.

 

In addition to bearing fixed or variable rates of interest, mezzanine loans also may provide an opportunity to participate in the capital appreciation of a borrower through an equity interest. We expect this equity interest will typically be in the form of a warrant. Due to the relatively higher risk profile and often less restrictive covenants, as compared to senior loans, mezzanine loans generally earn a higher return than senior loans. The warrants associated with mezzanine loans are typically detachable, which allows lenders to receive repayment of principal while retaining their equity interest in the borrower. In some cases, we

anticipate that mezzanine loans may be collateralized by a subordinated lien on some or all of the assets of the borrower.

 

In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest. To the extent interest is payment-in-kind, it will likely be payable through the increase of the principal amount of the loan by the amount of interest due on the then-outstanding aggregate principal amount of such loan.

 

We tailor the terms of our debt investments to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that aims to protect our rights and manage risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. For example, in addition to seeking a position senior to common and preferred equity in the capital structure of our portfolio companies, we will seek, where appropriate, to limit the downside potential of our debt investments by:

 

 

As described above, our debt investments may include equity features, such as warrants or options to buy a minority interest in the portfolio company. Warrants we receive in connection with an investment in debt may require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the portfolio company, upon the occurrence of specified events. In certain cases, we also may obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.

 

Equity Investments

 

Our equity investments will likely consist of preferred equity that is expected to pay dividends on a current basis, preferred equity that does not pay current dividends or common equity. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In general, our equity investments will not be control-oriented investments and we may acquire equity securities as part of a group of private equity investors in which we are not the lead investor. In many cases, we also may obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.

 

In addition to common and preferred stock, we may purchase limited liability company interests, limited partner interests, convertible securities, warrants and depository receipts of companies that are organized as corporations, limited liability companies or limited partnerships.

 

Taxable Subsidiaries

 

We expect to form one or more directly or indirectly wholly-owned taxable subsidiaries to make investments in accordance with our investment objective, generally with respect to investments in non-traded limited partnerships, in order to comply with federal income tax rules.

 

We will value our investment in such a subsidiary based on the net asset value of the subsidiary. The net asset value of the subsidiary will be computed by subtracting from the value of all of the subsidiary’s assets all of its liabilities, including but not limited to taxes. The subsidiary’s portfolio securities will be valued

in accordance with the same valuation procedures applied to our portfolio companies. See “Determination of Net Asset Value.”

 

Investments

 

We believe that our Advisor’s expertise in investing in small and middle market companies in the midstream and downstream segments of the U.S. energy infrastructure sector, and our Advisor’s experience as an investment advisor in the energy infrastructure sector, positions our Advisor to identify and capitalize on desirable investment opportunities. In addition, we believe that our Advisor’s regular contact with companies in the energy infrastructure sector, investment bankers engaged in financing and merger and acquisition advisory work, and other professionals providing services to growth companies in the energy infrastructure sector, will contribute to the number of quality investment opportunities that we can evaluate.

 

Since the completion of our approximately $46.3 million private placement in January 2006, we have invested approximately $22.5 million in three portfolio companies in the energy infrastructure sector through the acquisition of limited liability company units, limited partnership interests and a debenture. For a more detailed description of these investments, see “Portfolio Companies.”

 

Ongoing Relationships with Portfolio Companies

 

Monitoring

 

The investment professionals of our Advisor monitor each portfolio company to determine progress relative to meeting the company’s business plan and to assess the appropriate strategic and tactical courses of action for the company. This monitoring may be accomplished by attendance at board of directors meetings, the review of periodic operating reports and financial reports, an analysis of relevant reserve information and capital expenditure plans, and periodic consultations with engineers, geologists, and other experts. The performance of each portfolio company is also periodically compared to performance of similarly sized companies with comparable assets and businesses to assess performance relative to peers. Our Advisor’s monitoring activities are expected to provide it with the necessary access to monitor compliance with existing covenants, to enhance its ability to make qualified valuation decisions, and to assist its evaluation of the nature of the risks involved in each individual investment. In addition, these monitoring activities should permit our Advisor to diagnose and manage the common risk factors held by our total portfolio, such as sector concentration, exposure to a single financial sponsor, or sensitivity to a particular geography.

 

As part of the monitoring process, our Advisor continually assesses the risk profile of each of our investments and rates them on a scale of 1 to 3 based on the following categories:

 

 

As of the date of this prospectus, all of our portfolio companies have a rating of (1).

 

Managerial Assistance

 

The investment professionals of our Advisor make available, and will provide upon request, significant managerial assistance to our portfolio companies. This assistance may involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings,

consulting with and advising the management teams of our portfolio companies, assisting in the formulation of their strategic plans, and providing other operational, organizational and financial consultation. Involvement with each portfolio company will vary based on a number of factors.

 

Valuation Process

 

We value our portfolio in accordance with generally accepted accounting principles and will rely on multiple valuation techniques, reviewed on a quarterly basis by our board of directors. As most of our investments are not expected to have market quotations, our board of directors will undertake a multi-step valuation process each quarter, as described below:

 

 

Competition

 

We compete with public and private funds, commercial and investment banks and commercial financing companies to make the types of investments that we plan to make in the U.S. energy infrastructure sector. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, allowing them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act would impose on us as a result of our election to be regulated as a BDC and that we will be required to comply with in order to qualify as a RIC. These competitive conditions may adversely affect our ability to make investments in the energy infrastructure sector and could adversely affect our distributions to stockholders.

 

Brokerage Allocation and Other Practices

 

Since we will generally acquire and dispose of our investments in privately negotiated transactions, we infrequently will use brokers in the normal course of our business. Subject to policies established by our board of directors, we do not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we will generally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly on brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if it determines in good faith that such commission is reasonable in relation to the services provided.

Proxy Voting Policies

 

We, along with our Advisor have adopted proxy voting policies and procedures (“Proxy Policy”), that we believe are reasonably designed to ensure that proxies are voted in our best interests and the best interests of our stockholders. Subject to its oversight, the board of directors has delegated responsibility for implementing the Proxy Policy to our Advisor.

 

In the event requests for proxies are received with respect to the voting of equity securities, on routine matters, such as election of directors or approval of auditors, the proxies usually will be voted with management unless our Advisor determines it has a conflict or our Advisor determines there are other reasons not to vote with management. On non-routine matters, such as amendments to governing instruments, proposals relating to compensation and stock option and equity compensation plans, corporate governance proposals and stockholder proposals, our Advisor will vote, or abstain from voting if deemed appropriate, on a case by case basis in a manner it believes to be in the best economic interest of our stockholders. In the event requests for proxies are received with respect to debt securities, our Advisor will vote on a case by case basis in a manner it believes to be in the best economic interest of our stockholders.

 

Our Chief Executive Officer is responsible for monitoring our actions and ensuring that (i) proxies are received and forwarded to the appropriate decision makers, and (ii) proxies are voted in a timely manner upon receipt of voting instructions. We are not responsible for voting proxies we do not receive, but will make reasonable efforts to obtain missing proxies. Our Chief Executive Officer will implement procedures to identify and monitor potential conflicts of interest that could affect the proxy voting process, including (i) significant client relationships, (ii) other potential material business relationships, and (iii) material personal and family relationships. All decisions regarding proxy voting will be determined by our Advisor’s investment committee and will be executed by our Chief Executive Officer. Every effort will be made to consult with the portfolio manager and/or analyst covering the security. We may determine not to vote a particular proxy, if the costs and burdens exceed the benefits of voting (e.g., when securities are subject to loan or to share blocking restrictions).

 

If a request for proxy presents a conflict of interest between our stockholders on one hand, and our Advisor, the principal underwriters, or any affiliated persons of ours, on the other hand, our management may (i) disclose the potential conflict to the board of directors and obtain consent, or (ii) establish an ethical wall or other informational barrier between the persons involved in the conflict and the persons making the voting decisions.

 

Staffing

 

We do not currently have or expect to have any employees. Services necessary for our business will be provided by individuals who are employees of our Advisor, pursuant to the terms of the investment advisory agreement. Each of our executive officers described under “Management” is an employee of our Advisor or Fountain Capital.

 

Properties

 

Our office is located at 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.

 

Legal Proceedings

 

Neither we nor our Advisor are currently subject to any material legal proceedings.

 

As of August 24, 2006, we had invested a total of $22.5 million in three portfolio companies in the U.S. energy infrastructure sector. The following table sets forth a brief description of each portfolio company and a description of the investment we have made in each such company. We may on occasion hold seats on the board of directors of a portfolio company and endeavor to obtain board observation rights with respect to our portfolio companies.

 

 

 

Portfolio Company Descriptions

 

Eagle Rock Pipeline, L.P. (“Eagle Rock”)

 

Eagle Rock was formed by a management team with significant midstream operating experience in companies such as Enbridge Inc. and Dynegy Inc. and funded by their equity sponsor, Natural Gas Partners, LLC. The Company identifies, purchases and improves under-performing gathering and processing assets. We purchased $12.5 million of LP Interests in Eagle Rock on March 27, 2006. On June 5, 2006, Eagle Rock filed a registration statement with the SEC to register the sale of its units in an initial public offering. The offering is intended primarily to provide Eagle Rock with liquidity for additional acquisitions, but a portion of the proceeds will be used to fund a distribution to existing unitholders, including us. Contemporaneous with the anticipated closing of its initial public offering, Eagle Rock is expected to merge into a new entity to be called Eagle Rock Energy Partners, L.P. Eagle Rock’s principal office is located at 14950 Heathrow Forest Pkwy., Suite 111, Houston, TX 77032.

 

Mowood, LLC (“Mowood”)

 

We purchased 100% ownership in Mowood, a holding company whose sole asset is a wholly-owned operating company, Omega Pipeline, LLC (“Omega”). Omega is a natural gas local distribution company located on Fort Leonard Wood in southwest Missouri. Omega is in the second year of a ten-year contract with the Department of Defense pursuant to which it provides natural gas to Fort Leonard Wood. We invested $1.0 million in LLC units and purchased a $4.5 million subordinated debenture on June 1, 2006. Mowood’s principal office is located at P.O. Box 2861, Ordinance Street, Building 2570, Fort Leonard Wood, MO 65473.

 

Legacy Reserves LP (“Legacy”)

 

Legacy has purchased, and expects to continue to purchase, mature properties in the Permian Basin that generate stable volumes of oil and natural gas with low rates of decline. Legacy focuses on the exploitation of proved developed reserves, instead of the more risky exploration of undeveloped reserves and has hedged over 60% of production volumes expected over the next five years. We purchased $4.5 million of LP Interests in Legacy on March 6, 2006. Legacy’s principal office is located at 303 West Wall, Suite 1500, Midland, TX 79701.

 

Our board of directors provides the overall supervision and review of our affairs. Management of our portfolio is the responsibility of our Advisor’s investment committee. Our Advisor’s investment committee is composed of five senior investment professionals, all of whom are managers of our Advisor. Our Advisor has four senior investment professionals who are responsible for the negotiation, structuring and managing of our investments. Those senior investment professionals are Messrs. Matlack, Mojica, Russell and Schulte, of whom Messrs. Mojica and Russell are exclusively dedicated to our activities. The Advisor’s four senior investment professionals have almost 70 years of combined experience in energy, leveraged finance and private equity investing. For biographical information about our Advisor’s investment professionals, see “Advisor.”

 

Investment Committee

 

Management of our portfolio will be the responsibility of our Advisor’s investment committee. Our Advisor’s investment committee is comprised of its five Managing Directors: H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey, Terry C. Matlack and David J. Schulte. All decisions to invest in a portfolio company must be approved by the unanimous decision of our Advisor’s investment committee and any one member of our Advisor’s investment committee can require our Advisor to sell a security. Biographical information about each member of our Advisor’s investment committee is set forth under “Management — Directors and Officers,” below.

 

The following table provides information about the other accounts managed on a day-to-day basis by each member of our Advisor’s investment committee as of July 31, 2006:

 

 

None of Messrs. Birzer, Hamel, Malvey, Matlack or Schulte receives any direct compensation from the Company or any other of the managed accounts reflected in the table above. All such accounts are managed by the Advisor, Fountain Capital or KCEP. Messrs. Schulte and Matlack are full-time employees of the Advisor and receive a fixed salary for the services they provide. Fountain Capital is paid a fixed monthly fee, subject to adjustment, for the services of Messrs. Birzer, Hamel or Malvey. Each of Messrs. Birzer, Hamel, Malvey, Matlack and Schulte own an equity interest in either KCEP or Fountain Capital, the two entities that control the Advisor, and each thus benefits from increases in the net income of the Advisor, KCEP or Fountain Capital.

 

Directors and Officers

 

Our business and affairs are managed under the direction of our board of directors. Accordingly, our board of directors provides broad supervision over our affairs, including supervision of the duties performed by our Advisor. Certain employees of our Advisor are responsible for our day-to-day operations. The names, ages and addresses of our directors and officers and specified employees of our Advisor, together with their principal occupations and other affiliations during the past five years, are set forth below. Each director and officer will hold office for the term to which he is elected and until his successor is duly elected and qualifies, or until he resigns or is removed in the manner provided by law. Unless otherwise indicated, the address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210. Our board of directors consists of a majority of directors who are not “interested persons” (as defined in the 1940 Act) of our Advisor or its affiliates. The directors who are “interested persons” (as defined in the 1940 Act) are referred to as “Interested Directors.” Under our Charter, the board is divided into three classes. Each class of directors will hold office for a three year term. However, the initial members of the three classes have initial terms of one, two and three years, respectively. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify.

 

The directors and officers of the Company and their principal occupations and other affiliations during the past five years are set forth below. Each director and officer will hold office until his successor is duly elected and qualified, or until he resigns or is removed in the manner provided by law. The address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.

 

 

Audit Committee

 

Our board of directors has a standing Audit Committee that consists of three directors of the Company who are not “interested persons” (within the meaning of the 1940 Act) (“Independent Directors”). The Audit Committee’s function is to select independent accountants to conduct the annual audit of our financial statements, review with the independent accountants the outline, scope and results of this annual audit and review the performance and approval of all fees charged by the independent accountants for audit, audit-related and other professional services. In addition, the Audit Committee meets with the independent accountants and representatives of management to review accounting activities and areas of financial reporting and control. For purposes of the Sarbanes-Oxley Act, the Audit Committee has at least one member who is deemed to be a financial expert. The Audit Committee operates under a written charter approved by the Board of Directors. The Audit Committee meets periodically, as necessary, but has not yet held a meeting. The Audit Committee members are Mr. Ciccotello (Chairman), Mr. Graham, and Mr. Heath.

 

Nominating Committee

 

We have a Nominating Committee that consists exclusively of three Independent Directors. The Nominating Committee’s function is to (1) identify individuals qualified to become Board members and recommend to the Board the director nominees for the next annual meeting of stockholders and to fill any vacancies; (2) monitor the structure and membership of Board committees; recommend to the Board director nominees for each committee; (3) review issues and developments related to corporate governance issues and develop and recommend to the Board corporate governance guidelines and procedures, to the extent necessary or desirable; and (4) actively seek individuals who meet the standards for directors set forth in our Bylaws, who meet the requirements of any applicable laws or exchange requirements and who are otherwise qualified to become board members for recommendation to the Board. The Nominating Committee will consider stockholder recommendations for nominees for membership to the Board so long as such recommendations are

made in accordance with the Company’s Bylaws. The Nominating Committee members are Conrad S. Ciccotello, John R. Graham (Chairman), and Charles E. Heath.

 

Compensation Table

 

Our directors and officers who are interested persons receive no salary or fees from us. Each Independent Director receives from us an annual retainer of $20,000 and a fee of $4,000 (and reimbursement for related expenses) for each meeting of the Board or Audit Committee he or she attends in person (or $1,000 for each Board or Audit Committee meeting attended telephonically, or for each Audit Committee meeting attended in person that is held on the same day as a Board meeting). Except as noted for Audit Committee members, Independent Director also receives $1,000 for each other committee meeting attended in person or telephonically. The Chairman of the Audit Committee receives an additional annual retainer of $10,000.

 

The table below sets forth the compensation paid to our board of directors by TYG, TYY, TYN and us during fiscal 2006. We do not compensate our officers. No director or officer is entitled to receive pension or retirement benefits from us.

 

 

 

Tortoise Capital Advisors, a registered investment advisor, will serve as our investment advisor. Our Advisor was formed in October 2002 and has been managing investments in portfolios of MLPs in the energy infrastructure sector since that time. Our Advisor also manages the investments of TYG, TYY and TYN. TYG is a non-diversified, closed-end management investment company that was created to invest principally in MLPs in the energy infrastructure sector. TYY is a non-diversified, closed-end management investment company that was created to invest primarily in MLPs and their affiliates in the energy infrastructure sector. TYN is a non-diversified, closed-end management investment company that was created to invest primarily in energy infrastructure investments in public companies in the United States and Canada. As of July 31, 2006, our Advisor had client assets under management of approximately $1.8 billion.

 

 

Our Advisor is controlled equally by KCEP and Fountain Capital.

 

 

Our Advisor currently has four senior investment professionals who are responsible for the origination, negotiation, structuring and managing of our investments. Two of those senior investment professionals are Messrs. Matlack and Schulte, who are also Managing Directors of KCEP. The other two senior investment professionals are Messrs. Mojica and Russell, both of whom are dedicated to our activities. The Advisor’s four senior investment professionals have almost 70 years of combined experience in energy, leveraged finance and private equity investing. Their biographical information is set forth below.

 

 

Our Advisor has 20 full time employees, but also relies to a significant degree on the officers, employees, and resources of Fountain Capital. Three of the five members of the investment committee of our Advisor are affiliates of, but not employees of, our Advisor, and each has other significant responsibilities with Fountain Capital, which conducts businesses and activities of its own in which our Advisor has no economic interest. If these separate activities are significantly greater than our Advisor’s activities, there could be material competition for the efforts of key personnel.

 

Each of our Advisor’s investment decisions will be reviewed and approved for us by its investment committee, which also acts as the investment committee for TYG, TYY and TYN. Our Advisor’s investment committee is comprised of its five Managing Directors: H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey, Terry C. Matlack and David J. Schulte. Messrs. Birzer, Hamel and Malvey are each Partners/Senior

Analysts with Fountain Capital. The members of our Advisor’s investment committee have an average of over 20 years of financial investment experience.

 

Conflicts of Interests

 

Our senior professionals have a conflict of interest in allocating potentially more favorable investment opportunities to us and other funds and clients that pay our Advisor an incentive or performance fee. Performance and incentive fees also create the incentive to allocate potentially riskier, but potentially better performing, investments to us in an effort to increase the incentive fee. Our Advisor may also have an incentive to make investments by one fund, having the effect of increasing the value of a security in the same issuer held by another fund, which in turn may result in an incentive fee being paid to our Advisor by that other fund. However, senior professionals of our Advisor manage potential conflicts of interest by allocating investment opportunities in accordance with written allocation policies and procedures.

 

Investment Advisory Agreement

 

Management Services

 

Pursuant to an investment advisory agreement, our Advisor will be subject to the overall supervision and review of our board of directors, provide us with investment research, advice and supervision and will furnish us continuously with an investment program, consistent with our investment objective and policies. Our Advisor also will determine from time to time what securities we shall purchase, and what securities shall be held or sold, what portions of our assets shall be held uninvested as cash, short duration high yield securities or in other liquid assets, will maintain books and records with respect to all of our transactions, and will report to our board of directors on our investments and performance.

 

Our Advisor’s services to us under the investment advisory agreement will not be exclusive, and our Advisor is free to furnish the same or similar services to other entities, including businesses which may directly or indirectly compete with us, so long as our Advisor’s services to us are not impaired by the provision of such services to others. Under the investment advisory agreement and to the extent permitted by the 1940 Act, our Advisor will also provide on our behalf significant managerial assistance to portfolio companies to which we are required to provide such assistance under the 1940 Act and who require such assistance from us.

 

Administration Services

 

Pursuant to the investment advisory agreement, our Advisor also furnishes us with office facilities and clerical and administrative services necessary for our operation (other than services provided by our custodian, accounting agent, administrator, dividend and interest paying agent and other service providers). Our Advisor is authorized to cause us to enter into agreements with third parties to provide such services. To the extent we request, our Advisor will (i) oversee the performance and payment of the fees of our service providers and make such reports and recommendations to the board of directors concerning such matters as the parties deem desirable, (ii) respond to inquiries and otherwise assist such service providers in the preparation and filing of regulatory reports, proxy statements, and stockholder communications, and the preparation of materials and reports for the board of directors; (iii) establish and oversee the implementation of borrowing facilities or other forms of leverage authorized by the board of directors and (iv) supervise any other aspect of our administration as may be agreed upon by us and our Advisor. We have agreed, pursuant to the investment advisory agreement, to reimburse our Advisor or its affiliate for all out-of-pocket expenses incurred in providing the foregoing services.

 

Management Fee

 

Pursuant to the investment advisory agreement, we will pay our Advisor a fee consisting of two components — a base management fee and an incentive fee in return for the management and administration services described above. For a discussion regarding the basis for our board of director’s approval of the investment advisory agreement, see “Advisor — Board Approval of Investment Advisory Agreement.” This discussion will also be available in our annual report to stockholders.

The base management fee is 0.375% (1.5% annualized) of our Managed Assets, calculated and paid quarterly in arrears within 15 days of the end of each calendar quarter. The term “Managed Assets” as used in the calculation of the management fee means our average monthly total assets (including any assets purchased with any borrowed funds). The base management fee for any partial quarter will be appropriately prorated.

 

The incentive fee consists of two parts. The first part, the investment income fee, is calculated and payable quarterly in arrears and will equal 15% of the excess, if any, of our Net Investment Income for the quarter over a quarterly hurdle rate equal to 2% (8% annualized) of our Net Assets at the end of such quarter (defined as our managed assets minus our indebtedness). For purposes of calculating the investment income fee, “Net Investment Income” shall mean interest income, dividend income, and any other income (including any fees such as commitment, origination, syndication, structuring, diligence, monitoring, and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable by us, any interest expense, any tax expense and dividends paid on issued and outstanding preferred stock, if any, but excluding the incentive fees payable to our Advisor). Accordingly, we may pay an incentive fee based partly on accrued interest, the collection of which is uncertain or deferred. Net Investment Income also includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest, and zero coupon securities), accrued income that we have not yet received in cash. Net Investment Income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. The investment income fee is payable within fifteen days of the end of each calendar quarter but no investment income fee will be paid or earned until December 8, 2006. The investment income fee for any partial quarter will be appropriately prorated.

 

The second part of the incentive fee payable to our Advisor, the capital gains fee, is calculated and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement, as of the termination date), and equals: (i) 15% of (a) our net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from the closing of this offering to the end of each calendar year, less (b) any unrealized capital depreciation at the end of such calendar year, less (ii) the aggregate amount of all capital gains fees paid to our Advisor in prior years. Realized capital gains on a security will be calculated as the excess of the net amount realized from the sale or other disposition of such security over the original cost for that security. Realized capital losses on a security will be calculated as the amount by which the net amount realized from the sale or other disposition of such security is less than the original cost of such security. Unrealized capital depreciation on a security will be calculated as the amount by which our original cost of such security exceeds the fair value of such security at the end of a calendar year. Our Advisor will use at least 25% of any capital gains fees received from us at any time on or prior to December 8, 2007 to purchase our common shares. We will determine all fiscal year-end valuations in accordance with generally accepted accounting principles, the 1940 Act, and our policies and procedures to the extent consistent therewith. In the event the investment advisory agreement is terminated, the capital gains fee calculation will be undertaken as of, and any resulting capital gains fee will be paid within fifteen days of, the date of termination.

 

The payment of the investment income fee portion of the incentive compensation on a quarterly basis may lead our Advisor to accelerate or defer interest payable by our portfolio companies in a manner that could result in fluctuations in the timing and amount of dividends.

 

The following examples are intended to assist in an understanding of the two components of the incentive fee. These examples are not intended as an indication of our expected performance.

Examples of Quarterly Incentive Fee Calculation

 

Example 1: Income Related Portion of Incentive Fee(1):

 

Assumptions

 

 

 

 

Alternative 1

 

Additional Assumptions

 

 

 

Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.

 

Alternative 2

 

Additional Assumptions

 

 

Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.

 

 

 

(1) The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of our net assets.

(2) Represents 8.0% annualized hurdle rate.

(3) Represents 1.5% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we maintain no cash or cash equivalents.

(4) Excludes organizational and offering expenses.

Example 2: Capital Gains Portion of Incentive Fee:

 

Alternative 1

 

Assumptions

 

 

The impact, if any, on the capital gains portion of the incentive fee would be:

 

 

Alternative 2

 

Assumptions

 

 

The impact, if any, on the capital gains portion of the incentive fee would be:

 

 

Alternative 3

 

Assumptions

 

 

The impact, if any, on the capital gains portion of the incentive fee would be:

 

 

Alternative 4

 

Assumptions

 

 

The impact, if any, on the capital gains portion of the incentive fee would be:

 

 

Payment of Our Expenses

 

We will bear all expenses not specifically assumed by our Advisor and incurred in our operations, we have borne the expenses related to the private placement of our common shares and warrants and we will bear the expenses related to this offering. The compensation and allocable routine overhead expenses of all investment professionals of our Advisor and its staff, when and to the extent engaged in providing us investment advisory services, is provided and paid for by our Advisor and not us. The compensation and expenses borne by us include, but are not limited to, the following:

 

 

 

Duration and Termination

 

The investment advisory agreement was approved by our board of directors on September 12, 2005. Unless terminated earlier as described below, it will continue in effect for a period of two years from its effective date. It will remain in effect from year to year thereafter if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, upon approval by a majority of our directors who are not interested persons or parties to the investment advisory agreement. The investment advisory agreement will automatically terminate in the event of its assignment. The investment advisory agreement may be terminated by us without penalty upon not more than 60 days’ written notice to our Advisor. The investment advisory agreement may also be terminated by our Advisor without penalty upon not less than 60 days’ written notice to us.

 

Liability of Advisor

 

The investment advisory agreement provides that our Advisor will not be liable to us in any way for any default, failure or defect in any of the securities comprising our portfolio if it has satisfied the duties and the standard of care, diligence and skill set forth in the investment advisory agreement. However, our Advisor will be liable to us for any loss, damage, claim, cost, charge, expense or liability resulting from our Advisor’s willful misconduct, bad faith or gross negligence or disregard by our Advisor of its duties or standard of care, diligence and skill set forth in the investment advisory agreement or a material breach or default of our Advisor’s obligations under that agreement.

 

Board Approval of the Investment Advisory Agreement

 

Our board of directors, including a majority of the independent directors, reviewed and approved the investment advisory agreement on September 12, 2005.

 

In considering the approval of the investment advisory agreement, our board of directors evaluated information provided by our Advisor and their legal counsel and considered various factors, including the following:

 

 

 

Based on the information reviewed and the discussions among the members of our board of directors, our board of directors, including all of our independent directors, approved the investment advisory agreement and the administration agreement and concluded that the management fee rates were reasonable in relation to the services to be provided.

 

License Agreement

 

Pursuant to the investment advisory agreement, our Advisor has consented to our use on a non-exclusive, royalty-free basis, of the name “Tortoise” in our name. We will have the right to use the “Tortoise” name so long as our Advisor or one of its approved affiliates remains our investment advisor. Other than with respect to this limited right, we will have no legal right to the “Tortoise” name. This right will remain in effect for so long as the investment advisory agreement with our Advisor is in effect and will automatically terminate if the investment advisory agreement were to terminate for any reason, including upon its assignment.

 

Sub-Advisor Arrangement

 

The investment advisory agreement authorizes our Advisor to delegate any or all of its rights, duties and obligations to one or more sub-advisors upon receipt of approval of such sub-advisor by our board of directors and stockholders (unless such approval is not required by the relevant statutes, rules, regulations, interpretations, orders, or similar relief). Our Advisor has entered into a sub-advisory agreement with Kenmont.

 

Kenmont is a Houston, Texas based registered an investment advisor with experience investing in privately-held and public companies in the U.S. energy and power sectors. Kenmont provides additional contacts and enhances the number and range of potential investment opportunities in which we have the opportunity to invest. Kenmont Special Opportunities Master Fund LP purchased 666,666 of our common shares and 166,666 of our warrants in the initial closing of our offering of common shares and warrants on December 8, 2005. Pursuant to the sub-advisory agreement with Kenmont, Kenmont (i) assists in identifying potential investment opportunities, subject to the right of Kenmont to first show investment opportunities that it identifies to other funds or accounts for which Kenmont is the primary advisor, (ii) assists, as requested but subject to a limit of 20 hours per month, in the analysis of investment opportunities as requested by our Advisor, and (iii) if requested by our Advisor, assists in hiring an additional investment professional for the Advisor who will be located in Houston, Texas and for whom Kenmont will make office space available. Kenmont will not make any investment decisions on our behalf, but will recommend potential investments to, and assist in the investment analysis undertaken by, our Advisor. Our Advisor compensates Kenmont for the services it provides to us. Our Advisor indemnifies and holds us harmless from any obligation to pay or reimburse Kenmont for any fees or expenses incurred by Kenmont in providing such services to us. Kenmont will be indemnified by us for certain claims related to the services it provides. In addition to any termination rights we may have under the 1940 Act, the sub-advisory agreement between the Advisor and Kenmont may be terminated by our Advisor in limited circumstances.

 

Kenmont is a Texas limited partnership that serves as investment advisor to pooled investment vehicles and managed accounts. The principals of Kenmont have collectively created and managed private equity portfolios in excess of $1.5 billion and have over 50 years of experience working for investment banks, commercial banks, accounting firms, operating companies and money management firms.

 

We have entered into the investment advisory agreement with our Advisor, an entity in which certain of our officers and directors have ownership and financial interests. Our Advisor’s services under the investment advisory agreement will not be exclusive, and it is free to furnish the same or similar services to other entities, including businesses that may directly or indirectly compete with us so long as its services to us are not impaired by the provision of such services to others. In addition, the publicly traded funds and private accounts managed by our Advisor may make investments similar to investments that we may pursue. Although we currently are not generally targeting similar investment opportunities as other entities advised by our Advisor, this may change in the future. It is thus possible that our Advisor might allocate investment opportunities to other entities, and thus might divert attractive investment opportunities away from us. However, our Advisor intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, so that we will not be disadvantaged in relation to any other client.

 

Our independent directors will review any investment decisions that may present potential conflicts of interest among our Advisor and its affiliates and us in accordance with specific procedures and policies adopted by our board of directors.

 

Pursuant to the investment advisory agreement, our Advisor has consented to our use on a non-exclusive, royalty-free basis, of the name “Tortoise” in our name. We will have the right to use the “Tortoise” name so long as our Advisor or one of its approved affiliates remains our investment advisor. Other than with respect to this limited right, we will have no legal right to the “Tortoise” name. This right will remain in effect for so long as the investment advisory agreement with our Advisor is in effect and will automatically terminate if the investment advisory agreement were to terminate for any reason, including upon its assignment.

 

Our Advisor has entered into a sub-advisory agreement with Kenmont. Kenmont is an investment advisor with experience investing in privately-held and public companies in the U.S. energy and power sectors. Kenmont provides additional contacts and enhances the number and range of potential investment opportunities in which we have the opportunity to invest. Our Advisor compensates Kenmont for the services it provides to us. Our Advisor also indemnifies and holds us harmless from any obligation to pay or reimburse Kenmont for any fees or expenses incurred by Kenmont in providing such services to us. Kenmont will be indemnified by the Advisor for certain claims related to the services it provides and obligations assumed under the sub-advisory agreement. Kenmont Special Opportunities Master Fund LP, an affiliate of Kenmont, purchased 666,666 of our common shares and 166,666 of our warrants in the initial closing of our offering of common shares and warrants on December 8, 2005.

 

The following table sets forth certain beneficial ownership information with respect to our common shares for those persons who directly or indirectly own, control or hold with the power to vote, 5% or more of our common shares prior to this offering and all our officers and directors and the managing directors of our Advisor, as a group. One of the beneficial owners of more than 5% of our common shares is Kenmont Special Opportunities Master Fund LP, an affiliate of our sub-advisor Kenmont. Except as otherwise noted, the address for all stockholders in the table below is c/o Tortoise Capital Advisors, 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.

 

 

 

 

The following table sets forth the dollar range of equity securities beneficially owned by each of our directors as of May 31, 2006.