FS Energy & Power Fund - A Business Development Company

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An investment in common shares of FS Energy & Power Fund involves a high degree of risk and may be considered speculative. A more detailed description of the risk factors is found in the section of the prospectus entitled "Risk Factors." You should read and understand all of these risk factors before deciding to invest in our common shares. The following are some of the risks an investment in us involves:

We are a relatively new company and have limited operating history and are subject to the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives.
While the management team of FS Investment Advisor, LLC, our investment adviser ("FS Advisor"), consists of the same personnel that form the investment and operations team of FB Income Advisor, LLC (the adviser to Franklin Square’s first affiliated business development company, FS Investment Corporation), before advising us, FS Advisor had not managed a BDC or a regulated investment company, or RIC. Therefore, FS Advisor may not be able to successfully operate our business or achieve our investment objectives.
Economic activity in the United States was impacted by the global financial crisis of 2008 and has yet to fully recover. These conditions may make it more difficult for us to achieve our investment objectives.
Because there is no public trading market for our common shares and we are not obligated to effectuate a liquidity event by a specified date, it will be difficult for investors to sell their common shares.
While we intend to conduct quarterly tender offers for a limited number of our common shares pursuant to our share repurchase program beginning in the fourth calendar quarter of 2012, we may suspend or terminate the share repurchase program at any time.
The amount of any distributions we may make is uncertain. Our distribution proceeds have exceeded, and in the future may exceed our earnings, particularly during the period before we have substantially invested the net proceeds from this offering. Therefore, portions of the distributions that we make may represent a return of capital to you for tax purposes. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities and will be made after deduction of the fees and expenses payable in connection with the offering, including any fees payable to FS Advisor.
We have elected to be treated, and intend to qualify annually as a RIC for federal income tax purposes. Failure to maintain our qualifications as a RIC would subject us to federal income tax on all of our income, which would have a material adverse effect on our financial performance.
As a result of the annual distribution requirement to maintain our qualification as a RIC, we will likely need to continually raise cash or borrow to fund new investments. At times, these sources of funding may not be available to us on acceptable terms, if at all.
We are subject to financial market risks, including changes in interest rates, which may have a substantial negative impact on our investments.
An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies.
Our investment policy is to invest, under normal circumstances, at least 80% of our assets in securities of energy and power companies. The revenues, income (or losses) and valuations of energy and power companies can fluctuate suddenly and dramatically due to a number of environmental, regulatory, political and general market risks, which will impact our financial performance.
A significant portion of our portfolio is recorded at fair value as determined in good faith by our board of trustees and, as a result, there will be uncertainty as to the value of our portfolio investments.
We have not identified specific future investments that we will make with the proceeds of this offering, and therefore investors will not have the opportunity to evaluate our investments prior to purchasing our common shares.
We invest primarily in income-oriented securities of privately-held energy and power companies within the United States, including small and middle market companies. We intend to weight our portfolio towards senior and subordinated debt, but our portfolio may also include select income-oriented preferred or common equity interests that we believe will produce both current income and long-term capital appreciation. The senior debt in which we invest will typically be secured by assets of the issuing company. The collateral securing these investments may decrease in value or lose its entire value over time or may fluctuate based on the performance of the portfolio company which may lead to a loss in principal. Subordinated debt investments are typically unsecured, as are preferred and common equity interests, and this may involve a heightened level of risk, including a loss of principal or the loss of the entire investment.
The potential for FS Advisor to earn incentive fees under the investment advisory and administrative services agreement may create an incentive for it to enter into investments that are riskier or more speculative than would otherwise be in our best interests, and, since the base management fee is based on gross assets, FS Advisor may have an incentive to increase portfolio leverage in order to earn higher base management fees. In addition, since GSO Capital Partners LP, our investment sub-adviser ("GSO"), will receive a portion of the advisory fees paid to FS Advisor, GSO may have an incentive to recommend investments that are riskier or more speculative.
This is a ‘‘best efforts’’ offering and if we are unable to raise substantial funds then we will be more limited in the number and type of investments we may make.
FS Advisor, its affiliates and GSO face conflicts of interest as a result of compensation arrangements, time constraints, competition for investments, which they will attempt to resolve in a fair and equitable manner, but which may result in actions that are not in our shareholders’ best interests.
The purchase price at which investors purchase common shares will be determined at each semi-monthly closing date. As a result, such purchase price may be higher than the prior semi-monthly closing price per share, and therefore investors may receive a smaller number of common shares than if they had subscribed at the prior semi-monthly closing price.
The total return swap, or TRS, entered into by our wholly-owned financing subsidiary exposes us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage.
The agreements governing our wholly-owned financing subsidiary's credit facility contain various covenants which, if not complied with, could accelerate repayment under the credit facility, which would materially and adversely affect our liquidity, financial condition and our ability to pay distributions to our shareholders. In addition, the credit facility exposes us to the risks of borrowing, also known as leverage, which may be considered a speculative investment technique. Leverage increases the volatility of investments by magnifying the potential for gain and loss on amounts invested, therefore increasing the risks associated with investing in our securities.
Our portfolio investments, especially until we raise significant capital from this offering, may be concentrated in a limited number of portfolio companies, which would magnify the effect of any losses suffered by a few of these investments.