Fifth Street Asset Management Inc. - FORM 10-K

Fifth Street Asset Management Inc. - FORM 10-K - March 18, 2016

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Attached files

Fifth Street Asset Management Inc. Reports

file	filename
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - Fifth Street Asset Management Inc.	fsam-ex312_2015123110xk.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - Fifth Street Asset Management Inc.	fsam-ex311_2015123110xk.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Fifth Street Asset Management Inc.	fsam-ex321_2015123110xk.htm
EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - Fifth Street Asset Management Inc.	fsam-ex231_2015123110xk.htm
EX-23.2 - CONSENT OF COHNREZNICK LLP - Fifth Street Asset Management Inc.	fsam-ex232_2015123110xk.htm
EX-21.1 - LIST OF SUBSIDIARIES OF FIFTH STREET ASSET MANAGEMENT INC. - Fifth Street Asset Management Inc.	fsam-ex211_2015123110xk.htm
EX-10.23 - AMENDMENT NO. 1 TO CREDIT AGREEMENT - Fifth Street Asset Management Inc.	fsam-ex1023_2015123110xk.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Fifth Street Asset Management Inc.	fsam-ex322_2015123110xk.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K



	þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2015



	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 001-36701

Fifth Street Asset Management Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)




DELAWARE		46-5610118
(State or jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

777 West Putnam Avenue, 3rd Floor Greenwich, CT		06830
(Address of principal executive office)		(Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

(203) 681-3600

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



Title of Each Class		Name of Each Exchange on Which Registered
Class A Common Stock, par value $0.01 per share		The NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2015 was $58,860,011. The number of shares of the registrant's Class A common stock, par value $0.01 per share, outstanding as of March 15, 2016 was 5,798,614. The number of shares of the registrant's Class B common stock, par value $0.01 per share, outstanding as of March 15, 2016 was 42,856,854.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement relating to the registrant's 2016 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the registrant's fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.

TABLE OF CONTENTS




		Page

	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Mine Safety Disclosures	32
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	34
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 8.	Consolidated Financial Statements and Supplementary Data	60
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	106
Item 9A.	Controls and Procedures	106
Item 9B.	Other Information	107
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	109
Item 11.	Executive Compensation	109
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	109
Item 13.	Certain Relationships and Related Transactions, and Director Independence	109
Item 14.	Principal Accounting Fees and Services	109
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	109
Signatures		112
Exhibit Index

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934 as amended, (the "Exchange Act"), that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of those words or other comparable words. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. We believe these factors include, but are not limited to, those described under "Risk Factors" in this Annual Report on Form 10-K, as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (the "SEC"), which are accessible on the SEC's website at www.sec.gov. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Therefore, you should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Unless the context otherwise requires, references to "we," "us," "our" and "the Company" are intended to mean the business and operations of Fifth Street Asset Management Inc. and its consolidated subsidiaries since the consummation of our initial public offering on November 4, 2014. When used in the historical context (i.e., prior to November 4, 2014), these terms are intended to mean the business and operations of Fifth Street Management Group.

When used in this Annual Report on Form 10-K, unless the context otherwise requires:

•

"Adjusted Net Income" represents income before income tax benefit (provision) as adjusted for (i) certain compensation-related charges, including the amortization of equity-based awards related to the Reorganization and initial public offering, (ii) non-recurring underwriting costs relating to public offerings of our funds, (iii) non-recurring professional fees and other expenses incurred in connection with our initial public offering, (iv) unrealized gains (losses) on beneficial interests in CLO, (v) certain litigation-related costs and (vi) other non-recurring items;

•

"AUM" refers to assets under management of the Fifth Street Funds and material control investments of these funds, and represents the sum of the net asset value of such funds and investments, the drawn debt and unfunded debt and equity commitments at the fund or investment-level (including amounts subject to restrictions) and uncalled committed debt and equity capital (including commitments to funds that have yet to commence their investment periods);


•	"base management fees" refer to fees we earn for advisory services provided to our funds, which are generally based on a fixed percentage of fair value of assets, total commitments, invested capital, net asset value, total assets or par value of the investment portfolios managed by us;


•	"catch-up" refers to a provision for a manager or adviser of a fund to receive the majority or all of the profits of such fund until the agreed upon profit allocation is reached;


•	"CLO" refers to a collateralized loan obligation;


•	“CLO I” refers to Fifth Street Senior Loan Fund I, LLC, a CLO in our senior loan fund strategy managed by CLO Management;


•	"CLO II" refers to Fifth Street SLF II, Ltd. (formerly Fifth Street Senior Loan Fund II, LLC, prior to securitization), a CLO in our senior loan fund strategy managed by CLO Management;


•	"CLO Management" refers to Fifth Street CLO Management LLC, the collateral manager for CLO I and CLO II;


•	"fee-earning AUM" refers to the AUM on which we directly or indirectly earn management fees, and represents the sum of the net asset value of the Fifth Street Funds and their material control investments, and the drawn debt and unfunded debt and equity commitments at the fund or investment-level (including amounts subject to restrictions);


•	"Fifth Street BDCs" and "our BDCs" refer to FSC and FSFR together;


•	"Fifth Street Funds" and "our funds" refer to the Fifth Street BDCs and the other funds advised or managed by Fifth Street Management or CLO Management;


•	"Fifth Street Management" refers to Fifth Street Management LLC and, unless the context otherwise requires, its subsidiaries;


•	"Fifth Street Management Group" and the "Predecessor" refers to Fifth Street Management LLC, FSC, Inc., FSC CT, Inc., FSC Midwest, Inc., Fifth Street Capital West, Inc. (and their wholly-owned subsidiaries) and certain combined funds;


•	"FSC" refers to Fifth Street Finance Corp., a publicly-traded business development company managed by Fifth Street Management;


•	"FSFR" refers to Fifth Street Senior Floating Rate Corp., a publicly-traded business development company managed by Fifth Street Management;


•	"FSOF" refers to "Fifth Street Opportunities Fund, L.P.", a hedge fund managed by Fifth Street Management;


•	"Fund II" refers to Fifth Street Mezzanine Partners II, L.P., a fund advised by an affiliate of Fifth Street Management;


•	"Holdings Limited Partners" refers to active, limited partners in Fifth Street Holdings (other than us), which include, among other persons, the Principals;


•	"hurdle rate" or "hurdle" refers to a specified minimum rate of return that a fund must exceed in order for the investment adviser or manager of such a fund to receive performance fees;


•	"management fees" refer to base management fees and Part I Fees;


•	"MMKT" refers to MMKT Exchange LLC, a financial technology company in which FSM owns 80% of the common membership interests;

•

"Part I Fees" refer to fees paid to us by our BDCs that are based on a fixed percentage of pre-incentive fee net investment income, which are calculated and paid quarterly, and subject to certain specified performance hurdles. Part I Fees are classified as management fees as they are predictable and are recurring in nature, are not subject to repayment (or clawback) and are generally cash-settled each quarter;


•	"Part II Fees" refer to fees paid to us by our BDCs that are based on net capital gains, which are paid annually;


•	"performance fees" refer to fees we earn based on the performance of a fund, which are generally based on certain specific hurdle rates as defined in the fund's investment management or partnership agreements, may be either an incentive fee or carried interest, are paid annually and also include Part II Fees;

•

"permanent capital" refers to capital of funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, which funds currently consist of FSC and FSFR; such funds may be required to distribute all or a portion of capital gains and investment income or elect to distribute capital;


•	"Principals" refers to Leonard M. Tannenbaum and Bernard D. Berman and, where applicable, any entities controlled directly or indirectly by them;


•	"SLF I" refers to Fifth Street Senior Loan Fund I, LLC, a fund in our senior loan fund strategy, previously managed by Fifth Street Management prior to CLO I securitization;


•	"SLF II" refers to Fifth Street Senior Loan Fund II, LLC, a fund in our senior loan fund strategy, previously managed by Fifth Street Management prior to CLO II securitization; and


•	"TRA recipients" refers to the Principals and Ivelin M. Dimitrov.

Many of the terms used in this Annual Report on Form 10-K, including AUM, fee-earning AUM and Adjusted Net Income, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and fee-earning AUM are not based on any definition of AUM or fee-earning AUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM set forth in other agreements to which we are a party from time to time, including the agreements governing our revolving credit facility. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures and Operating Metrics — Assets Under Management" and "— Fee-earning AUM" for more information on AUM and fee-earning AUM. Further, Adjusted Net Income is not a performance measure calculated in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). We use Adjusted Net Income as a measure of operating performance, not as a measure of liquidity. We believe that Adjusted Net Income provides investors with a meaningful indication of our core operating performance and Adjusted Net Income is evaluated regularly by our management as a decision tool for deployment of resources. We believe that reporting Adjusted Net Income is helpful in understanding our business and that investors should review the same supplemental non-GAAP financial measures that our management uses to analyze our performance. Adjusted Net Income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results prepared in accordance with GAAP. The use of Adjusted Net Income without consideration of related GAAP measures is not adequate due to the adjustments described above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures and Operating Metrics — Adjusted Net Income."

Amounts and percentages throughout this Annual Report on Form 10-K may reflect rounding adjustments and consequently totals may not appear to sum.

PART I

Item 1. Business

Our Business

Fifth Street is a leading alternative asset manager with more than $5.0 billion of assets under management. The funds we manage provide innovative and flexible financing solutions to small and mid-sized companies across their capital structures, primarily in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million. As of December 31, 2015, 85.1% of our assets under management reside in publicly-traded permanent capital vehicles, consisting of Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp.

Our direct origination platform is sustained by strong relationships with over 250 private equity sponsors. We believe we are differentiated from other alternative asset managers by our structuring flexibility, financial strength and a reputation for delivering on commitments. We provide innovative and customized credit solutions across the capital structure, including one-stop financing, unitranche debt, senior secured debt, mezzanine debt, equity co-investments and venture debt financing. Our platform targets loans for investment of up to $250 million and will structure and syndicate loans of up to $500 million.

Since our founding in 1998, we have grown into a diversified asset manager with approximately 70 employees, approximately half of whom are investment professionals. Our management team has a proven 17-year track record across market cycles using a disciplined investment process. Our historical growth has been facilitated through a scalable operating platform.

We provide our investment management services to the following fund strategies:



Fund Strategy⁽¹⁾	Strategy and Focus	Launch	AUM (As of December 31, 2015) (in thousands)
Permanent Capital Vehicles:
Fifth Street Finance Corp. (NASDAQ: FSC)	- Publicly-traded business development company, or BDC, focused on investing and lending to sponsor-backed small and mid-sized companies across their capital structure - Permanent capital vehicle	June 2008	$	3,518,119

Fifth Street Senior Floating Rate Corp. (NASDAQ: FSFR)	- Publicly-traded BDC focused on floating rate, senior secured loans to sponsor-backed mid- sized companies - Permanent capital vehicle	July 2013	989,702

Institutional Vehicles:
Senior Loan Funds	- Securitized private vehicles focused on senior secured loans to middle market companies. Consists of CLO I and CLO II	February 2014	697,701
Fifth Street Opportunities Fund	- A long/short hedge fund targeting uncorrelated returns by primarily focusing on yield-oriented corporate credit assets and equities, including leveraged loans and BDCs	March 2013	90,090
	Total AUM		$	5,295,612

____________________

(1) FSC, FSFR, our Senior Loan Funds and FSOF may utilize leverage as part of their respective investment programs. See "Risk Factors — Risks Related to Our Business Development Companies and Other Funds — Dependence on leverage by certain of our funds and by our funds' portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect our funds' ability to achieve attractive rates of return on those investments."

Our Mission

Our mission is to build a leading alternative asset management firm with a core focus on credit solutions and to be admired in the marketplace for our ideas, talent and integrity.

We foster a culture of dedicated and innovative professionals who strive to deliver impeccable service and create value for both our investors and clients.

Our Investment Vehicles

We receive management fees in connection with the advisory services that we provide to the Fifth Street BDCs and

private funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Overview of Results of Operations." We also provide administrative services to the Fifth Street BDCs and have granted the Fifth Street BDCs non-exclusive, royalty-free license to use the name "Fifth Street."

Historical Performance of our Funds

The following table sets forth historical performance for certain of our funds as of December 31, 2015. When considering the data presented below, you should note that the historical results of our funds are not indicative of the future results that you should expect from such funds, from any future funds we may raise, our future results or from your investment in our Class A common stock. An investment in our Class A common stock is not an investment in any of our funds, and the assets and revenues of our funds are not directly available to us. See "Risk Factors — Risks Related to Our Business — The historical returns attributable to our funds should not be considered as indicative of the future results of our funds, our new investment strategies, our operations or of any returns expected on an investment in our Class A common stock."



Fund	Period Presented⁽¹⁾	Net IRR	Total Return	Benchmark Index⁽²⁾	Benchmark Index Performance
Fund II ⁽³⁾	01/28/2005 - 12/31/2014	6.7%⁽⁴⁾	N/A	LPX Mezzanine	(0.03)%
FSC	06/12/2008 - 12/31/2015	N/A	2.5%⁽⁵⁾	CS Leveraged Loan Index	4.4%
FSOF	03/01/2013 - 12/31/2015	N/A	23.7% ⁽⁶⁾	BAML HY Index	3.1%
FSFR	07/12/2013 - 12/31/2015	N/A	(10.9%)⁽⁵⁾	CS Leveraged Loan Index	1.8%

____________________

(1) Periods presented are shown from each included fund's date of inception or initial public offering through December 31, 2015, unless otherwise indicated. We have included in this table each of our funds for which we can calculate over one year of operating performance data. Our CLOs have been excluded from the table above since there has not been one year of operating performance since securitization.

(2) The LPX Mezzanine Index covers all listed private equity companies that pursue a mezzanine capital investment strategy and fulfill certain liquidity constraints. The index is diversified across regions, investment styles and vintage years. The Credit Suisse Leveraged Loan Index, or the CS Leveraged Loan Index, is an index designed to mirror the investable universe of the $US-denominated leveraged loan market. Securities in the index must meet the following criteria: loans must be rated "5B" or lower; only fully-funded term loans are included; the tenor must be at least one year; and the issuers of loans must be domiciled in developed countries. The BofA Merrill Lynch US High Yield Master II Index, or the BAML HY Index, tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the U.S. domestic market. Securities in the BAML HY Index must have a below investment grade rating and an investment grade rated country of risk. Each security must have more than one year of remaining maturity, a fixed coupon schedule, and a minimum amount outstanding of $100 million.

(3) The partnership term of Fund II has expired and all remaining assets were transferred into a liquidating trust on December 31, 2014, for the period until such time that all underlying assets are liquidated.

(4) Percentage represents annualized Net IRR for the period indicated on invested capital based on contributions, distributions and unrealized value after giving effect to management fees, the general partner's carried interest, where applicable, and other expenses.

(5) Percentage represents the annualized total return provided to shareholders on our BDCs' common stock from the closing price on the date of their respective initial public offerings and equals the increase (or decrease) of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment under their respective dividend reinvestment plans.

(6) Percentage represents the annualized total return for the period indicated which is calculated based on the change in net asset value per share since inception after giving effect to management fees, performance fees and other expenses. Includes returns of predecessor fund of FSOF that operated with a substantially similar investment objective and strategy as FSOF.

Business Development Companies

Overview

Our BDCs are publicly-traded permanent capital vehicles that maintain a portfolio of a diverse range of companies in a tax-favored structure. These permanent capital vehicles are externally managed, closed-end, non-diversified investment companies that have elected to be regulated as BDCs under the 1940 Act. BDCs are required to comply with regulatory requirements, including limitations on the use of debt. Our BDCs are permitted to, and expect to continue to, finance investments through borrowings. However, such entities are only generally allowed to borrow amounts such that their asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing (subject, in the case of FSC, to certain exemptive relief granted with respect to its small business investment company, or SBIC, subsidiaries). Also under the 1940 Act, a BDC may not acquire any asset other than qualifying assets, as defined in Section 55(a) of the 1940 Act, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. In order to count portfolio securities as qualifying assets for purposes of the 70% test, the portfolio company must (i) have its principal operations in the United States, (ii) generally be a private or thinly-traded public operating company and (iii) not be an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act, and the BDC must either control the issuer of the securities in which it is investing or offer to make available significant managerial assistance to such issuer. Generally,

BDCs are not able to issue or sell common stock at a price below the net asset value per share.

Our BDCs have each elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Code. A BDC treated as a RIC generally will not have to pay corporate-level federal income taxes on any net ordinary income or realized net capital gains that is distributed to its stockholders if it meets certain source-of-income, income distribution, asset diversification and other requirements imposed under the Code.

Fifth Street Finance Corp.

FSC is a specialty finance company that lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. FSC's investment objective is to maximize its portfolio's total return by generating current income from its debt investments and capital appreciation from its equity investments. FSC is advised by Fifth Street Management pursuant to an investment advisory agreement.

FSC's investments generally range in size from $10 million to $100 million and are principally in the form of first lien, second lien and subordinated debt investments, which may also include an equity component. As of December 31, 2015, 80.5% of FSC's portfolio at fair value consisted of debt investments that were secured by first or second priority liens on the assets of its portfolio companies. Moreover, FSC held equity investments consisting of common stock, preferred stock or other equity interests in approximately half of its portfolio companies as of December 31, 2015.

From inception through December 31, 2015, FSC has originated over $6.0 billion of funded debt and equity investments. FSC's portfolio totaled $2.3 billion at fair value at December 31, 2015 and was comprised of 131 investments, 113 of which were in operating companies, one of which was in a senior loan fund vehicle and 17 of which were in private equity funds. The 17 investments in private equity funds represented approximately 1% of the fair value of FSC's assets as of December 31, 2015.

In addition, FSC maintains wholly-owned subsidiaries that are licensed as SBICs and regulated by the United States Small Business Administration, or SBA. The SBIC licenses allow FSC, through its wholly-owned subsidiaries, to issue SBA-guaranteed debentures. FSC received exemptive relief from the SEC to permit it to exclude the debt of its SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the 200% asset coverage ratio it is required to maintain under the 1940 Act. Pursuant to the 200% asset coverage ratio limitation, FSC is permitted to borrow one dollar for every dollar it has in assets less all liabilities and indebtedness not represented by debt securities issued by it or loans obtained by it. As a result of the receipt of exemptive relief from the SEC for its SBA debt, FSC has increased capacity to fund up to $225 million (the maximum amount of SBA-guaranteed debentures FSC's SBICs may currently have outstanding once certain conditions have been met) of investments with SBA-guaranteed debentures in addition to being able to fund investments with borrowings up to the maximum amount of debt that the 200% asset coverage ratio limitation would allow FSC to incur.

Fifth Street Senior Floating Rate Corp.

FSFR is a specialty finance company whose investment objective is to maximize the total return on its portfolio by generating current income from debt investments while seeking to preserve capital. FSFR invests primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, that pay interest at rates which are determined periodically on the basis of a floating base lending rate, made to private middle market companies whose debt is rated below investment grade, which we refer to collectively as "senior loans." FSFR may also invest in senior unsecured loans issued by private middle market companies and, to a lesser extent, subordinated loans issued by private middle market companies and senior and subordinated loans issued by public companies. Under normal market conditions, at least 80% of the value of FSFR's net assets plus borrowings for investment purposes is invested in floating rate senior loans. FSFR is advised by Fifth Street Management pursuant to an investment advisory agreement.

FSFR invests in senior loans made primarily to private leveraged middle market companies with approximately $20 million to $100 million of EBITDA. Its business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. FSFR's investments generally range between $3 million and $30 million, although FSFR expects that this investment size will vary proportionately with the size of its capital base. In addition, FSFR may invest a portion of its portfolio in other types of investments, which it refers to as opportunistic investments, which are not its primary focus, but are intended to enhance overall returns. These opportunistic investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States. FSFR may invest up to 30% of its total assets in such opportunistic investments, including senior loans issued by non-U.S. issuers, subject to compliance with its regulatory obligations as a BDC under the 1940 Act.

From the time FSFR commenced operations on June 29, 2013 through December 31, 2015, it has originated over $1.5 billion of funded debt investments. As of December 31, 2015, its portfolio totaled $604.0 million at fair value and was comprised of 68 investments, 67 of which were in operating companies and one of which was in a senior loan fund vehicle.

Senior Loan Funds

The investment objective of our senior loan funds strategy is to generate leveraged returns by focusing on investing, directly or indirectly, through subsidiaries, in senior secured term loan debt (including broadly syndicated loans, first lien term loans, second lien loans and to a lesser extent, delayed draw term loans and revolving loans) of middle market companies. The portfolios of loan debt currently provide eligible collateral for securitization financing that are employed by the senior loan funds' strategy to enhance the size of investment portfolios and magnify the returns generated from such portfolios. Portfolio investments in loans are subject to certain criteria and restrictions with respect to the loans and the underlying obligors. In particular, we may not invest in a loan of which Fifth Street or an affiliate is the obligor.

We launched Fifth Street Senior Loan Fund I, LLC in February 2014 and Fifth Street Senior Loan Fund II, LLC in August 2014, each a warehouse financing vehicle. In February 2015, we securitized the senior secured loan portfolio warehoused in Fifth Street Senior Loan Fund I, LLC. In September 2015, we securitized the senior secured loan portfolio warehoused in Fifth Street Senior Loan II, LLC into CLO II.

Fifth Street Opportunities Fund

The investment objective of FSOF is to generate income and long-term capital appreciation. Fifth Street intends to achieve the investment objective by primarily investing opportunistically in various credit-related instruments, including, without limitation, debt securities, instruments and obligations of U.S. and non-U.S. government, corporate and other non-governmental entities and issuers and preferred and convertible preferred securities that include fixed-income features, and in publicly-traded equity and equity-linked securities, including, without limitation, the equity securities of BDCs managed by unaffiliated investment managers. FSOF may invest in instruments and obligations directly or indirectly by investing in derivative or synthetic instruments, including, without limitation, credit default swaps and loan credit default swaps, and may engage in currency trading. FSOF's investment program may include opportunistic investments in corporate structured credit, cash and synthetic collateralized loan obligations and collateralized debt obligations, or CDOs (e.g., bank and insurance trust preferred CDOs), cash and synthetic high-yield debt and leveraged loans, and non-mortgage asset-backed securities. FSOF may utilize other strategies or financial instruments as determined by Fifth Street, subject to the oversight of the general partner of FSOF. FSOF's general partner is FSCO GP and its investment adviser is Fifth Street Management.

Our Investment Team and Institutionalized Operating Platform

Fifth Street Management has carefully assembled a highly regarded team with significant experience in sponsor-led investing in private growing companies. As of December 31, 2015, we had over 30 professionals focused on originating, structuring and managing our investment portfolio, as well as other professionals focused on corporate operations.

Investment Process

We maintain a disciplined investment process approach across our funds that utilizes policies and procedures and leverages the strengths of our operating platform.

•Sourcing - Our relationships with private equity sponsors are our principal source of originations. Potential investments are screened on company, industry, capital structure and transaction considerations.

•Due diligence - We maintain a rigorous underwriting process that includes one-on-one meetings with management, review of third-party reports, utilization of industry consultations and in-depth financial analysis. We utilize our sponsor and portfolio company networks to form real-time industry sector views. Deal teams present their findings and recommendations to the investment committee or portfolio manager of the fund for further review and approval.

•Portfolio construction - We carefully consider asset and industry concentrations in the context of potential macroeconomic, cyclical, technological and regulatory headwinds. We evaluate price and risk alongside our ability to obtain optimal levels of leverage.

•Legal documentation and closing - We view legal documentation as a key risk mitigant. We work closely with external legal counsel to negotiate credit documentation with an emphasis placed on financial covenants that may be adverse to lenders.

Moreover, each fund is subject to certain investment criteria set forth in its governing documents that generally contain requirements and limitations for investments, such as limitations relating to types of assets in which the fund can invest, the amount that will be invested in any one company, the geographic regions in which the fund will invest and potential conflicts of interest that may arise from investing alongside funds within the same or a different investment group. Certain of our affiliates have received an exemptive order from the SEC that permits certain negotiated co-investments among our affiliates that would otherwise be prohibited under the 1940 Act. See "— Regulatory and Compliance Matters — SEC Regulation."

Deal Origination

The Fifth Street Funds' deal origination efforts center on building relationships with private equity sponsors that are focused on investing in the small and mid-sized companies that these funds target. The Fifth Street Funds emphasize active, consistent sponsor coverage across the United States. The investment professionals of Fifth Street Management have developed an extensive network of relationships with these private equity sponsors. We estimate that there are over 3,500 of such private equity sponsors and Fifth Street Management has active relationships with over 250 of them. An active relationship is one through which Fifth Street Management has received at least one potential investment opportunity from the private equity sponsor within the last year.

A significant portion of the investment transactions that the Fifth Street Funds have completed to date were originated through Fifth Street Management's relationships with private equity sponsors. We believe we are differentiated from other alternative asset managers by our structuring flexibility, financial strength and a reputation for delivering on commitments. We believe that this reputation and the relationships that Fifth Street Management has built with sponsors will continue to provide our funds with significant investment opportunities.

We have the capacity to be flexible in structuring transactions for private equity sponsors because of our ability in and experience with originating financings at every level of the capital structure, from senior debt to equity, across multiple industries and utilizing a variety of structures. For example, our broad product offerings include an innovative unitranche product that provides sponsors with a one-stop solution to their financing needs. Unitranche products provide private equity sponsors with ease of execution and post-closing management, higher certainty of closing because of the involvement of fewer stakeholders and a single class of debt thereby removing intercreditor complexity. In addition, our product offerings are bolstered by our permanent capital vehicles that allow us to support private equity sponsors' financing needs through economic cycles.

Our platform targets loans for investment of up to $250 million and will structure and syndicate transactions of up to $500 million. Our financing solutions include:

•One-Stop Financing

•First Lien Debt and Second Lien Debt

•Revolver

•Mezzanine Debt

•Delayed Draw Term Loan

•Equity Co-Investment

We provide financing solutions across industry sectors, including:

•Healthcare

•Food and Restaurants

•Manufacturing

•Software and Technology

•Business Services

•Energy

•Education

•Aerospace and Defense

•Consumer Products

•Marketing Services

Risk Management

We have established risk management policies and procedures that are integrated into all aspects of our business from deal origination to portfolio management. Our management team is attuned to the macro-environment and focuses our funds' investments on industry leaders with the scale to withstand market volatility. We also monitor investment concentration across portfolio companies and industry sectors to ensure our portfolios are sufficiently diversified. A credit committee or the portfolio manager must approve each investment that our funds make. We have sought to adhere to underwriting best practices by utilizing, among others, defined credit boxes, standardized write-ups and strict underwriting guidelines. Once our funds have made an investment, we take a proactive approach to portfolio management. We utilize our integrated portfolio management system to monitor financials, covenant compliance, financial performance trends and portfolio level concentration data. We keep an active watch list and utilize proprietary metrics to monitor the performance of our investments. We monitor the portfolio investments of our funds using a variety of tools and processes on a daily, weekly and monthly basis. We also believe that we are differentiated from our competitors by taking an active role in attending certain board meetings of our BDCs'

portfolio companies.

Information Technology

Information technology is important for us to conduct our investment, management and administrative activities for our funds. As part of our technology strategy and governance processes, we develop and routinely refine our technology architecture to leverage solutions that will best serve the needs of our investors. We have developed an enterprise management system that enables us to efficiently integrate our portfolio management and operations activities. Our systems provide us with the ability to generate reports on individual fund investments or entire portfolios. We also utilize subscription-based information services and databases to conduct research, track market movements and perform credit analysis. In addition, our systems, data, network and infrastructure are monitored and administered by formal controls and risk management processes that also help protect the data and privacy of our employees and investors. Our business continuity plan is designed to allow critical business functions to continue in the event of a significant business disruption.

Competition

We face competition both in the pursuit of outside investors for our funds and in acquiring investments in attractive portfolio companies and making other investments. We compete in all aspects of our business with other investment management companies, including BDCs, investment funds, private equity funds, traditional financial services companies, such as commercial banks and other sources of financing. We compete for outside investors based on a variety of factors, including:


•	investment performance;


•	investor perception of investment managers' drive, focus and alignment of interest;


•	terms of investment, including the level of fees and expenses charged for services;


•	our actual or perceived financial condition, liquidity and stability;


•	the quality and mix of services provided to, and the duration of relationships with, investors; and


•	our business reputation.

In order to grow our business, we must be able to compete effectively for investments based on a variety of factors, including:


•	the experience and contacts of our management team;


•	our responsive and efficient investment analysis and decision-making processes;


•	the investment terms we offer; and


•	our willingness to make smaller investments.

Many of our competitors are substantially larger and may possess greater financial and technical resources. Several of these competitors have raised, or are expected to raise, significant amounts of capital and many of them have similar investment objectives to us, which may create additional competition for investment opportunities. Some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities. Some of these competitors may have higher risk tolerance, make different risk assessments or have lower return thresholds, which could allow them to consider a wider variety of investments, bid more aggressively for investments that we want to make or accept legal or regulatory limitations or risks we would be unable or unwilling to accept. We believe that some of our competitors make loans with interest rates and returns that are comparable to, or lower than, the rates and returns that we target.

Therefore, we do not seek to compete solely on the interest rates that are offered by our funds to potential portfolio companies. Corporate buyers may be able to achieve synergistic cost savings with regard to an investment that may provide them with a competitive advantage relative to us when bidding for an investment. Moreover, an increase in the allocation of capital to alternative investment strategies by institutional and individual investors could lead to a reduction in the size and duration of pricing inefficiencies that many of our investment funds seek to exploit. Alternatively, a decrease in the allocation of capital to alternative investments strategies could intensify competition for that capital and lead to fee reductions and redemptions, as well as difficulty in raising new capital.

Competition is also intense for the attraction and retention of qualified employees. Our ability to compete effectively in our businesses will depend upon our ability to continue to attract new employees and retain and motivate our existing employees.

For information on the competitive risks we face, see "Risk Factors — Risks Related to Our Business — The investment

management business is intensely competitive."

Employees

We employ approximately 70 employees, approximately half of whom are investment professionals. None of our employees are subject to collective bargaining agreements. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

Regulatory and Compliance Matters

We are subject to extensive regulation. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to limit, restrict or prohibit an investment adviser from carrying on particular activities in the event that it fails to comply with such laws and regulations. Any failure to comply with these rules and regulations could expose us to liability and/or reputational damage. In addition, additional legislation, increasing regulatory oversight of fundraising activities, changes in rules promulgated by self-regulatory organizations or exchanges or changes in the interpretation or enforcement of existing laws and rules may directly affect our mode of operation and profitability.

Rigorous legal and compliance analysis of our businesses and investments is important to our culture. We strive to maintain a culture of compliance through the use of policies and procedures, such as oversight compliance, codes of ethics, compliance systems, communication of compliance guidance and employee education and training. We have a compliance group that monitors our compliance with the regulatory requirements to which we are subject and manages our compliance policies and procedures. Our Chief Compliance Officer supervises our compliance group, which is responsible for monitoring all regulatory and compliance matters that affect our activities. Our compliance policies and procedures address a variety of regulatory and compliance risks, such as the handling of material, non-public information, personal securities trading, document retention, potential conflicts of interest and the allocation of investment opportunities. Senior management is involved at various levels in all of these functions, including through active participation on oversight and credit committees.

SEC Regulation

Fifth Street Management and CLO Management are registered as investment advisers and Fifth Street Capital LLC, the former adviser of Fund II, reports as an exempt reporting adviser with the SEC pursuant to the Advisers Act, and our BDCs are regulated under the 1940 Act. As compared to other, more disclosure-oriented U.S. federal securities laws, the Advisers Act and the 1940 Act, together with the SEC's regulations and interpretations thereunder, are highly restrictive regulatory statutes. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the 1940 Act, ranging from fines and censures to termination of an adviser's registration.

Under the Advisers Act, an investment adviser (whether or not registered under the Advisers Act) has fiduciary duties to its clients. The SEC has interpreted these duties to impose standards, requirements and limitations on, among other things, trading for proprietary, personal and client accounts; allocations of investment opportunities among clients; use of "soft dollars," a practice that involves using client brokerage commissions to purchase research or other services that help managers make investment decisions; execution of transactions; and recommendations to clients. On behalf of our investment advisory clients, we make decisions to buy and sell securities for each portfolio, select broker dealers to execute trades and negotiate brokerage commission rates.

Section 28(e) of the Exchange Act provides a "safe harbor" to investment managers who use commission dollars generated by their advised accounts to obtain investment research and brokerage services that provide lawful and appropriate assistance to the manager in the performance of investment decision-making responsibilities. Conduct outside of the safe harbor afforded by Section 28(e) is subject to the traditional standards of fiduciary duty under state and federal law. While neither we nor any of our funds currently use soft dollars, to the extent that we may use "soft dollars" in the future, we would intend for such use to fall within the safe harbor of Section 28(e).

The Advisers Act also imposes specific restrictions on an investment adviser's ability to engage in principal and agency cross transactions. As a registered adviser, we are subject to many additional requirements that cover, among other things, disclosure of information about our business to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; solicitation arrangements; maintaining effective compliance program; custody of client assets; client privacy; advertising; and proxy voting. The SEC has authority to inspect any registered investment adviser and typically inspects a registered adviser periodically to determine whether the adviser is conducting its activities in compliance with (i) applicable laws, (ii) disclosures made to clients and (iii) adequate systems, policies and procedures to ensure compliance.

A majority of our revenues are derived from our advisory services to our BDCs, which are subject to regulation under the 1940 Act. The 1940 Act imposes significant requirements and limitations on BDCs, including with respect to their capital

structure, investments and transactions. While we exercise broad discretion over the day-to-day management of these funds, each BDC is also subject to oversight and management by a board of directors, a majority of whom are not "interested persons" as defined under the 1940 Act. The responsibilities of each board include, among other things, approving our advisory contract with the BDC; approving certain service providers; determining the valuation and the method for valuing assets; and monitoring transactions involving affiliates. Our advisory contracts with a Fifth Street BDC may be terminated by the stockholders or directors of such BDC on not more than 60 days' notice, and are subject to annual renewal by each respective BDC's board of directors after an initial two-year term.

Generally, BDCs are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without prior approval of their board of directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the prohibition on transactions with affiliates to prohibit "joint transactions" among entities that share a common investment adviser.

On September 9, 2014, Fifth Street Management and certain of its affiliates received an exemptive order from the SEC that permits them to co-invest with each other and other funds managed by Fifth Street Management or its affiliates in negotiated transactions in a manner consistent with the Fifth Street BDCs' investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements (including the terms and conditions of the exemptive order).

Under the terms of the exemptive order, a "required majority" (as defined in Section 57(o) of the 1940 Act) of BDC directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the BDC and its stockholders and do not involve overreaching in respect of the BDC and its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the BDC's stockholders and its investment objectives and strategies.

In certain situations where co-investment with one or more funds managed by Fifth Street Management or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the same issuer, the personnel of Fifth Street Management or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations and our allocation policy. Moreover, except in certain circumstances, when relying on the Order, we are unable to invest in any issuer in which one or more funds managed by Fifth Street Management or its affiliates has previously invested.

Under the Advisers Act, our investment management agreements may not be assigned without the client's consent. Under the 1940 Act, advisory agreements with 1940 Act funds (such as the BDCs we manage) terminate automatically upon assignment. The term "assignment" is broadly defined and includes direct assignments as well as assignments that may be deemed to occur upon the transfer, directly or indirectly, of a controlling interest in us.

Other Federal and State Regulators; Self-Regulatory Organizations

In addition to the SEC regulatory oversight we are subject to under the 1940 Act and the Advisers Act, there are a number of other regulatory bodies that have or could potentially have jurisdiction to regulate our business activities. For example, certain of FSC's subsidiaries must comply with regulations adopted by the SBA, in order to maintain their status as SBICs. In addition, in connection with many of the activities of our BDCs or ourselves, we rely on a number of exemptions from regulatory oversight of various other Federal regulatory agencies (including the CFTC and DOL), various self-regulatory organizations (including FINRA and NFA) and various state regulatory authorities. These exemptions are in many cases complex rules in and of themselves, and complying with them can be difficult and time consuming. At times, they may also impose restrictions on our ability to engage in various types of investments or other activities that we would otherwise engage in for the benefit of our clients absent the need to comply with an applicable exemption. Failure to comply with these exemptions (or a change in the scope or conditions of these exemptions) could subject us or our BDCs to additional regulatory oversight.

For additional information about our regulatory environment, see "Risk Factors — Risks Related to Our Industry — The regulatory environment in which we operate is subject to continual change and regulatory developments designed to increase oversight may adversely affect our business."

Item 1A. Risk Factors

RISK FACTORS

We are subject to a number of significant risks inherent in our business. You should carefully consider the risks and uncertainties described below and other information included in this Annual Report on Form 10-K. If any of the events described below occur, our business and financial results could be seriously harmed. The trading price of our Class A Common Stock could decline as a result of any of these risks, and you could lose all or part of your investment.

Risks Relating to Economic Conditions

Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations.

Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase the funding costs of our funds, limit access to the capital markets of our funds or result in a decision by lenders not to extend credit to us or our funds. An economic decline could also negatively impact the private equity sponsors with whom we partner, leading to decreased origination opportunities and potentially less favorable economic terms for our funds in connection with our direct originations. These events could limit investment originations by the Fifth Street Funds, limit our ability to grow the Fifth Street Funds and negatively impact our operating results.

In addition, to the extent that recessionary conditions return, the financial results of small and mid-sized companies, like those in which our funds invest, will likely experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of the products and services of the portfolio companies of our funds would likely experience negative economic trends. The performance of certain of the portfolio companies of our funds have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from the portfolio companies of our funds and/or losses or charge offs related to such investments, and, in turn, may materially adversely affect the fees we receive from our funds. Further, adverse economic conditions may decrease the value of collateral securing some of the loans, including the first lien loans, and the value of equity investments held by our funds. As a result, the Fifth Street Funds may need to modify the payment terms of their investments, including changes in payment-in-kind interest provisions and/or cash interest rates. These factors may result in the receipt of a reduced level of interest income from our funds' portfolio companies and/or losses or charge offs related to their investments, and, in turn, may adversely affect the fees that we receive and have a material adverse effect on our results of operations.

Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial condition and earnings.

Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit rating downgrades and economic slowdowns, or a recession in the United States. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. government's sovereign credit rating or its perceived creditworthiness could adversely affect the United States and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

Global economic, political and market conditions and economic uncertainty may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. Economic uncertainty can have a negative impact on our business through changing spreads, structures and purchase multiples, as well as the overall supply of investment capital. Since 2010, several European Union, or EU, countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as Russia and China, may have a severe impact on the worldwide and United States financial markets. We cannot predict the effects of these or similar events in the future on the U.S. economy and securities markets or on our investments. As a result of these factors, there can be no assurance that we will be able to successfully monitor developments and manage the investments of our funds in a manner consistent with achieving their investment objectives.

Risks Relating to Our Business

The growth of our business depends in large part on our ability to raise capital from investors. If we are unable to raise capital from new or existing investors or existing investors decide to withdraw their investments from our funds, the Fifth Street Funds will be unable to deploy such capital into investments and we will be unable to collect additional management fees, which would have a negative effect on our growth prospects.

Our ability to raise capital from investors depends on a number of factors, including many that are outside our control. Investors may choose not to make investments with alternative asset managers, including BDCs, private funds and hedge funds, and may choose to invest in asset classes and fund strategies that we do not offer. Poor performance of our funds could also make it more difficult for us to raise new capital. Our investors and potential investors continually assess the performance of these funds independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds depends on our performance. If economic and market conditions deteriorate, we may be unable to raise sufficient amounts of capital to support the investment activities of our new and future strategies and funds. In addition, one of our key growth strategies is the expansion of our product offerings through the development of new and future strategies and funds. If we are unable to successfully raise capital for our existing and future funds, we will be unable to collect additional management fees, which would have a negative effect on our growth prospects.

In addition, certain of our newer strategies permit investors to withdraw their investments from our funds and could be affected by portfolio rebalancing. This could have the effect of decreasing the capital available for investments in our funds and reduce our revenues and cash flows. As of December 31, 2015, these non-permanent capital strategies constituted 15% of our fee-earning AUM as compared to 10% at December 31, 2014. The AUM of our non-permanent capital vehicles may increase, in both absolute dollars and as a percentage of our total AUM over time.

The loss of our executive officers, key investment professionals or senior management team could have a material adverse effect on our business. Our ability to attract and retain qualified investment professionals is critical to our success.

We depend on the investment expertise, skill and network of business contacts of our executive officers, key investment professionals and senior management team. Our executive officers, key investment professionals and senior management team evaluate, negotiate, structure, execute, monitor and service our funds' investments. Our future success will depend to a significant extent on the continued service and coordination of our executive officers, key investment professionals and senior management team. The departure of any of these individuals could have a material adverse effect on our ability to achieve our funds' investment objectives.

The ability of the Fifth Street Funds to achieve their investment objectives depends on our ability to identify, analyze, invest in, finance and monitor companies that meet their investment criteria. Our capabilities in structuring the investment process, providing competent, attentive and efficient services to our funds, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve the investment and growth objectives of the Fifth Street Funds, we may, through our affiliates, need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. We may not be able to find investment professionals in a timely manner or at all. We also face competition from other industry participants for the services of qualified investment professionals, both with respect to hiring new and retaining current investment professionals. Failure to support our investment process could have a material adverse effect on our business, financial condition and/or results of operations. We do not carry any "key man" insurance that would provide us with proceeds in the event of the death or disability of our executive officers, key investment professionals or senior management team.

Our business model depends to a significant extent upon strong referral relationships with private equity sponsors, and the inability of our executive officers, key investment professionals and senior management team to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.

We expect that certain of our executive officers, key investment professionals and senior management team will maintain and develop our relationships with private equity sponsors, and our funds will rely to a significant extent upon these relationships to provide them with potential investment opportunities. Certain key private equity sponsors regularly provide us with access to their transactions. If such persons fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we may not be able to grow the investment portfolios of the Fifth Street Funds. In addition, individuals with whom such persons have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for the Fifth Street Funds.

The investment management business is intensely competitive.

The investment management business is intensely competitive, with competition based on a variety of factors, including investment performance, continuity of investment professionals and client relationships, the quality of services provided to clients, corporate positioning and business reputation and continuity of selling arrangements with intermediaries and differentiated products. A number of factors, including the following, serve to increase our competitive risks:


•	a number of our competitors have greater financial, technical, marketing and other resources, including a lower cost of capital and better access to funding sources, more established name recognition and more personnel than we do;


•	there are relatively low barriers impeding entry to new investment funds, including a relatively low cost of entering these businesses;


•	there are an increasing number of BDCs and the size of BDCs has also been increasing;


•	the recent trend toward consolidation in the investment management industry, and the securities business in general, has served to increase the size and strength of our competitors;


•	some investors may prefer to invest with an investment manager that is not publicly-traded based on the perception that publicly-traded companies focus on growth to the detriment of performance;


•	some competitors may invest according to different investment styles or in alternative asset classes that the markets may perceive as more attractive than our investment approach;


•	some competitors may have higher risk tolerances or different risk assessments than we or our funds have; and


•	other industry participants, hedge funds and alternative asset managers may seek to recruit our qualified investment professionals.

If we are unable to compete effectively, our earnings would be reduced and our business could be materially adversely affected.

The Fifth Street Funds face increasing competition for investment opportunities, which could reduce returns and result in losses at the Fifth Street Funds and reduce our revenues.

The Fifth Street Funds compete for investments with other BDCs and investment funds (including private equity funds and mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we or our funds do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us or the Fifth Street Funds. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we or our funds have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do for our funds. We may lose investment opportunities for our funds if we do not match our competitors' pricing, terms and structure. If we are forced to match our competitors' pricing, terms and/or structure, we may not be able to achieve acceptable returns on investments for the Fifth Street Funds or such investments may bear substantial risk of capital loss, particularly relative to the returns to be achieved. A significant part of our competitive advantage stems from the fact that the market for investments in small and mid-sized companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms for the Fifth Street Funds. Recently, there has been an increase in the number and size of BDCs as part of the competitive landscape in our industry. Furthermore, some of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on our two largest funds as BDCs.

Poor performance of our funds would cause a decline in our revenues and results of operations and could materially adversely affect our ability to raise capital for future funds.

We derive revenues primarily from management fees from the BDCs and funds we manage. When any of our funds perform poorly, either by incurring losses or underperforming benchmarks, as compared to our competitors or otherwise, our investment record suffers. As a result, our revenues may be adversely affected and the value of our assets under management could decrease, which may, in turn, reduce our management fees. Moreover, we may experience losses on investments of our own capital as a result of poor investment performance, including investments in our own funds. If a fund performs poorly, we may receive little or no incentive fees with regard to the fund and little income or possibly losses from our own principal investment in such fund. Poor performance of our funds could also make it more difficult for us to raise new capital. Investors in our closed-end funds may decline to invest in future closed-end funds we raise as a result of poor performance. Investors and potential investors in our funds continually assess performance of our funds independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds and avoid excessive redemption levels depends on our funds' performance. Accordingly, poor performance may deter future investment in our funds and thereby

decrease the capital invested in our funds and, ultimately, our revenues. Alternatively, in the face of poor fund performance, investors could demand lower fees or fee concessions for existing or future funds which would likewise decrease our revenues.

Management fees received from the Fifth Street BDCs comprise a significant portion of our revenues and a reduction in such fees, including from the termination of investment advisory agreements, could have an adverse effect on our revenues and results of operations.

For the year ended December 31, 2015, the management fees generated from FSC and FSFR were approximately 97% of our management fees (including 35% attributable to Part I Fees). The investment advisory agreements Fifth Street Management has with each of the Fifth Street BDCs categorizes the fees we receive, with respect to each BDC, as: (a) base management fees, which are paid quarterly and generally increase or decrease based on such BDC's total assets, (b) Part I Fees, which are paid quarterly, and (c) Part II Fees, which are paid annually. We classify the Part I Fees as management fees because they are paid quarterly, are predictable and recurring in nature, are not subject to repayment (or clawback) and are generally cash-settled each quarter. Part I Fees, however, are subject to certain specified performance hurdles and, if we do not meet the specified performance hurdles, the amount of fees paid to us would decrease. Due to underperformance versus these hurdles, we did not earn the full Part I Fees for FSC and FSFR for the quarter ended December 31, 2015. If the total assets or net investment income of FSC or FSFR were to decline significantly for any reason, including without limitation, due to short-term changes in market value, mark-to-market accounting requirements, the poor performance of its investments or the failure to successfully access or invest capital, the amount of the fees we receive from these BDCs, including management fees, would also decline significantly, which could have an adverse effect on our revenues and results of operations. In addition, because the Part II Fees are not paid unless such BDC achieves cumulative realized capital gains (net of realized capital losses and unrealized capital depreciation), Part II Fees payable to us are variable and not predictable.

Fees paid to us by the Fifth Street BDCs could vary quarter to quarter due to a number of factors, including such BDC's ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities it acquires, the level of its expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which it encounters competition in our market, its ability to fund investments and general economic conditions. Variability in revenues received from the Fifth Street BDCs could have an adverse effect on our revenues, results of operations and could cause volatility or a decline in the market price of our Class A common stock. We may also be required to reduce fees as a result of industry and competitive pressures. In January 2016, we and the FSC board of directors made a decision to permanently reduce the base management fee on FSC's total gross assets (excluding cash and cash equivalents) from 2.00% to 1.75%. See "Risks Relating to Our Industry—We may not be able to maintain our current fee structure as a result of industry pressure to reduce fees, or as a result of changes in our business mix, which could have an adverse effect on our profit margins and results of operations."

The investment advisory agreements with FSC and FSFR may be terminated by either party without penalty upon 60 days' written notice to the other.

Certain stockholders of FSC and FSFR have recently put forth binding proposals to terminate our respective investment advisory agreements with these BDCs. These certain stockholders nominated director nominees who would seek to replace us as the investment manager of the BDCs. On February 18, 2016, we entered into a purchase and settlement agreement with these FSC stockholders and such stockholders irrevocably withdrew and rescinded their proposals and director nominees. We can give no assurance that the FSFR proposals will be unsuccessful or that the BDCs will not receive similar proposals in the future from other stockholders of FSC or FSFR. If either of these agreements were terminated, our business would be materially and adversely affected and we would suffer a significant decline in revenues and profitability. In addition, a proxy contest involving either of our BDCs would be disruptive, costly and time-consuming to such BDC and us and would divert the attention of our senior management team and employees from the operation of such BDC. In addition perceived uncertainties as to the strategic direction of either of our BDCs, or any abrupt changes in senior management or the board of directors of such BDC, may lead to concerns regarding the direction or stability of its business and operations, which may be exploited by competitors, resulting in the loss of business opportunities for us and our BDCs.

The historical returns attributable to our funds should not be considered as indicative of the future results of our funds, our new investment strategies, our operations or of any returns expected on an investment in our Class A common stock.

We have presented in this Annual Report on Form 10-K the returns relating to the historical performance of our funds. The returns are relevant to us primarily insofar as they are indicative of revenues we have earned in the past and may earn in the future, our reputation and our ability to raise new funds. The returns of the funds we manage are not, however, directly linked to returns on our Class A common stock. Therefore, you should not conclude that continued positive performance of the funds we manage will necessarily result in positive returns on an investment in our Class A common stock. However, poor performance of the funds we manage may cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and the value of our Class A common stock. An investment in our Class A common stock is not an

investment in any of the Fifth Street funds. Moreover, the historical returns of our funds should not be considered indicative of the future returns of these or from any future funds we may raise, in part because our funds' returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including the availability of debt capital on attractive terms, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities.

In addition, the IRR and total return going forward for any current or future fund may vary considerably from the historical IRR and total return generated by any particular fund, or for our BDCs as a whole. Future returns will also be affected by the risks described elsewhere in this Annual Report on Form 10-K, including risks of the industries and businesses in which a particular fund invests.

The significant growth we have experienced, particularly with respect to assets under management and revenues, will be difficult to sustain.

Our AUM increased from approximately $1.1 billion as of December 31, 2010 to approximately $5.3 billion as of December 31, 2015. Our management fee revenues have increased from approximately $24.8 million (including Part I Fees of $12.2 million) for the year ended December 31, 2010 to approximately $88.5 million (including Part I Fees of $31.2 million) for the year ended December 31, 2015. This significant growth will be difficult to sustain. In this regard, our total AUM as of December 31, 2015 decreased by approximately $1.0 billion from December 31, 2014. In addition, our AUM decreases when the Fifth Street BDCs engage in stock repurchase activities. As part of an existing $100 million stock repurchase authorization, FSC announced plans to repurchase a significant amount of its common stock by the end of 2016. The continued growth of our business will depend on, among other things, our ability to devote sufficient resources to maintaining existing investment strategies and developing new investment strategies and funds, maintain and further develop relationships with private equity sponsors and other sources of investment opportunities, our success in producing attractive returns from our investment strategies, our ability to extend our distribution capabilities, our ability to deal with changing market conditions, our ability to maintain adequate financial and business controls and our ability to comply with legal and regulatory requirements arising in response to the increased sophistication of the investment management market. In addition, we expect there to be significant demand on our infrastructure and investment team and we cannot assure you that we will be able to manage our growing business effectively or that we will be able to sustain the level of growth we have achieved historically, and any failure to do so could adversely affect our ability to generate revenues and control our expenses.

We intend to enter into new lines of business and expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses.

We intend, if market conditions warrant, to grow by increasing AUM in existing businesses and expanding into new investment strategies, geographic markets and businesses. We may develop new strategies and funds organically through our existing platform. We may also pursue growth through acquisitions of other investment management companies, acquisitions of critical business partners or other strategic initiatives, which may include entering into new lines of business. In addition, consistent with our past experience, we expect opportunities will arise to acquire other alternative or traditional asset managers.

Attempts to expand our businesses involve a number of special factors, including some or all of the following:


•	the required investment of capital and other resources;


•	the diversion of management's attention from our core businesses;


•	the levels of experience of our executive officers, investment professionals and senior management in operating new investment strategies and funds;


•	the assumption of liabilities in any acquired business;


•	unexpected difficulties or the incurrence of unexpected costs associated with integrating and overseeing the operations of new businesses and activities;


•	entry into markets or lines of business in which we may have limited or no experience;


•	increasing demands on our operational and management systems and controls;


•	new investment strategies and funds may provide for less profitable fee structures and arrangements than our existing investment strategies and funds;


•	compliance with additional regulatory requirements; and


•	the broadening of our geographic footprint, increasing the risks associated with conducting operations in certain foreign jurisdictions where we currently have no presence.

Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business does not generate sufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. Our strategic initiatives include joint ventures, in which case we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control. Further, as we expand existing and develop new funds that are not permanent capital vehicles, we may be subject to a greater risk of, among other things, investor redemptions and reallocation. Because we have not yet identified these potential new investment strategies, geographic markets or lines of business, we cannot identify for you all the risks we may face and the potential adverse consequences on us and your investment that may result from any attempted expansion. The risks described above, including those we cannot identify, may prevent us from growing our business through expanded product offerings or result in unexpected costs that may lead to a decline in our financial position and the market value of our Class A common stock.

In connection with our investment in MMKT, we are expanding into a new business and industry in which we do not have any operating experience. We cannot assure you that this new business will succeed.

We have a controlling financial interest in MMKT, a financial technology company. MMKT is a development stage enterprise with a limited operating history. There can be no assurances that MMKT will be successful at commercializing its technology for the financial services industry, that any such commercialization will generate significant future revenue or that MMKT will attain profitability. In addition, we have not previously operated a business in the financial technology industry and we cannot assure you that this new business will succeed. Our entry into this new line of business may subject us to additional risks and uncertainties. See Item 1A. Risk Factors and under the heading "Risk Factors-Risks Related to Our Business-We intend to enter into new lines of business and expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses." Specifically, our entry into the financial technology industry may present additional or heightened risks to our business including those relating to the management of information technology systems and infrastructure, cybersecurity, handling of confidential client and financial information and the protection and use of intellectual property.

In addition, because we hold a controlling interest in MMKT and it is consolidated within our operating results for financial reporting purposes, we have and expect to continue to incur development and start-up costs and expenses that have a negative impact on our earnings. If MMKT is not successful, it may not produce substantial revenue or profit and we may not be able to recover these costs and expenses and our operating results could be adversely affected.

Operational risks may disrupt our business, result in losses or limit our growth.

We are heavily dependent on the capacity and reliability of the technology systems supporting our operations, whether owned and operated by us or by third parties. Operational risks such as trading errors or interruption of our financial, accounting, trading, compliance and other data processing systems, whether caused by fire, other natural disaster, power or telecommunications failure, cyber-attacks or other cyber incidents, act of terrorism or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage. If any of these systems do not operate properly or are disabled for any reason or if there is any unauthorized disclosure of data, whether as a result of tampering, a breach of our network security systems, a cyber-incident or attack or otherwise, we could suffer financial loss, a disruption of our businesses, liability to our funds, regulatory intervention or reputational damage. Insurance and other safeguards might be unavailable or might only partially reimburse us for our losses. Although we have back-up systems in place, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate.

The inability of our systems to accommodate an increasing volume of transactions also could constrain our ability to expand our businesses. Additionally, any upgrades or expansions to our operations or technology may require significant expenditures and may increase the probability that we will suffer system degradations and failures.

A failure in cyber-security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively.

The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our management employees or investment professionals were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.

We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical

and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.

We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on our and third parties' communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:


•	sudden electrical or telecommunications outages;


•	natural disasters such as earthquakes, tornadoes and hurricanes;


•	disease pandemics;


•	events arising from local or larger scale political or social matters, including terrorist acts; and/or


•	cyber-attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our Class A common stock and our ability to pay dividends.

Employee misconduct could expose us to significant legal liability and reputational harm.

We are vulnerable to reputational harm, as we operate in an industry where integrity and the confidence of our clients are of critical importance. If an employee were to engage in illegal or suspicious activities, we could be subject to regulatory sanctions and suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), financial position, client relationships and ability to attract new clients. Our business often requires that we deal with confidential information. If our employees were to improperly use or disclose this information, we could suffer serious harm to our reputation, financial position and current and future business relationships.

Our new investment strategies may expose us to additional employee misconduct risks, for example with respect to the Foreign Corrupt Practices Act, or the FCPA, and other anticorruption laws. While we may develop and implement policies and procedures designed to ensure strict compliance by us and our personnel with such potentially newly applicable regulations, including the FCPA, such policies and procedures may not be effective in all instances to prevent violations in the future. Any determination that we have violated the FCPA or other applicable anticorruption laws could subject us to significant penalties and negative effects on our business and operations.

It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.

If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.

In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to market, operational, legal and reputational risks. Our risk management methods may prove to be ineffective due to their design or implementation or as a result of the lack of adequate, accurate or timely information. If our risk management efforts are ineffective, we could suffer losses or face litigation, particularly from our clients, and sanctions or fines from regulators.

Our techniques for managing risks in our funds may not fully mitigate the risk exposure in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in those funds or to seek positive, risk-adjusted returns. In addition, any risk management failures could cause fund losses to be significantly greater than historical measures predict. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses in the net asset value of the funds and therefore a reduction in our revenues.

Our failure to adequately address conflicts of interest could damage our reputation and materially adversely affect our business.

As we have expanded the scope of our business, we increasingly confront potential, perceived or actual conflicts of interest relating to our existing and future investment activities. For example, certain of our strategies have overlapping investment objectives, and potential conflicts of interest may arise with respect to our decisions regarding how to allocate investment opportunities among those strategies. In addition, investors (or holders of our Class A common stock) may perceive conflicts of interest regarding investment decisions for strategies in which our investment professionals, who have and may continue to make significant personal investments, are personally invested. It is possible that potential, perceived or actual conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Adequately addressing conflicts of interest is complex and difficult and we could suffer significant reputational harm if we fail, or appear to fail, to adequately address potential, perceived or actual conflicts of interest. This could result in a loss of AUM and adversely affect our business and financial condition.

In addition, Fifth Street Management and certain of our affiliates have received an exemptive order from the SEC, on September 9, 2014 that permits certain negotiated co-investments among our affiliates that would otherwise be prohibited under the 1940 Act. Such joint transactions among us and our affiliates may give rise to increased perceived or actual conflicts among investors in our funds.

Our revolving credit facility may restrict our current and future operations, particularly our ability to respond to certain changes or to take future actions, and expose use to risks relating to the use of leverage.

The credit agreement for our revolving credit facility contains a number of restrictive covenants. These covenants collectively impose significant operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests. The financial covenants, among other things, impose limitations on waiving or deferring management fees from our funds, require us not to exceed a total leverage ratio, require us to maintain a minimum AUM and require us to maintain a minimum consolidated interest coverage ratio.

Our ability to comply with these and other covenants is dependent upon a number of factors, some of which are beyond our control but could nonetheless result in noncompliance. For example, our leverage ratio fluctuates depending upon changes in revenues and expenses relative to our outstanding debt; our consolidated interest coverage ratio fluctuates depending upon changes in revenues and expenses relative to our interest payment obligations; and the value of our AUM fluctuates due to a variety of factors, including mark-to-market valuations of certain assets, other market factors and our net capital raised or returned.

Our credit agreement also contains other covenants that restrict our operations and a number of events that would constitute an event of default under the agreement. A failure by us to comply with the covenants in our credit agreement could result in an event of default under the agreement, which could give the lenders under the agreement the right to terminate their commitments to provide additional loans under our revolving credit facility and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. If the debt under our credit agreement were accelerated, we might not have sufficient cash on hand to repay this debt, which could have an immediate material adverse effect on our business, results of operations and financial condition. For more detail regarding our current credit agreement and the status of our compliance with the related covenants, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Revolving Credit Facility."

In addition, our incurrence of debt under the revolving credit facility will expose us to the typical risks associated with the use of leverage. Increased leverage makes it more difficult for us to withstand adverse economic conditions or business plan variances, to take advantage of new business opportunities or to make necessary capital expenditures. As of December 31, 2015, we had $65.0 million of outstanding borrowings under our credit facility.

A change of control could result in termination of certain of our investment advisory agreements.

Pursuant to the 1940 Act, each of the investment advisory agreements for the Fifth Street BDCs automatically terminates upon its deemed "assignment" and a BDC's board and shareholders must approve a new agreement in order for us to continue to act as its investment adviser. A sale of a controlling block of our voting securities and certain other transactions would be deemed an "assignment" pursuant to the 1940 Act. In addition, our investment advisory agreement with FSOF may not be "assigned" without the consent of the fund or the fund's limited partners. Such an assignment may be deemed to occur in the event that our pre-IPO owners dispose of enough of their interests in us such that they no longer own a controlling interest in us. If such a deemed assignment occurs, there can be no assurance that we will be able to obtain the necessary consents from FSOF, or its limited partners, or the necessary approvals from the boards and shareholders of the Fifth Street BDCs. An assignment, actual or constructive, would trigger these termination and consent provisions and, unless the necessary approvals and consents are obtained, could adversely affect our ability to continue managing these funds, resulting in the loss of assets

under management and a corresponding loss of revenue.

We and FSC are currently subject to litigation that could adversely affect our financial condition, business and results of operations.

We have been named as a defendant in several putative class-action lawsuits and derivative actions and we may possibly be subject to a variety of additional claims and lawsuits. See Item 3. Legal Proceedings in this Annual Report on Form 10-K for additional information concerning these lawsuits and actions. The outcome of any such proceedings may materially adversely affect our business, financial condition and/or operating results, and may continue without resolution for long periods of time. Any litigation may consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources to litigation may, at times, be disproportionate to the amounts at stake in the litigation. In addition our involvement or our funds’ involvement in litigation could harm our reputation, which in turn could have a material adverse effect on our business in a number of ways, making it harder for us to raise new funds and discouraging others from doing business with us. The litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. In addition, accounting rules may require us to record a liability related to a particular matter prior to its resolution if the incurrence of a loss related to such matter becomes probable and reasonably estimable. In addition, we have incurred and will continue to incur expenses associated with defending ourselves against this litigation and other future claims, and these expenses may be material to our earnings in future periods.

The majority of the lawsuits and derivative actions to which we have been named as a defendant also name FSC as a defendant and relate to our role as investment advisor to FSC. The outcome of any such proceedings may also materially adversely affect FSC’s business, financial condition, and/or operating results, and may continue without resolution for long periods of time. To the extent that FSC is negatively impacted by such proceedings, we could also be negatively impacted. See "— Management fees received from the Fifth Street BDCs comprise a significant portion of our revenues and a reduction in such fees, including from the termination of investment advisory agreements, could have an adverse effect on our revenues and results of operations."

Risks Relating to Our Industry

Difficult market conditions can adversely affect our business in many ways, including by reducing the value of our AUM, causing clients to withdraw funds and making it more difficult to raise additional capital for our funds, each of which could materially reduce our revenues and adversely affect our financial condition.

The fees we earn under our investment management fee agreements are typically based on the market value of and investment income earned on our fee-earning AUM. In addition, the prices of the securities held in the portfolios we manage may decline due to any number of factors beyond our control, including, among others, political uncertainty, acts of terrorism, a declining stock market or general economic downturn. In difficult market conditions, the pace of client redemptions or withdrawals from our investment strategies could accelerate if clients move assets to investments they perceive as offering greater opportunity or lower risk. In addition, when the share price of the common stock of our BDCs is below the net asset value it is more difficult for our BDCs to raise capital. As of December 31, 2015, both FSC's and FSFR's common stock was trading below net asset value per share. See "— Risks Related to Our Business Development Companies and Other Funds — Regulations governing the operation of FSC and FSFR as BDCs affect their ability to raise, and the way in which they raise, additional capital." Any decrease in AUM from these or other sources would result in lower fees paid to us by our funds. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced and our business may be negatively affected.

We are subject to extensive regulation.

We are subject to extensive regulation. In particular, we are subject to regulation by the SEC, under the Federal securities laws (including the Investment Advisers Act of 1940, or the Advisers Act, and the 1940 Act). In addition, the BDCs we manage are regulated by the SEC under the 1940 Act, and certain of their subsidiaries must comply with regulations adopted by the Small Business Administration, or SBA, in order to maintain their status as small business investment companies. We also must comply with NASDAQ rules and listing requirements and our BDCs are subject to NASDAQ rules and listing requirements. Finally, many of the activities that our BDCs or we engage in are subject to or potentially subject to (in the absence of certain exemptions that we rely on and must comply with) the jurisdiction and regulatory oversight of various other Federal regulatory agencies (including the Commodities Futures Trading Commission, or CFTC, and the Department of Labor, or DOL), various self-regulatory organizations (including the Financial Industry Regulatory Authority, or FINRA, and the National Futures Association, or NFA) and various state regulatory authorities.

The various legal statutes and regulatory rules that we are subject to are extremely complex, and monitoring compliance with them can be a time-consuming and difficult task. For example, the Advisers Act imposes numerous obligations on investment advisers, including record keeping, advertising and operating requirements, disclosure obligations

and prohibitions on misleading or fraudulent activities. The Advisers Act also imposes an overriding fiduciary duty on investment advisers. The 1940 Act imposes similar obligations on BDCs, as well as additional detailed operational requirements that must be strictly adhered to by their investment advisers and other service providers. A failure to comply with the obligations imposed by the Advisers Act, the 1940 Act or other regulatory agencies could result in investigations, sanctions and reputational damage.

As we develop new investment strategies and businesses, we expect to become subject to additional regulations and oversight by regulatory agencies with which we do not currently have experience.

Failure to comply with various laws and regulations applicable to our BDCs and ourselves could have a materially adverse impact on our business. These include the possibility of significant civil or criminal fines, censure, suspensions of personnel or other sanctions (including the possibility of being barred from the industry) or the revocation of the registration of our subsidiary investment adviser. Moreover, even if the announcement of a sanction imposed against us, one of our subsidiaries or our personnel by a regulator is for a small monetary amount, the adverse publicity related to the sanction could harm our reputation, which in turn could have a material adverse effect on our businesses in a number of ways, making it harder for us to raise new funds and discouraging others from doing business with us. Additionally, the bringing of a significant enforcement action against us could cause irreparable damage to our business reputation and ability to remain in business, regardless of the merits of the claim against us. See "Business — Regulatory and Compliance Matters."

The regulatory environment in which we operate is subject to continual change and regulatory developments designed to increase oversight may adversely affect our business.

The regulatory environment in which we operate has undergone significant changes in the recent past, including the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the adoption of many new rules and regulations in response. We believe there may be more regulatory changes in our industry, which would result in subjecting participants to significant additional regulation. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us. These regulations often serve to limit our activities, including through customer protection and market conduct requirements. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients may adversely affect our business. Our ability to function in this environment depends on our ability to constantly monitor and promptly react to legislative and regulatory changes. For investment management firms in general, there have been a number of highly publicized regulatory inquiries that focus on the asset management industry. These inquiries already have resulted in increased scrutiny in the industry and new rules and regulations for investment managers. This regulatory scrutiny may limit our ability to engage in certain activities that might be beneficial to our stockholders. See "Business - Regulatory and Compliance Matters."

In addition, as a result of the recent economic downturn, acts of serious fraud in the asset management industry and perceived lapses in regulatory oversight, U.S. governmental and regulatory authorities may increase regulatory oversight of our businesses. We may be materially adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. The enactment of new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

We may not be able to maintain our current fee structure as a result of industry pressure to reduce fees, or as a result of changes in our business mix, which could have an adverse effect on our profit margins and results of operations.

We may not be able to maintain our current fee structure as a result of industry pressure to reduce fees or as a result of changes in our business mix. For example, in January 2016, we and the FSC board of directors made a decision to permanently reduce the base management fee on FSC's total gross assets (excluding cash and cash equivalents) from 2.00% to 1.75%. Although our investment management fees vary from product to product, historically we have competed primarily on the basis of our performance and not on the level of our investment fees relative to those of our competitors. In recent years, however, there has been a general trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that incentivize our investors to pay our fees. We cannot assure you that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure.

The board of directors of each BDC we manage must make certain findings as to the reasonableness of our fees and can renegotiate them annually. Further fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.

The investment management industry faces substantial litigation risks which could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.

We depend to a large extent on our network of relationships and on our reputation in order to attract and retain investors and clients. If an investor or client is not satisfied with our products or services, such dissatisfaction, especially communicated to others, may be more damaging to our business than to other types of businesses. We make investment decisions on behalf of our clients that could result in substantial losses to them. If our investors and/or clients suffer significant losses, or are otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty, breach of contract, unjust enrichment or fraud. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time, even after an action has been commenced. We may incur significant legal expenses in defending against litigation. Substantial legal liability or significant regulatory action against us could cause significant reputational harm to us and could materially adversely affect our business, financial condition or results of operations.

Our failure to comply with guidelines set by our clients, the boards of our BDCs or regulators could result in damage awards against us and a loss of assets under management, either of which could cause our earnings to decline.

As an investment adviser, we have a fiduciary duty to our clients. When clients retain us to manage assets on their behalf, they may specify certain guidelines regarding investment allocation and strategy that we are required to follow in the management of their portfolios. In addition, the boards of the BDCs we manage have established similar guidelines regarding the investment of assets in those funds. We are also required to invest the BDCs' assets in accordance with limitations under the 1940 Act and applicable provisions of the Internal Revenue Code of 1986, as amended, or the Code. Our failure to comply with these guidelines and other limitations could result in losses to a client or an investor in a fund, as the case may be, who could seek to recover damages from us or could result in the client withdrawing its assets from our management or the fund terminating our management agreement. Any of these events could harm our reputation and cause our earnings to decline significantly.

Risks Relating to Our Business Development Companies and Other Funds

Changes in interest rates may affect the cost of capital and net investment income for our BDCs.

Because our BDCs borrow to fund their investments, a portion of their net investment income may be dependent upon the difference between the interest rate at which they borrow funds and the interest rate at which they invest these funds. Portions of the Fifth Street BDCs investment portfolio and borrowings will likely have floating interest rate components from time to time. As a result, a significant change in market interest rates could have a material adverse effect on the Fifth Street BDCs' net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce the Fifth Street BDCs' net investment income to the extent investments are at fixed rates. The Fifth Street BDCs may hedge against such interest rate fluctuations by using standard hedging instruments, such as interest rate swap agreements, futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the CFTC. These activities may limit the Fifth Street BDCs' ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on the business, financial condition and results of operations of the Fifth Street BDCs, which would have a negative impact on our revenues, net income and cash flows.

A significant portion of each of the Fifth Street BDCs' investment portfolios is and will continue to be recorded at fair value as determined in good faith by each BDC's respective board of directors and, as a result, there is and will continue to be uncertainty as to the value of the portfolio investments of the Fifth Street BDCs.

Under the 1940 Act, BDCs are required to carry portfolio investments at market value or, if there is no readily available market value, at fair value as determined by the board of directors of such BDC. Typically, there is not a public market for the securities of the privately held companies in which the Fifth Street BDCs have invested and will generally continue to invest. As a result, each of the Fifth Street BDCs value these securities quarterly at fair value as determined in good faith by their respective board of directors.

Certain factors that may be considered in determining the fair value of investments of the Fifth Street BDCs include the nature and realizable value of any collateral, the portfolio company's earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, a determination of fair value by a Fifth Street BDC may differ materially from the values that would have been used if a ready market for these securities existed. In addition, any investments that include original issue discount or PIK interest may have unreliable valuations because their continuing accruals require ongoing judgments about the collectability of their deferred

payments and the value of their underlying collateral. As a result, the value for certain assets may never be realized, which may materially adversely affect the Fifth Street BDCs' investment performance and its results of operations, which in turn may have a material adverse effect on our revenues, net income and cash flows.

Certain of the claims in the legal proceedings described under the heading “Legal Proceedings” relate to the valuation of the Fifth Street BDC’s investment portfolios. See Item 3. Legal Proceedings in this Annual Report on Form 10-K for additional information concerning these lawsuits.

Market values of debt instruments and publicly-traded securities that our funds hold as investments may be volatile.

The market prices of debt instruments and publicly-traded securities held by the Fifth Street BDCs may be volatile and are likely to fluctuate due to a number of factors beyond their or our control, including actual or anticipated changes in the profitability of the issuers of such securities, general economic, social or political developments, changes in industry conditions, changes in government regulation, shortfalls in operating results from levels forecast by securities analysts, inflation and rapid fluctuations in inflation rates, the general state of the securities markets and other material events, such as significant management changes, financings, refinancings, securities issuances, acquisitions and dispositions. The value of publicly-traded securities in which the Fifth Street BDCs invest may be particularly volatile as a result of these factors. In addition, debt instruments that are held by our funds to maturity or for long terms must be "marked-to-market" periodically, and their values are therefore vulnerable to interest rate fluctuations and the changes in the general state of the credit environment, notwithstanding their underlying performance. Changes in the values of these investments may adversely affect the Fifth Street BDCS' investment performance and its results of operations, which in turn may have a material adverse effect on our revenues, net income and cash flows.

Substantially all of the assets of the Fifth Street BDCs are subject to security interests under secured credit facilities or, in the case of certain assets of FSC, subject to a superior claim over its stockholders by the U.S. Small Business Administration and, if a Fifth Street BDC defaults on its obligations under the facilities or with respect to SBA-guaranteed debentures, it may suffer adverse consequences, including foreclosure on its assets.

As of December 31, 2015, substantially all of the assets of the Fifth Street BDCs were pledged as collateral under their credit facilities or, in the case of certain assets of FSC, subject to a superior claim over its stockholders by the SBA. If a Fifth Street BDC defaults on its obligations under these facilities or SBA-guaranteed debentures, as may be applicable, the lenders and/or the SBA may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or their superior claim. In such event, such Fifth Street BDC may be forced to sell its investments to raise funds to repay its outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices it would not consider advantageous. Moreover, such deleveraging of the BDC could significantly impair its ability to effectively operate its business in the manner in which it has historically operated. As a result, it could be forced to curtail or cease new investment activities and lower or eliminate the distributions that it has historically paid to its stockholders. In addition, if the lenders exercise their right to sell the assets pledged under such Fifth Street BDC's credit facilities, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to the BDC after repayment of the amounts outstanding under the credit facilities, which could adversely affect the timing of payments to us.

A failure on the part of the Fifth Street BDCs to maintain their qualifications as BDCs would significantly reduce their operating flexibility.

Our BDCs are subject to complex rules under the 1940 Act, including rules that restrict them from engaging in transactions with affiliates, generally prohibit them from issuing and selling their common stock at a price below net asset value per share and from incurring indebtedness (including for this purpose, preferred stock), if their asset coverage, as calculated pursuant to the 1940 Act, equals less than 200% after such incurrence (subject, in the case of FSC, to certain exemptive relief granted with respect to its SBIC subsidiaries). Also under the 1940 Act, a BDC may not acquire any asset other than qualifying assets, as defined in Section 55(a) of the 1940 Act, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. If either of the Fifth Street BDCs fails to continuously qualify as a BDC, such BDC might be subject to regulation as a registered closed-end investment company under the 1940 Act, which would significantly decrease its operating flexibility. In addition, failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against such BDC, which could have a material adverse effect on us. See "Business — Our Investment Vehicles — Business Development Companies" and "Business — Regulatory and Compliance Matters — SEC Regulation."

A Fifth Street BDC's failure to qualify or remain qualified as a RIC would subject it to U.S. federal income tax and would adversely affect its, and in turn, our financial results.

Our BDCs have each elected to be treated for U.S. federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Code. A BDC treated as a RIC generally will not have to pay corporate-level federal income

taxes on any net ordinary income and realized net capital gains that are distributed to its stockholders if it meets certain source-of-income, income distribution, asset diversification and other requirements imposed under the Code. If a BDC were to fail to meet one or more of these requirements and such BDC were unable to correct such failure or failures under applicable statutory cure provisions, such BDC generally would be required to pay corporate-level federal income taxes on its taxable net income, regardless of whether such net income were distributed to its stockholders. As a result, a loss of RIC status by one of our BDCs would have a negative impact on such BDC's business and financial results, and therefore a negative impact on our revenues, net income and cash flows. The RIC qualification status of our BDCs is actively monitored by our personnel and professional advisors, and it is expected that each BDC qualifies and will continue to qualify as a RIC. However, the RIC requirements require an analysis of a variety of facts about each BDC on an ongoing basis, and there can be no assurance that any of our BDCs will not cease to qualify as a RIC at some point in the future.

Regulations governing the operation of FSC and FSFR as BDCs affect their ability to raise, and the way in which they raise, additional capital.

As BDCs, FSC and FSFR operate as highly regulated businesses within the provisions of the 1940 Act. Many of the regulations governing BDCs have not been modernized in the light of recent securities laws amendments and restrict, among other things, leverage incurrence, co-investments and other transactions with other entities within Fifth Street and the Fifth Street Funds. The BDC industry has proposed certain legislation to address some of these issues, but there can be no assurance that such legislation will be enacted. Certain of our funds may be restricted from engaging in transactions with FSC and FSFR and their respective subsidiaries.

As BDCs registered under the 1940 Act, FSC and FSFR may issue preferred stock, debt securities and 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. Under the provisions of the 1940 Act, each of the Fifth Street BDCs is permitted to issue senior securities only in amounts such that its asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities (subject, in the case of FSC, to certain exemptive relief granted with respect to its SBIC subsidiaries). If the value of their assets decline, they may be unable to satisfy this test. If that happens, they may be required to sell a portion of their investments and, depending on the nature of their leverage, repay a portion of their indebtedness at a time when such sales may be disadvantageous. There is pending legislation to lessen the asset coverage test, but there can be no assurance that such legislation will be enacted.

BDCs may issue and sell common stock at a price below net asset value per share only in limited circumstances, one of which is during the one-year period after stockholder approval. The stockholders of each of FSC and FSFR have, in the past, approved such a proposal. FSC and FSFR may ask their stockholders for such approvals from year to year. There can be no assurance that such approvals will be obtained. As of December 31, 2015, both FSC and FSFR's common stock was trading below net asset value per share. If FSC and FSFR are not able to grow through public or private offerings of their common stock, we may not be able to increase our AUM at such companies or the revenues earned from such companies.

There are significant potential conflicts of interest that could adversely impact investment returns of the Fifth Street BDCs.

Fifth Street Management has adopted, and the board of directors of each of FSC and FSFR has approved, an investment allocation policy that governs the allocation of investment opportunities among the investment funds managed by Fifth Street Management and its affiliates. To the extent an investment opportunity is appropriate for one of the BDCs or any other investment fund managed by our affiliates, and co-investment is not possible, Fifth Street Management will adhere to its investment allocation policy in order to determine to which entity to allocate the opportunity. Any such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity's investment strategy, on an alternating basis. Although our investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, either of FSC, FSFR or another fund that we manage could be adversely affected to the extent investment opportunities are allocated among the investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and Fifth Street Management. There is no guarantee that Fifth Street Management will make the correct decision in such allocation.

The 1940 Act prohibits the Fifth Street BDCs from making certain negotiated co-investments with affiliates, unless such BDC receives an order from the SEC permitting it to do so, or in accordance with applicable regulatory guidance and interpretations. Fifth Street Management and certain of its affiliates received an exemptive order from the SEC on September 9, 2014 that permits each of the Fifth Street BDCs to co-invest with other funds managed by Fifth Street Management or its affiliates in negotiated transactions in a manner consistent with its investment objective, positions, policies, strategies and restrictions as well as regulatory requirements (including the terms and conditions of the exemptive order).

Fifth Street Management's investment allocation policy is also designed to manage and mitigate conflicts of interest associated with the allocation of investment opportunities if one of the Fifth Street BDCs is able to co-invest, either pursuant to

SEC interpretive positions or the exemptive order, with other funds managed by Fifth Street Management or its affiliates. Generally, under the investment allocation policy, if a Fifth Street BDC is permitted to co-invest pursuant to the exemptive order, co-investments will be allocated pursuant to the conditions of the exemptive order. If a Fifth Street BDC is able to co-invest pursuant to SEC interpretive positions, generally, under the investment allocation policy, a portion of each opportunity that is appropriate for such BDC and any affiliated fund will be offered to such BDC and such other eligible accounts as determined by Fifth Street Management and generally based on asset class, fund size and liquidity, among other factors. If there is a sufficient amount of securities to satisfy all participants, the securities will be allocated among the participants in accordance with their order size and if there is an insufficient amount of securities to satisfy all participants, the securities will be allocated pro rata based on each participating party's capital available for investment in the asset class being allocated, up to the amount proposed to be invested by each. Fifth Street Management seeks to treat all clients fairly and equitably such that none receive preferential treatment vis-à-vis the others over time, in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where certain funds receive allocations where others do not.

Our funds' investments in portfolio companies may be risky, and our funds could lose all or part of their investments.

The companies in which our funds invest are typically highly leveraged, and, in most cases, our funds' investments in such companies are not rated by any rating agency. If such investments were rated, we believe that they would likely receive a rating from a nationally recognized statistical rating organization of below investment grade (i.e., below BBB- by S&P or Baa by Moody's). Exposure to below investment grade securities involves certain risks, and those securities are viewed as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Investing in small and mid-sized companies involves a number of significant risks. Among other things, these companies:

•

may have limited financial resources and may be unable to meet their obligations under their debt instruments that our funds hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our funds' portfolio companies that they may have obtained in connection with their investments, as well as a corresponding decrease in the value of the equity components of our funds' investments;


•	may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors' actions and market conditions, as well as general economic downturns;


•	are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our funds' portfolio companies and, in turn, on our funds;


•	generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and


•	generally have less publicly available information about their businesses, operations and financial condition.

If our funds are unable to uncover all material information about these companies, our funds may not make a fully informed investment decision, and as a result may lose part or all their investment. In addition, in the course of providing significant managerial assistance to certain of the Fifth Street BDC's portfolio companies, certain of our officers and directors may serve as directors on the boards of such companies. To the extent that litigation arises out of our funds' investments in these companies, our officers and directors may be named as defendants in such litigation, which could result in an expenditure of funds (through our funds' indemnification of such officers and directors) and the diversion of management time and resources.

An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.

Our funds invest primarily in privately held companies. Generally, little public information exists about these companies, including typically a lack of audited financial statements and ratings by third parties. Our funds must therefore rely on their adviser's ability to obtain adequate information to evaluate the potential risks of investing in these companies. These companies and their financial information may not be subject to the Sarbanes-Oxley Act and other rules that govern public companies. If our funds are unable to uncover all material information about these companies, our funds may not make a fully informed investment decision, and our funds may lose money on our investments. These factors could affect the investment return of our funds and, in turn, affect our results of operations.

If our funds make unsecured debt investments, they may lack adequate protection in the event their portfolio companies become distressed or insolvent and they will likely experience a lower recovery than more senior debtholders in the event their portfolio companies defaults on their indebtedness.

Our funds have made, and may in the future make, unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of small and mid-sized companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing. These factors could affect the investment return of our funds and, in turn, affect our results of operations.

The lack of liquidity in our funds' investments may adversely affect their businesses.

Our funds invest, and will continue to invest, in companies whose securities are not publicly-traded, and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly-traded securities. In fact, all of our funds' assets may be invested in illiquid securities. The illiquidity of these investments may make it difficult for our funds to sell these investments when desired. In addition, if any our funds are required to liquidate all or a portion of its portfolio quickly, such fund may realize significantly less than the value at which it had previously recorded these investments. Our funds' 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 funds' investments may make it difficult for our funds to dispose of them at a favorable price, and, as a result, our funds may suffer losses, which could affect our results of operations.

Our funds may not have the funds or ability to make additional investments in their portfolio companies.

After an initial investment in a portfolio company, our funds may be called upon from time to time to provide additional funds to such company or have the opportunity to increase their investments through the exercise of a warrant to purchase common stock. There is no assurance that our funds 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 funds' 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 such fund to increase its participation in a successful operation or may reduce the expected yield on the investment, any of which could affect our results of operations.

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

Our funds invest primarily in first lien, second lien and subordinated debt issued by small and mid-sized companies. Our funds' portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which our funds invest. By their terms, such debt instruments may entitle the holders to receive payments of interest or principal on or before the dates on which our funds are entitled to receive payments with respect to the debt instruments in which our funds invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our funds' investment in that portfolio company would typically be entitled to receive payment in full before our funds receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to our funds. In the case of debt ranking equally with debt instruments in which our funds invest, such funds 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. Any of these circumstances could indirectly have a material adverse effect on our business, financial condition and results of operations.

We generally do not, and do not expect to, control our portfolio companies.

Our funds do not, and do not expect to, control most of their portfolio companies, even though our funds may have board representation or board observation rights, and our funds' debt agreements may contain certain restrictive covenants. As a result, our funds are subject to the risk that a portfolio company in which they invest may make business decisions with which our funds disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our funds' interests as a debt investor. Due to the lack of liquidity for our funds' investments in non-traded companies, our funds may not be able to dispose of their interests in portfolio companies as readily as such funds would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our funds' portfolio holdings, having a negative effect on our results of operations.

Defaults by our funds' portfolio companies would harm our funds' operating results.

A portfolio company's failure to satisfy financial or operating covenants imposed by our funds or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company's ability to meet its obligations under the debt or equity securities that our funds hold. Such funds may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. Any of these circumstances could indirectly have a material adverse effect on our business, financial condition and results of operations.

Dependence on leverage by certain of our funds and by our funds' portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect our funds' ability to achieve attractive rates of return on those investments.

FSC, FSFR, our CLOs and FSOF and our funds' portfolio companies currently rely on the use of leverage, and our ability to achieve attractive rates of return on investments will depend on our ability to access sufficient sources of indebtedness at attractive rates. While the funds mentioned above are our only funds that currently rely on the use of leverage, certain of our other funds may in the future rely on the use of leverage. If our funds or the companies in which our funds invest raise capital in the structured credit, leveraged loan and high yield bond markets, the results of their operations may suffer if such markets experience dislocations, contractions or volatility. Any such events could adversely impact the availability of credit to businesses generally and could lead to an overall weakening of the U.S. and global economies. Any economic downturn could adversely affect the financial resources of our funds and their investments (in particular those investments that depend on credit from third parties or that otherwise participate in the credit markets) and their ability to make principal and interest payments on, or refinance, outstanding debt when due. Moreover, these events could affect the terms of available debt financing with, for example, higher interest rates, higher equity requirements and/or more restrictive covenants.

The absence of available sources of sufficient debt financing for extended periods of time or an increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments. Certain investments may also be financed through borrowings on fund-level debt facilities, which may or may not be available for a refinancing at the end of their respective terms. Finally, the interest payments on the indebtedness used to finance our funds' investments are generally deductible expenses for income tax purposes, subject to limitations under applicable tax law and policy. Any change in such tax law or policy to eliminate or substantially limit these income tax deductions, as has been discussed from time to time in various jurisdictions, would reduce the after-tax rates of return on the affected investments, which may have an adverse impact on our businesses and financial results.

Similarly, our funds' portfolio companies regularly utilize the corporate debt markets to obtain additional financing for their operations. Our funds' portfolio companies are typically highly leveraged. Those that have credit ratings are typically non-investment grade and those that do not have credit ratings would likely be non-investment grade if they were rated. If the credit markets render such financing difficult to obtain or more expensive, this may negatively impact the operating performance of those portfolio companies and, therefore, the investment returns of our funds. In addition, if the markets make it difficult or impossible to refinance debt that is maturing in the near term, some of our funds' portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Any of the foregoing circumstances could have a material adverse effect on our business, results of operations and financial condition.

Our funds may choose to use leverage as part of their respective investment programs. Substantially all of the investments held by our CLOs are financed by the issuance of senior secured and subordinated notes. Below is a summary of leverage utilized by our BDCs as of December 31, 2015 (shown in thousands):



Fifth Street Fund	Total Debt		Net Asset Value		Total Debt as a % of Net Asset Value		BDC Asset Coverage Ratio
FSC ⁽¹⁾	$	1,154,840	$	1,263,114	91.4	%	235.95%
FSFR	$	291,558	$	334,661	87.1	%	214.78%

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(1) FSC has received exemptive relief from the SEC to exclude debentures issued by the Small Business Administration from the definition of senior securities in the 200% asset coverage test under the 1940 Act, which allows greater flexibility under the test.

The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss to investors. A fund may borrow money from time to time to make investments or may enter into derivative transactions with counterparties that have embedded leverage. The interest expense and other costs incurred in connection with such borrowing may not be recovered by returns on such investments and may be lost, and the timing and magnitude of such losses may be accelerated or exacerbated, in the event of a decline in the market value of such investments. Gains realized with borrowed funds may cause the fund's net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results

fail to cover the cost of borrowings, the fund's net asset value could also decrease faster than if there had been no borrowings. In addition, as BDCs regulated under the 1940 Act, FSC and FSFR are each permitted to issue senior securities in amounts such that its asset coverage ratio equals at least 200% after each issuance of senior securities. Each of FSC's and FSFR's ability to pay dividends will be restricted if its asset coverage ratio falls below at least 200% and any amounts that it uses to service its indebtedness are not available for dividends to its common stockholders. An increase in interest rates could also decrease the value of fixed rate debt investments that our funds make. Any of the foregoing circumstances could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to our Class A Common Stock

The market price and trading volume of our Class A common stock has been extremely volatile, which could result in rapid and substantial losses for our stockholders.

The market price of our Class A common stock has been and may continue to be highly volatile and subject to wide fluctuations. Between January 1, 2015 and December 31, 2015, the sales price of Class A common stock has fluctuated from a low of $3.25 to a high of $14.50 per share. In addition, the trading volume on our Class A common stock may fluctuate and cause significant price variations to occur. If the market price of our Class A common stock declines significantly, you may be unable to resell your shares of Class A common stock at or above your purchase price, if at all. We cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of our Class A common stock, include:


•	variations in our quarterly operating results;


•	failure to meet our earnings estimates;


•	publication of research reports about us or the investment management industry, or the failure of securities analysts to cover our Class A common stock;


•	departures of our Principals or additions/departures of other key personnel;


•	adverse market reaction to any indebtedness we may incur or securities we may issue in the future;


•	actions by stockholders;


•	material changes in market valuations of similar companies;


•	actual or anticipated poor performance in our underlying investment strategies;


•	changes or proposed changes in laws or regulation, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters;


•	adverse publicity about the investment management industry, generally, or individual scandals specifically;


•	litigation and governmental investigations; and


•	general market and economic conditions.

The market price of our Class A common stock may decline due to the potential for future sales of our Class A common stock on the exchange of Holdings LP Interests.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock by us or the exchange of Holdings LP Interests by the Holdings Limited Partners (such exchanges to be permitted at specified quarterly exchange dates beginning November 4, 2016), or the perception that such sales or exchanges could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

As of December 31, 2015, we had a total of 5,798,614 shares of our Class A common stock outstanding. All of the 5,798,614 shares of our Class A common stock outstanding are freely tradeable without restriction or further registration under the Securities Act by persons other than our "affiliates."

Pursuant to the terms of an Exchange Agreement that we entered into at the time of our initial public offering, the Holdings Limited Partners may from time to time, beginning two years after our initial public offering, exchange their Holdings LP Interests for shares of our Class A common stock on a one-for-one basis. As of December 31, 2015, the Holdings Limited Partners beneficially own 44,000,000 Holdings LP Interests in the aggregate, which will be exchangeable for 44,000,000 shares of our Class A common stock in the aggregate, subject to certain limits.

Pursuant to a resale and registration rights agreement with the Holdings Limited Partners, we have agreed to use our reasonable best efforts to file registration statements from time to time for the sale of the shares of our Class A common stock, including Class A common stock which is deliverable upon exchange of Holdings LP Interests.

In addition, as of December 31, 2015, 14,333,718 shares of Class A common stock are reserved for issuance under our 2014 Omnibus Incentive Plan. From January 1, 2016, and ending on and including January 1, 2024, the foregoing share reserve amount may be increased by a number of shares of our Class A common stock equal to the positive difference, if any, of (x) 15% of the aggregate number of Class A common stock (including partnership interests exchangeable into Class A common stock) outstanding on the last day of the prior year minus (y) the total number of shares of Class A common stock available for issuance on such last day (or such lesser amount as determined by the Compensation Committee). As of December 31, 2015, we have options outstanding with respect to 5,562,866 shares of our Class A common stock and unvested restricted stock units with respect to 1,201,794 shares of Class A common stock. Upon the exercise of outstanding options and vesting of outstanding restricted stock units, shares of our Class A common stock will be issued and become eligible for sale in the public market in the future, subject to certain legal and contractual restrictions.

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our Class A common stock to decline.

The requirements of being a public entity and generating growth may strain our resources.

As a newly public entity, we are subject to the rules and requirements of the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board, or the PCAOB, and NASDAQ, each of which imposes additional reporting and other obligations on public companies. These requirements may place a strain on our systems and resources. For example, the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires that we file annual, quarterly and current reports with respect to our business and financial condition and the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which is discussed below.

We have been and will continue to be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, generating growth also will require us to commit additional management, operational, and financial resources to identify new professionals to join the firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our businesses, financial condition, results of operations and cash flows. We may incur significant additional annual expenses related to these steps and, among other things, additional directors' and officers' liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing, tax and legal fees and similar expenses.

We have identified material weaknesses in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

We identified the following control deficiencies, each of which has been determined to be a material weakness:


•	We did not maintain sufficient accounting resources with technical accounting knowledge, experience and training in the application of U.S. GAAP and for effective preparation and review of our financial statements.

•

We did not design and maintain effective controls to analyze complex and non-routine transactions or adequately review the accounting and/or disclosure for these transactions. This material weakness was identified as the primary cause of errors relating to the treatment of stock-based compensation and liabilities associated with existing membership units, and the consequent improper recording and improper disclosure of certain equity transactions, as well as incorrectly recording expenses reimbursable by our funds on a net basis.

•

We did not design and maintain sufficient controls to evaluate information provided from and accounting conclusions reached by FSC CT LLC, the administrator of the Fifth Street BDCs and our wholly-owned subsidiary, in the determination of Part I fee revenue. This material weakness was identified as the primary cause of the revision relating to the Part I fees, and the consequent improper recording of fee revenue.

These control deficiencies resulted in audit adjustments to the Company’s interim and annual financial statements during the year ended December 31, 2015. Additionally, these control deficiencies could result in misstatements of the stock-based compensation and liabilities associated with existing membership units, certain equity transactions and Part I fee revenue that would not be prevented or detected.

Because of the material weaknesses described above, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2015, based on criteria in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have taken and will take a number of actions to remediate these material weaknesses including, but not limited to, adding senior experienced accounting and financial personnel, reallocating existing internal resources and retaining third-party consultants to help enhance our internal control over financial reporting following reviews of our accounting and finance function conducted by members of senior management. Management is committed to improving our internal control processes and believes that the measures described above should be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. We cannot assure you, however, that the steps taken will remediate such weaknesses, nor can we be certain of whether additional actions will be required or the costs of any such actions. As of December 31, 2015, these material weaknesses have not been remediated.

We may need to take additional measures to fully mitigate these issues, and the measures we have taken, and expect to take, to improve our internal controls may not be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses or significant deficiencies or other material weaknesses or deficiencies will not result in a material misstatement of our annual or interim financial statements. In addition, other material weaknesses or deficiencies may be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our Class A common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

We are an emerging growth company and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our Class A common stock may be less attractive to investors.

We are an emerging growth company and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies, including, but not limited to, an exemption from the auditor attestation requirement of Section 404, a provision allowing us to provide fewer years of financial statements and other financial data and reduced disclosure about executive compensation arrangements. We have elected to adopt these reduced disclosure requirements and the exemption from the auditor attestation requirement available to emerging growth companies. We will remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our Class A common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our Class A common stock less attractive as a result of our choices, there may be a less active trading market for our Class A common stock, and the price of our Class A common stock may be more volatile.

We cannot guarantee that our share repurchase program will be fully consummated or that our share repurchase program will enhance long-term shareholder value, and share repurchases could increase the volatility of the price of our Class A common stock.

In May 2015, our board of directors authorized us to repurchase up to $20.0 million of our Class A common stock. Although our board of directors has authorized this program, we are not obligated to purchase any specific dollar amount or to acquire any specific number of shares. As of December 31, 2015, we repurchased approximately $1.8 million of our Class A common stock under the share repurchase program. The share repurchase program could affect the price of our Class A common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our stock. For example, the existence of a share repurchase program could cause the price of our Class A common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our Class A common stock may decline below the levels at which we determine to repurchase our Class A common stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term share price fluctuations could reduce the program’s effectiveness. The amount of stock we are permitted to repurchase is also limited by the terms of our Credit Facility.

We are controlled by the Principals, whose interests may conflict with those of our other stockholders.

As of December 31, 2015, the Principals hold approximately 97.4% of the combined voting power of our common stock. So long as the Principals continue to hold, directly or indirectly, shares of common stock representing more than 50% of the voting power of our common stock, the Principals are able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions, and have significant control over our management and the Principals' control may have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The interests of the Principals may not always coincide with the interests of other stockholders, and the Principals may act in a manner that advances its best interests and not necessarily those of our other stockholders.

We are a "controlled company" within the meaning of NASDAQ rules and, as a result, qualify for, and intend to rely on certain of the "controlled company" exemptions from certain NASDAQ corporate governance requirements. Our stockholders will not have the same protections afforded to stockholders of other companies.

Under NASDAQ rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a "controlled company" and may elect not to comply with certain NASDAQ corporate governance requirements. As of December 31, 2015, the Principals held approximately 97.4% of the combined voting power of our common stock. As such we are eligible to take advantage of this "controlled company" exemption. A "controlled company" may elect not to comply with certain NASDAQ corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended by a majority of the independent directors or by a nominating committee composed solely of independent directors. We intend to continue to take advantage of these controlled company exemptions. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could negatively affect the market price of our Class A common stock.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. For example, our amended and restated certificate of incorporation authorizes the issuance of preferred stock that could be issued by our Board of Directors to thwart a takeover attempt. The market price of our Class A common stock could be adversely affected to the extent that the provisions of our amended and restated certificate of incorporation and bylaws discourage potential takeover attempts that our stockholders may favor.

Risks Relating to Our Structure

Our ability to pay regular dividends to our stockholders is subject to the discretion of our Board of Directors and may be limited by our holding company structure and applicable provisions of Delaware law.

We currently intend to pay cash dividends to the holders of our Class A common stock on a quarterly basis. Our Board of Directors may, in its sole discretion, decrease the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will be dependent upon the ability of our subsidiaries to generate earnings and cash flows and distribute them to us so that we may pay dividends to our stockholders. We expect to cause Fifth Street Holdings to make distributions to its members, including us. However, its ability to make such distributions will be subject to its operating results, cash requirements and financial condition, the applicable provisions of Delaware law which may limit the amount of funds available for distribution to its members, its compliance with covenants and financial ratios related to existing or future indebtedness, and its other agreements with third parties. In addition, each of the companies in the corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment of dividends or distributions.

Under the Delaware General Corporation Law, or the DGCL, we may only pay dividends from legally available surplus or, if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. Under the DGCL, our Board of Directors can use the fair value of assets and liabilities, rather than book value, in making this determination. Under the Delaware Revised Uniform Limited Partnership Act, or the Delaware Limited Partnership Act, Fifth Street Holdings may not make a distribution to a partner if, after the distribution, all its liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of

creditors is limited to specific property of the partnership, would exceed the fair value of our assets. If Fifth Street Holdings were to make such an impermissible distribution, any limited partner who received a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Partnership Act would be liable to Fifth Street Holdings for the amount of the distribution for three years. See "Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy."

Our ability to pay taxes and expenses may be limited by our holding company structure and applicable provisions of Delaware law.

As a holding company, we will have no material assets other than our ownership of partnership interests of Fifth Street Holdings and will have no independent means of generating revenue. Fifth Street Holdings will be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to U.S. federal income tax. Instead, for U.S. federal income tax purposes, taxable income will be allocated to its partners, including us, pro rata according to the number of partnership interests each owns. Accordingly, we will incur U.S. federal income taxes on our proportionate share of any net taxable income of Fifth Street Holdings and will also incur expenses related to our operations. We intend to cause Fifth Street Holdings to distribute cash to its members, including us. However, its ability to make such distributions will be subject to various limitations as set forth in the preceding risk factor. If, as a consequence of these various limitations and restrictions, we do not have sufficient funds to pay tax or other liabilities to fund our operations, we may have to borrow funds and thus, our liquidity and financial condition could be materially adversely affected.

We will be required to pay the TRA Recipients most of the tax benefit of any depreciation or amortization deductions we may claim as a result of the tax basis step up we receive in connection with the exchanges of Holdings LP Interests.

Any taxable exchanges by the TRA Recipients of Holdings LP Interests for shares of our Class A common stock and payments under the tax receivable agreement are expected to result in increases in the tax basis in the tangible and intangible assets of Fifth Street Holdings connected with such Holdings LP Interests. The increase in tax basis is expected to reduce the amount of tax that we would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, might challenge all or part of this tax basis increase, and a court might sustain such a challenge.

The tax receivable agreement that we entered into with the TRA Recipients generally provides that we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state, local and foreign income tax that we realize (or, under certain circumstances, are deemed to realize) as a result of these increases in tax basis. Assuming no material relevant tax law changes and that we earn sufficient taxable income to realize the full tax benefits of the increased depreciation and amortization of our assets, we expect that the future payments to the TRA Recipients in respect of the sale of Holdings LP Interests will aggregate to $45.5 million. The actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending on a number of factors, including the price of our Class A common stock at the time of the purchase, the amount and timing of our income and the tax rates then applicable. Similarly, the tax receivable agreement payments related to the future exchanges will vary based on the timing of the exchanges, the price of the Class A common stock at the time of the exchanges, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable. The tax receivable agreement payments related to future exchanges have not been included in the above amounts. We expect that, as a result of the increases in the tax basis of the tangible and intangible assets of Fifth Street Holdings attributable to the exchanged Holdings LP Interests, the payments that we may make to the TRA Recipients will be substantial.

Moreover, if we exercise our right to terminate the tax receivable agreement early, we will be obligated to make an early termination payment to the TRA Recipients, or their transferees, based upon the net present value (based upon certain assumptions in the tax receivable agreement, including the assumption that we would have enough taxable income in the future to fully utilize the tax benefit resulting from any increased tax basis that results from an exchange) of all payments that would be required to be paid by us under the tax receivable agreement. If certain change of control events were to occur, we would be obligated to make payments to the TRA Recipients using certain assumptions and deemed events similar to those used to calculate an early termination payment.

We will not be reimbursed for any payments previously made under the tax receivable agreement if the basis increases described above were successfully challenged by the IRS or another taxing authority. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of our cash tax savings.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We do not own any real estate or other physical properties material to our operations. Our headquarters is located at 777 West Putnam Avenue, 3rd Floor, Greenwich, CT 06830. We lease our headquarters from an entity controlled by Mr. Tannenbaum. See Note 10 - Related Party Transactions to our consolidated financial statements included in this Annual Report on Form 10-K for more information on this lease. Additionally, we currently lease office space that is utilized by our affiliates in Chicago, IL and San Francisco, CA. We and our affiliates have subleased or canceled a portion of the existing leased properties in White Plains, NY and Greenwich, CT since the move of our headquarters to 777 West Putnam Avenue. We believe that our office facilities are adequate for our business as presently conducted, although we will remain active in evaluating alternative options should the need arise.

Item 3. Legal Proceedings

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings except as described below.

FSC class-action lawsuits

The Company has been named as a defendant in three putative securities class-action lawsuits arising from our role as investment adviser to FSC. The first lawsuit was filed on October 1, 2015, in the United States District Court for the Southern District of New York and is captioned Howard Randall, Trustee, Howard & Gale Randall Trust FBO Kimberly Randall Irrevocable Trust UA Feb 15, 2000 v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-07759-LAK. The second lawsuit was filed on October 14, 2015, in the United States District Court for the District of Connecticut and is captioned Lynn Waters-Cottrell v. Fifth Street Finance Corp., et al., Case No. 3:15-cv-01488. The case was later transferred to the United States District Court for the Southern District of New York, where it is pending as Case No. 16-cv-00088-LAK. The third lawsuit was filed on November 12, 2015, in the United States District Court for the Southern District of New York and is captioned Robert J. Hurwitz v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-08908-LAK. The defendants in all three cases are Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, and Richard Petrocelli, FSC, and the Company.

The lawsuits allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of investors who purchased FSC common stock between July 7, 2014, and February 6, 2015, inclusive. The lawsuits allege in general terms that defendants engaged in a purportedly fraudulent scheme designed to artificially inflate the true value of FSC’s investment portfolio and investment income in order to increase FSAM’s revenue, which FSAM received as the asset manager and investment advisor of FSC. For example, the lawsuits allege that FSC improperly delayed the write-down of five of its investments until the fiscal quarter ending in December 31, 2014, after FSAM conducted its IPO in October 2014, when FSC purportedly should have taken the write-down before FSAM’s IPO. The plaintiffs seek compensatory damages and attorneys’ fees and costs, among other relief, but have not specified the amount of damages being sought in any of the actions. On February 1, 2016, the court appointed Oklahoma Police Pension and Retirement System as lead plaintiff and the law firm of Labaton Sucharow LLP as lead counsel. The parties have proposed that lead plaintiff file its consolidated complaint by April 1, 2016.

The Company has also been named as a defendant in a putative class action lawsuit filed by a purported stockholder of FSC on January 29, 2016, in the Court of Chancery of the State of Delaware. The case is captioned James Craig v. Bernard D. Berman, et al., C.A. No. 11947-VCG. The defendants in the case are Bernard D. Berman, James Castro-Blanco, Ivelin M. Dimitrov, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Sandeep K. Khorana, Todd G. Owens, Douglas F. Ray, Fifth Street Management LLC, FSAM, FSC, and Fifth Street Holdings L.P. The complaint alleges that the defendants breached their fiduciary duties to FSC stockholders by, among other things, issuing an incomplete or inaccurate preliminary proxy statement that purportedly attempted to mislead FSC stockholders into voting against proposals presented by another shareholder (RiverNorth Capital Management) in a proxy contest in connection with FSC’s 2016 annual meeting. The competing shareholder proposals sought to elect three director nominees to FSC’s Board and to terminate the Investment Advisory Agreement between FSC and FSAM. The complaint also charges that the director defendants breached their fiduciary duties by perpetuating and failing to terminate the Investment Advisory Agreement and by seeking to entrench themselves as directors and FSAM affiliates as FSC’s manager. The FSAM entities are charged with breaching their duties as alleged controlling persons of FSC and with aiding and abetting the FSC directors’ breaches of duty. The complaint seeks, among other things, an injunction preventing FSC and its board of directors from soliciting proxies for the 2016 annual meeting until additional disclosures are issued; a declaration that the defendants have breached their fiduciary duties by refusing to terminate the Investment Advisory Agreement and by acting to have the FSC board of directors and Fifth Street Management LLC remain in place; a declaration that any shares repurchased by FSC after the record date of the 2016 annual meeting will not be considered outstanding shares for purposes of the FSC stockholder approvals sought at the annual meeting; and awarding plaintiff costs and disbursements. The plaintiff moved for expedited proceedings and for a preliminary injunction.

Defendants opposed plaintiff’s motion for expedited proceedings and moved to dismiss the case. FSC also filed another amendment to the preliminary proxy statement, making additional disclosures relating to issues raised by plaintiff and RiverNorth. On February 16, 2016, plaintiff informed the Delaware court that the basis for his injunction motion had become moot and that he was withdrawing his motions for a preliminary injunction and expedited proceedings. On February 18, 2016, FSC announced that it had entered into an agreement with RiverNorth pursuant to which RiverNorth would withdraw its competing proxy solicitation.

The Company believes that, with respect to itself and its related entities, all of the claims in the above described lawsuits are without merit, and it intends to vigorously defend against such claims.

FSC shareholder derivative actions

On December 4, 2015, a putative shareholder derivative action captioned Solomon Chau v. Leonard M. Tannenbaum, et al., Case No. 3:15-cv-01795, was filed on behalf of FSC in the United States District Court for the District of Connecticut. The complaint names Leonard Tannenbaum, Bernard D. Berman, Todd G. Owens, Ivelin M. Dimitrov, Alexander C. Frank, Steven M. Noreika, David H. Harrison, Brian S. Dunn, Douglas F. Ray, Richard P. Dutkiewicz, Byron J. Haney, James Castro-Blanco, Richard A. Petrocelli, Frank C. Meyer, and the Company as defendants and FSC as the nominal defendant. In addition, a second putative shareholder derivative action, captioned Scott Avera v. Leonard M. Tannenbaum, et al., Case No. 3:15-cv-01889, was filed in the United States District Court for the District of Connecticut on December 31, 2015, against the same group of defendants. The underlying allegations in both complaints are related to the allegations in the securities class actions against FSC, the Company, and others. The complaints allege that FSC’s Board approved an unfair advisory and management agreements with entities related to the Company and that certain defendants engaged in allegedly improper conduct designed to make the Company appear more attractive to potential investors before its IPO. The cases have been stayed by consent of the parties and order of the court until September 30, 2016.

On January 27, 2016, two putative shareholder derivative actions were filed on behalf of FSC in the Superior Court of Connecticut, Judicial District of Stamford/Norwalk. The cases are captioned John Durgerian v. Leonard M. Tannenbaum, et al. and Kamile Dahne v. Leonard M. Tannenbaum, et al. The defendants in the cases are Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, Richard A. Petrocelli, James Castro-Blanco, Brian S. Dunn, Richard P. Dutkiewicz, Byron J. Haney, Jeffrey R. Kay (subsequently dropped from the litigation), Douglas F. Ray, Sandeep K. Khorana, Steven M. Noreika, David H. Harrison, Frank C. Meyer, and the Company, with FSC as the nominal defendant. The allegations in the two cases are generally similar to those in the federal derivative actions.

FSAM class-action lawsuits

The Company has been named as a defendant in two putative securities class-action lawsuits filed by purchasers of the Company’s shares. The suits are related to the securities class actions brought by shareholders of FSC, for which Fifth Street Management serves as investment advisor.

The first lawsuit by the Company’s shareholders was filed on January 7, 2016, in the United States District Court for the District of Connecticut and is captioned Ronald K. Linde, etc. v. Fifth Street Asset Management Inc., et al., Case No. 1:16-cv-00025. The defendants are the Company, Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Steven M. Noreika, Wayne Cooper, Mark J. Gordon, Thomas L. Harrison, and Frank C. Meyer. The lawsuit asserts claims under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 on behalf of a putative class of persons and entities who purchased common stock in or pursuant to the Company’s IPO. The complaint alleges that the defendants engaged in a fraudulent scheme and course of conduct to artificially inflate FSC’s assets and investment income and, in turn, the Company’s valuation at the time of its IPO, thereby rendering the Company’s IPO Registration Statement and Prospectus materially false and misleading. The plaintiffs have not quantified their claims for relief. On February 25, 2016, the court granted the Company’s unopposed motion to transfer the case to the United States District Court for the Southern District of New York, where the case can be coordinated with the securities class actions filed by FSC shareholders.

On March 7, 2016, the other putative class action by the Company’s shareholders was filed, in the United States District Court for the Southern District of New York. The case is captioned Joyce L. Trupp Agreement of Trust v. Fifth Street Asset Management Inc., et al., No. 1:16-cv-01711. The defendants are the same as in the Linde case, and the complaint is a virtual clone of the Linde complaint.

The Company believes that the claims are without merit and intends vigorously to defend itself against the plaintiffs’ allegations.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Class A Common Stock

Our Class A common stock is listed for trading on the NASDAQ Global Select Market under the symbol "FSAM." As of December 31, 2015, there were two record holders of our Class A common stock and two record holders of our Class B common stock. These numbers do not include shareholders who hold their shares through one or more intermediaries, such as banks, brokers or depositories.

The following table sets forth the quarterly high and low sales prices of our Class A common stock on the NASDAQ Global Select Market for the period from the date our Class A common stock was listed through December 31, 2015:



	High		Low
Fiscal year ended December 31, 2015
First quarter	$	14.50	$	11.01
Second quarter	$	11.49	$	8.63
Third quarter	$	10.40	$	7.02
Fourth quarter	$	8.02	$	3.25
Fiscal year ended December 31, 2014
Fourth quarter (1)	$	16.19	$	11.30

____________________


(1)	Our Class A common stock first began trading on the NASDAQ Global Select Market on October 30, 2014.

Dividend Policy

We will pay dividends to holders of our Class A common stock, on a quarterly basis, substantially all of our allocable share of Fifth Street Holdings' distributable earnings, net of applicable corporate taxes and amounts payable under the tax receivable agreement, in excess of amounts determined to be necessary or appropriate to be retained by Fifth Street Holdings or its subsidiaries to provide for the conduct of our businesses, to make appropriate investments in our businesses and our funds, to comply with the terms of our debt instruments, other agreements or applicable law or to provide for future distributions to us and the Holdings Limited Partners for any ensuing quarter. We intend to fund our dividends from our portion of distributions made to us by Fifth Street Holdings which, in turn, will fund its distributions to us from distributions that it receives from its subsidiaries. The Class B common stock does not entitle its holders to any cash dividends in their capacity as holders of Class B common stock.

Our ability to pay dividends is subject to Board of Director discretion and may be limited by our holding company structure and applicable provisions of Delaware law. See "Item 7. Management's Discussion and Analysis of Financial Condition and Operating Results - Dividend Policy" and "Item 1A. Risk Factors - Risks Related to Our Class A Common Stock - Our ability to pay dividends is subject to the discretion of our Board of Directors and may be limited by our holding company structure and applicable provisions of Delaware law."

Purchases and Sales of Equity Securities

We did not engage in any sales of unregistered securities during the year ended December 31, 2015.

In May 2015, our Board of Directors authorized a share repurchase program of up to $20.0 million of our Class A common stock. For the year ended December 31, 2015, FSAM repurchased and retired 217,641 and 193,583 shares, respectively, of our Class A common stock at a weighted average price of $8.47 per share pursuant to this program. The aggregate cash consideration paid for these repurchases was $1.8 million. The following table outlines repurchases of our Class A common stock during the year ended December 31, 2015:



Month	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
May 2015 (1)	72,158	$9.49
June 2015	1,100	9.99
August 2015	27,206	8.55
September 2015	117,177	7.80
	217,641	$8.47	217,641	$18.2 million

(1) Program authorized by our Board of Directors on May 11, 2015.

Equity Compensation Plan Information

The information required by this Item is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

Stock Performance Graph

The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for shares of our Class A common stock, the S&P 500 Index and the SNL U.S. Asset Manager Index for the period from October 30, 2014, the date our Class A common stock first began trading on the NASDAQ Global Select Market, through December 31, 2015. The graph assumes $100 was invested in each of our Class A common stock, the S&P 500 Index and the SNL U.S. Asset Manager Index as of the market close on October 30, 2014. Note that historic stock price performance is not necessarily indicative of future stock price performance.



	10/29/14	11/28/14	12/31/14	3/31/15	6/30/15	9/30/15	12/31/15
Fifth Street Asset Management Inc.	100.00	87.12	82.06	68.07	63.10	46.92	21.47
S&P 500 Index	100.00	104.55	104.29	105.28	105.57	98.77	105.73
SNL U.S. Asset Manager Index	100.00	106.18	106.98	109.18	107.16	88.59	91.24

Item 6. Selected Financial Data

The following tables set forth the selected historical consolidated financial data for the Fifth Street Management Group, our predecessor, and consolidated financial data for Fifth Street Asset Management Inc. as of the dates and for the periods indicated. The selected consolidated statement of income data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated statement of financial condition data as of December 31, 2015 and 2014 have been derived from the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data for the year ended December 31, 2012 and the selected consolidated statement of financial condition data as of December 31, 2013 and 2012 have been derived from Fifth Street Management Group's audited financial statements not included in this Annual Report on Form 10-K. The historical consolidated financial statements consist of the combined results of the Fifth Street Management Group which includes affiliated entities either wholly or substantially owned and/or under the voting control of Leonard M. Tannenbaum at the time of the Reorganization and initial public offering. As such, the acquisition of our 12% membership interest in Fifth Street Holdings and related Reorganization have been accounted for as transactions among entities under common control and recorded on a historical cost basis.

You should read the information set forth below in conjunction with our historical consolidated financial statements and the notes to those statements and "Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.



		Years Ended December 31,
		2015			2014 (4)			2013			2012
Consolidated Statements of Income Data:		(in thousands)
Revenues
Management fees (includes Part I Fees of $31,172, $35,618, $30,573 and $23,393 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively)	(1)	$	88,474		$	92,092		$	68,417		$	50,007
Performance fees		225			107			—			—
Other fees	(2)	9,068			10,338			5,205			4,637
Total revenues		97,766			102,537			73,622			54,644

Expenses
Compensation and benefits	(2)	36,636			53,827			22,411			17,376
Fund offering and start-up expenses		—			1,248			5,702			—
General, administrative and other expenses	(2)	17,887			13,029			5,506			5,039
Depreciation and amortization		1,693			986			237			203
Total expenses		56,217			69,090			33,856			22,618

Other income (expense)
Interest income		653			13			17			34
Interest expense		(2,144		)	(323		)	(11		)	—
Income from equity method investments		21			246			—			—
Unrealized loss on beneficial interests in CLOs		(1,080		)	—			—			—
Realized loss on beneficial interests in CLOs		(249		)	—			—			—
Other income (expense), net		279			90			—			—
Total other income (expense), net		(2,520		)	26			6			34
Income before provision (benefit) for income taxes		39,030			33,473			39,772			32,060
Provision (benefit) for income taxes		5,065			(2,124		)	—			—
Net income		33,964			35,596			39,772			32,060
Less: Net income attributable to Predecessor		—			(25,631		)	(39,772		)	(32,060		)
Less: Net income attributable to non-controlling interests		(31,556		)	(9,528		)	—			—
Net income attributable to Fifth Street Asset Management Inc.		$	2,408		$	438		$	—		$	—
Earnings per share data:	(3)
Basic and Diluted		$	0.41		$	0.07

		As of December 31,
		2015			2014			2013			2012
Consolidated Statements of Financial Condition Data:
Cash and cash equivalents		$	17,185		$	3,238		$	4,016		$	16,157
Total assets		151,234			111,061			33,506			21,000
Total liabilities		152,917			90,264			12,481			6,523
Total equity (deficit)		(1,683		)	20,797			21,025			14,477
Total liabilities and equity		151,234			111,061			33,506			21,000

__________________

(1) Management fees consist of base management fees and Part I Fees that are classified as management fees as they are predictable and are recurring in nature, are not subject to repayment (or clawback) and are generally cash-settled each quarter.

(2) Other fees consist of reimbursement that we receive from the Fifth Street Funds for direct fund expenses and administrative services, facilities and personnel that we provide to these funds pursuant to administrative agreements with them. Such reimbursement is at cost with no profit to, or markup by, us. These expenses for which we receive reimbursement are included in compensation and benefits and general, administrative and other expenses.

(3) For the year ended December 31, 2014, based on net income attributable to Fifth Street Asset Management Inc. for the period from November 4, 2014 through December 31, 2014.

(4) These amounts are revised as shown in Note 2 to the consolidated financial statements.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included in this Annual Report on Form 10-K.

Unless the context otherwise requires, references to "we," "us," "our," and "the Company" are intended to mean the business and operations of Fifth Street Asset Management Inc. and its consolidated subsidiaries since the consummation of our initial public offering on November 4, 2014. When used in the historical context (i.e., prior to November 4, 2014), these terms are intended to mean the business and operations of Fifth Street Management Group, our predecessor.

Amounts and percentages presented throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments and consequently totals may not appear to sum. The highlights listed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period's activity with those of prior periods.

Our Business

We are a leading alternative asset manager with approximately $5.3 billion of assets under management. The funds we manage provide innovative and flexible financing solutions to small and mid-sized companies across their capital structures, primarily in connection with investments by private equity sponsors. We define small and mid-sized companies as those with annual revenues between $25 million and $250 million. As of December 31, 2015, 85.1% of our assets under management reside in publicly-traded permanent capital vehicles, consisting of FSC and FSFR.

Our direct origination platform is sustained by strong relationships with over 250 private equity sponsors. We believe we are differentiated from other alternative asset managers by our structuring flexibility, financial strength and a reputation for delivering on commitments. We provide innovative and customized credit solutions across the capital structure, including one-stop financing, unitranche debt, senior secured debt, mezzanine debt, equity co-investments and venture debt financing. Our platform targets loans for investment of up to $250 million and will have the ability to structure and syndicate loans of up to $500 million.

Since Fifth Street's founding in 1998, we have grown into an asset manager with approximately 70 employees, approximately half of whom are investment professionals. Our management team has a proven 17-year track record across market cycles using a disciplined investment process. Our growth has been facilitated through a scalable operating platform.

Organization

We provide asset management services to the Fifth Street Funds, which, to date, consist primarily of our BDCs. We conduct all of our operations through our consolidated subsidiaries, FSM, CLO Management and FSCO GP.

Our primary sources of revenues are management fees, primarily from the BDCs, which are driven by the amount of the assets under management and quarterly investment performance of the Fifth Street Funds. We conduct substantially all of our operations through one reportable segment that provides asset management services to the Fifth Street Funds. We generate all of our revenues in the United States.

Reorganization

In anticipation of its initial public offering that closed November 4, 2014, FSAM was incorporated in Delaware on May 8, 2014 as a holding company with its primary asset expected to be a limited partnership interest in Fifth Street Holdings. Fifth Street Holdings was formed on June 27, 2014 by Principals of FSM as a Delaware limited partnership. Prior to the transactions described below, the Principals were the general partners and limited partners of Fifth Street Holdings. Fifth Street Holdings has a single class of limited partnership interests, or "Holdings LP Interests". Immediately prior to the IPO:


•	The Principals contributed their general partnership interests in Fifth Street Holdings to FSAM in exchange for 100% of FSAM's Class B common stock;


•	The members of FSM contributed 100% of their membership interests in FSM to Fifth Street Holdings in exchange for Holdings LP Interests; and


•	The members of FSCO GP, a Delaware limited liability company, formed on January 6, 2014 to serve as the general partner of FSOF, contributed 100% of their membership interests in FSCO GP to Fifth Street Holdings in exchange for Holdings LP Interests.

These collective actions are referred to herein as the "Reorganization."

Initial Public Offering

On November 4, 2014, FSAM issued 6,000,000 shares of Class A common stock in the IPO at a price of $17.00 per common share. The proceeds totaled $95.9 million, net of underwriting commissions of $6.1 million. The proceeds were used to purchase a 12.0% limited partnership interest in Fifth Street Holdings.

Immediately following the Reorganization and the closing of the IPO on November 4, 2014:


•	The Principals held 42,856,854 shares of FSAM Class B common stock and 42,856,854 Holdings LP Interests;


•	FSAM held 6,000,000 Holdings LP Interests and the former members of FSM and FSCO GP, including the Principals, held 44,000,000 Holdings LP Interests; and


•	The Principals, through their holdings of FSAM Class B common stock in the aggregate, had approximately 97.3% of the voting power of FSAM's common stock.

In connection with the above transactions, the former members of FSM agreed to allocate FSM's earnings (excluding the compensation charges related to the Reorganization) from October 1, 2014 through the date of the IPO to the limited partners of Fifth Street Holdings, including FSAM.

Exchange Agreement

In connection with the Reorganization, FSAM entered into an exchange agreement with the limited partners of Fifth Street Holdings that granted each limited partner of Fifth Street Holdings, and certain permitted transferees, the right, beginning two years after the closing of the IPO and subject to vesting and minimum retained ownership requirements, on a quarterly basis, to exchange such person's Holdings LP Interests for shares of Class A common stock of FSAM, on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications (collectively referred to as the "Exchange Agreement"). As a result, each limited partner of Fifth Street Holdings, over time, has the ability to convert his or her illiquid ownership interests in Fifth Street Holdings into Class A common stock of FSAM, which can more readily be sold in the public markets. As of December 31, 2015, FSAM held approximately 11.6% of Fifth Street Holdings after taking into account the repurchase of 217,641 Class A common shares during the year ended December 31, 2015, of which, 193,583 were retired. FSAM’s percentage ownership in Fifth Street Holdings will continue to change as Holdings LP Interests are exchanged for Class A common stock of FSAM or when FSAM otherwise issues or repurchases FSAM common stock.

FSAM's purchase of Holdings LP Interests concurrent with its IPO, and the subsequent and future exchanges by holders of Holdings LP Interests for shares of FSAM's Class A common stock pursuant to the Exchange Agreement are expected to result in increases in its share of the tax basis of the tangible and intangible assets of Fifth Street Holdings, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to FSAM. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that FSAM would otherwise be required to pay in the future. FSAM entered into a tax receivable agreement ("TRA") with the TRA Recipients that requires FSAM to pay the TRA Recipients 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax that FSAM actually realizes (or, under certain circumstances, is deemed to realize) as a result of the increases in tax basis in connection with exchanges by the TRA Recipients described above and certain other tax benefits attributable to payments under the tax receivable agreement.

Basis of Presentation

We have prepared our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC and the requirements for reporting on Form 10-K and Regulation S-X. All significant intercompany transactions and balances have been eliminated in consolidation.

Prior to the completion of the Reorganization and the IPO, the historical financial statements consisted of the combined results of the Fifth Street Management Group, which were affiliated entities that were either wholly or substantially owned and/or under the voting control of Leonard M. Tannenbaum.

Upon the completion of the Reorganization and the IPO, FSAM became the general partner of Fifth Street Holdings and acquired a 12.0% limited partnership interest in Fifth Street Holdings. These transactions were accounted for as transactions among entities under common control, pursuant to ASC 805-50, and recorded on a historical cost basis. Subsequent to the Reorganization and the IPO, Fifth Street Holdings and its wholly-owned subsidiaries (including FSM, CLO Management and FSCO GP) are consolidated by FSAM in the consolidated financial statements. All income attributable to the Predecessor prior to the Reorganization are recorded as "Net income attributable to Predecessor" within the Consolidated Statements of Income.

Subsequent to November 4, 2014, the portion of net income attributable to the limited partners of Fifth Street Holdings, excluding FSAM, is recorded as "Net income attributable to non-controlling interests" on the Consolidated Statements of Income.

The diagram below depicts our organizational structure as of December 31, 2015:


(1)	Shares of our Class A common stock, which were issued to the public in our initial public offering, entitle holders to one vote per share and economic rights (including rights to dividends and distributions upon liquidation).


(2)	Shares of our Class B common stock, which are held by our Principals, entitle holders to five votes per share, but have no economic rights.


(3)	Holdings Limited Partners, pursuant to the Exchange Agreement and subject to vesting and minimum retained ownership requirements and transfer restrictions, may exchange their Holdings LP Interests for shares of our Class A common stock.


(4)	FSCO GP is the general partner of FSOF, our hedge fund, and is entitled to receive an annual performance allocation from FSOF based on the performance of such fund. Fifth Street Management is the investment adviser to FSOF.

(5)

The direct subsidiaries of Fifth Street Management, FSC CT LLC, FSC LLC and FSC Midwest LLC. FSM owns approximately 1% of the CLO I notes and CLO Management owns approximately 5% of the CLO II notes. FSC CT LLC is the primary employer of our employees located in Connecticut and is the tenant to our Connecticut headquarters lease and performs certain administrative functions for our business. FSC LLC is the owner of Fifth Street Capital West LLC. FSC Midwest LLC and Fifth Street Capital West LLC employ certain of our employees, are tenants under certain of our office leases and perform certain other administrative functions for our business.


(6)	CLO Management serves as the collateral manager to CLO I and CLO II.

Market Conditions

The global economy has experienced economic uncertainty in recent years. Economic uncertainty impacts our business in many ways, including changing spreads, structures and purchase multiples as well as the overall supply of investment capital.

Middle market loan volume in 2015 experienced its weakest year since 2009. Our December quarter, which has historically been the most active for new originations at Fifth Street, reflected broader middle market trends and experienced muted volumes versus prior years. We believe a number of factors contributed to the protracted slowdown in private equity sponsored deals, including an increase in borrowing costs and buyer/seller divergence stemming from lower deal quality and higher valuations, as strategic buyers continued to drive up multiples.

With a shorter backlog of sponsored deals than prior years, we are not expecting increased deal volume in the first quarter. However, we believe deal volume may pick up later in 2016, as the market gradually adjusts to higher borrowing costs.

As a result of the broader market volatility, we have noticed a widening of spreads in the middle market. We believe an opportunity is developing for lenders with flexible, long-term capital to invest in deals with strong risk adjusted returns. Despite our business lines exhibiting slower growth, we believe that both of our BDCs are well-positioned to invest going forward in this market.

Trends Affecting our Business

In addition to general market conditions, we believe the following trends will influence our future performance:

•

Demand for Alternative Investments. Our ability to attract new capital and generate additional AUM and fee-earning AUM is dependent on investors' views of alternative assets relative to traditional assets. We believe fundraising efforts will continue to be impacted by certain fundamental asset management trends that include: (1) the increasing importance and market share of alternative investment strategies to investors of all types, (2) shifting asset allocation policies of institutional investors and (3) increasing demand for alternative assets from retail investors. We believe that part of the growth in the alternative investment space is due to institutional and retail demand for a more attractive risk-return profile compared to traditional bond investments, which is driving a re-thinking of asset allocations and re-positioning toward alternative credit strategies. Since our funds have always been credit focused, we stand to benefit from this migration. In addition, our BDCs are positioned to capitalize on increasing demand for alternative assets from retail investors.

•

Dislocation in the Traditional Capital Markets. Recent regulatory changes in responses to the global financial crisis have increased the cost and complexity for banking institutions to participate in the middle market lending space. We believe that many traditional senior lenders have de-emphasized their product offerings to middle market companies in favor of lending to large corporate clients, managing capital markets transactions and delivering other non-credit services to their customers. As a result, we are seeing relatively less competition from these sources in the middle market lending space. This has facilitated higher quality deal flow and has allowed us to be more selective throughout the investment process. We also benefit from better pricing and deal structure. We believe that the reduced capacity of traditional senior lenders to serve middle market opportunities will continue to create opportunities for our funds to originate direct investments in companies. In addition, certain recent regulatory developments, including the SEC's liquidity management program and risk retention rules for CLOs, may provide additional opportunities for our BDCs.

•

Competitive Landscape for Alternative Asset Managers. Middle market lending requires specialized due diligence and underwriting capabilities, as well as the extensive ongoing monitoring of investments. We believe that our operating platform, investment process and risk management approach provide us with advantages over our competitors for both capital and investment opportunities. At the same time, we face increasing competition from a growing number of larger investment management companies and other alternative asset managers. In particular, there is an increasing number of BDCs and the size of BDCs has also been increasing. In spite of increased competition, we believe we are well-positioned to grow our existing business and develop new funds and strategies.

•

Interest Rate Environment. We believe that we are well-positioned for a rising interest rate environment. The majority of the assets that we manage are floating rate loans that benefit from rising interest rates through increased Net Investment Income, which is income from interest, dividends, fees and other investment income. The increase would drive higher management fees to us, given the structure of our management agreements, which include fixed level performance benchmarks and do not include total return hurdles.

We intend, if market conditions warrant, to grow by increasing AUM in existing businesses and expanding into new investment strategies, geographic markets and businesses. We may develop new strategies and funds organically through our existing platform. For example, in February 2015, we closed our first CLO under management, CLO I, and in September 2015, we closed our second CLO under management, CLO II. In January 2016, we closed our first separately managed account

("SMA") with a large institutional investor who intends to purchase a minimum of $50 million of middle-market loans in the SMA.

We may also pursue growth through other strategic initiatives, which may include entering into new lines of business. As previously disclosed, we have invested approximately $1,380,000 to date in MMKT through the purchase of a convertible note and common membership interests. MMKT is a financial technology company that seeks to bring increased liquidity and transparency to middle market loans. MMKT is consolidated for financial reporting purposes, as Fifth Street Management owns 80% of the common membership interests, and may in the near term have a negative impact on earnings. In that regard, our allocable portion of the net loss attributable to MMKT was $1,136,432 for the year ended December 31, 2015.

Historically, substantially all of our revenues were generated from our BDCs. As we continue to expand our non-BDC funds and develop new funds and products, we expect that the fee structures and arrangements from which we derive our revenues could be different and, potentially, less favorable to us. In addition, the nature of these funds and lines of business may be different and subject to different risks and uncertainties than our BDCs. We may also modify fee structures with our existing investment vehicles, including our BDCs. For example, in January 2016, we amended and restated the FSC Investment Advisory Agreement, which reduced the base management fee payable to us on gross assets, excluding cash and cash equivalents, from 2.00% to 1.75% effective as of January 1, 2016. We believe, however, that there are significant opportunities and that we are well-positioned to grow our existing investment vehicles, launch additional credit strategies, develop new products and funds and continue to grow as a diversified asset manager.

Revision of Financial Statements

During 2015, we identified errors in the calculation of Part I Fees that were originally recognized as revenue in the first quarter of 2012 through the third quarter of 2015. The cumulative adjustment of $739,594 related to the years ended 2012 and 2013, was not considered material to these years and as a result was recorded as an out-of-period adjustment in the three months ended March 31, 2014. The identified errors related to incorrect information used by FSC CT LLC, our administrator, a wholly-owned subsidiary of us and the administrator of the Fifth Street BDCs. The errors related primarily to the timing of when Part I fees should have been recognized. We also incorrectly recorded certain reimbursements from the BDCs on a net basis during the interim periods of 2015 and year ended December 31, 2014, respectively. This error had no impact on net income as the correction was to gross-up revenue - other fees and general, administrative and other expenses by the same amounts. We assessed the materiality of the errors on its prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin ("SAB") No. 99 and SAB No. 108 and concluded that the errors were not material to any of its previously issued financial statements. However, we concluded the cumulative corrections of these errors would be material to our 2015 financial statements and, therefore, it was not appropriate to recognize the cumulative corrections in the current year. Consequently, we revised the 2014 financial statements to correct these errors (the "Revision") as well as other unrelated, immaterial out-of-period adjustments that had been previously recorded. The Revision had no net impact on our net cash provided by operating activities for any period presented.

The Holdings Limited Partners have refunded all of the prematurely paid fees to us, including interest, and therefore none of the expense was borne by the Class A stockholders of FSAM.

Non-GAAP Financial Measures and Operating Metrics

Adjusted Net Income

Adjusted Net Income represents income before income tax benefit (provision) as adjusted for (i) certain compensation-related charges, including the amortization of equity-based awards related to the Reorganization and initial public offering, (ii) non-recurring underwriting costs relating to public offerings of our funds, (iii) non-recurring professional fees and other expenses incurred in connection with our initial public offering, (iv) unrealized gains (losses) on beneficial interests in CLO, (v) certain litigation-related costs and (vi) other non-recurring items. We believe the exclusion of these items provides investors with a meaningful indication of our core operating performance and Adjusted Net Income is evaluated regularly by our management as a decision tool for deployment of resources. We believe that reporting Adjusted Net Income is helpful in understanding our business and that investors should review the same supplemental non-GAAP financial measures that our management uses to analyze our performance. Adjusted Net Income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results prepared in accordance with GAAP. The use of Adjusted Net Income without consideration of related GAAP measures is not adequate due to the adjustments described above. This measure supplements and should be considered in addition to and not in lieu of the results of operations discussed below, which are prepared in accordance with GAAP.

Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income. The following table provides a reconciliation of income before income tax benefit (provision) to Adjusted Net Income (shown in thousands):



	Year ended December 31,
	2015			2014		2013
Income before provision for income taxes	$	39,030		$	33,473	$	39,772
Adjustments:
Compensation-related charges (a)(b)	6,111			25,025		1,739
FSFR initial public offering underwriting costs (c)	—			—		5,700
Unrealized loss on beneficial interests in CLOs (d)	1,080			—		—
FSC follow-on equity offering underwriting costs (e)	—			822		—
Lease termination charges (f)	(72		)	707		—
Professional fees and other expenses in connection with our IPO	—			1,118		—
Adjusted Net Income before adjustment for litigation-related costs (g)	46,149			61,145		47,211
Litigation-related costs	2,685			—		—
Adjusted Net Income (g)	$	48,834		$	61,145	$	47,211

__________________


(a)	For the years ended December 31, 2015, 2014 and 2013, this amount includes $1.0 million, $1.8 million and $1.7 million, respectively, of amortization expense relating to the conversion and vesting of member interests in connection with the Reorganization (see Note 11 to the consolidated financial statements).

(b)

For the year ended December 31, 2015, this amount includes $5.1 million of amortization expense relating to stock-based compensation that was awarded to certain of our employees in connection with our IPO. For the year ended December 31, 2014, this amount includes: (1) $3.1 million of noncash compensation expense relating to the separation of a former equity member in May 2014, (2) $3.1 million of cash payments to purchase the equity interest from a former member, (3) $15.1 million of noncash compensation expense relating to our Reorganization and IPO, (4) $1.1 million of cash bonus awards paid to certain of our employees in connection with our IPO and (5) $0.8 million of amortization expense relating to stock-based compensation that was awarded to certain of our employees in connection with our IPO.


(c)	Represents the costs borne by us relating to equity underwriting commissions attributable to an equity offering at FSFR.


(d)	Represents change in fair value on beneficial interests in CLO on which we have elected the fair value option.


(e)	Represents the costs borne by us relating to equity underwriting commissions attributable to an equity offering at FSC.


(f)	Includes non-recurring charges and refunds for termination payments and related exit costs accrued at present value relating to our office leases.


(g)	Adjusted Net Income is presented on a pre-tax basis.

Assets under management

AUM is an operating metric that is commonly used in the alternative asset management industry. AUM refers to assets under management of the Fifth Street Funds and material control investments of these funds. Our calculations of fee-earning AUM and AUM may differ from the calculations of other alternative asset managers and, as a result, this measure may not be comparable to similar measures presented by others. Further, AUM and fee-earning AUM are not measures calculated in accordance with GAAP. Our AUM equals the sum of the following:


•	the net asset value, or NAV of such funds and investments;


•	the drawn debt and unfunded debt and equity commitments at the fund- or investment-level (including amounts subject to restrictions); and


•	uncalled committed debt and equity capital (including commitments to funds that have yet to commence their investment periods).

The following table provides a roll-forward of AUM for the years ended December 31, 2015, 2014 and 2013 (shown in thousands):



	Year ended December 31,
	2015			2014			2013
Beginning balance	$	6,301,260		$	4,377,364		$	2,327,225
Commitments and equity raises	413,061			549,780			436,349
Subscriptions, deployments and changes in leverage	(1,225,326		)	1,481,390			1,630,962
Redemptions and distributions	(175,324		)	(178,082		)	(139,059		)
Change in fund value	(18,059		)	70,808			121,887
Ending balance	$	5,295,612		$	6,301,260		$	4,377,364
Average AUM	$	5,798,436		$	5,399,312		$	3,352,294

The following tables provide a roll-forward of AUM by fund strategy for the years ended December 31, 2015, 2014 and 2013 (shown in thousands):



	Year ended December 31, 2015
	FSC			FSFR			FSOF			Senior Loan Funds			Total
Beginning balance	$	4,911,422		$	791,103		$	74,710		$	524,025		$	6,301,260
Commitments and equity raises	—			175,000			27,650			210,411			413,061
Subscriptions, deployments and changes in leverage	(1,267,903		)	59,515			441			(17,379		)	(1,225,326		)
Redemptions and distributions	(105,559		)	(31,677		)	(14,368		)	(23,720		)	(175,324		)
Change in fund value	(19,841		)	(4,239		)	1,657			4,364			(18,059		)
Ending balance	$	3,518,119		$	989,702		$	90,090		$	697,701		$	5,295,612
Average AUM	$	4,214,770		$	890,403		$	82,400		$	610,863		$	5,798,436



	Year ended December 31, 2014
	Structured Equity			FSC			FSFR			FSOF			Senior Loan Funds			Total
Beginning balance	$	4,364		$	4,148,794		$	213,873		$	10,333		$	—		$	4,377,364
Commitments and equity raises	—			138,139			276,182			45,900			89,559			549,780
Subscriptions, deployments and changes in leverage	(182		)	727,507			308,581			15,742			429,742			1,481,390
Redemptions and distributions	(4,722		)	(151,183		)	(21,013		)	(294		)	(870		)	(178,082		)
Change in fund value	540			48,165			13,480			3,029			5,594			70,808
Ending balance	$	—		$	4,911,422		$	791,103		$	74,710		$	524,025		$	6,301,260
Average AUM	$	2,182		$	4,530,108		$	502,488		$	42,521		$	262,013		$	5,339,312



	Year ended December 31, 2013
	Structured Equity			FSC			FSFR			FSOF		Senior Loan Funds		Total
Beginning balance	$	6,583		$	2,320,642		$	—		$	—	$	—	$	2,327,225
Commitments and equity raises	—			327,187			100,002			9,160		—		436,349
Subscriptions, deployments and changes in leverage	387			1,516,793			113,198			584		—		1,630,962
Redemptions and distributions	(4,147		)	(133,512		)	(1,400		)	—		—		(139,059		)
Change in fund value	1,541			117,684			2,073			589		—		121,887
Ending balance	$	4,364		$	4,148,794		$	213,873		$	10,333	$	—	$	4,377,364
Average AUM	$	5,474		$	3,234,718		$	106,936		$	5,166	$	—	$	3,352,294

We generally use fee-earning AUM as a metric to measure changes in the assets from which we earn management or performance fees. Total AUM tends to be a better measure of our investment and fundraising performance as it reflects assets at fair value plus available uncalled capital on which we earn fees.

Fee-earning AUM

Fee-earning AUM refers to AUM on which we directly or indirectly earn management fees. Our fee-earning AUM equals the sum of the following:


•	the NAV of the Fifth Street Funds and their material control investments; and


•	the drawn debt and unfunded debt and equity commitments at the fund- or investment-level (including amounts subject to restrictions).

Our calculations of fee-earning AUM and AUM may differ from the calculations of other alternative asset managers and, as a result, this measure may not be comparable to similar measures presented by others. In addition, our definitions of AUM and fee-earning AUM are not based on any definition of AUM or fee-earning AUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM set forth in other agreements to which we are a party from time to time, including the agreements governing our revolving credit facility.

The following table provides a roll-forward of fee-earning AUM for the years ended December 31, 2015, 2014 and 2013 (shown in thousands):



	Year ended December 31,
	2015			2014			2013
Beginning balance	$	5,554,013		$	3,929,066		$	1,729,311
Commitments and equity raises	338,182			533,980			427,189
Subscriptions, deployments and changes in leverage	(1,347,989		)	1,199,780			1,790,161
Redemptions and distributions	(173,323		)	(177,608		)	(138,795		)
Change in fund value	(19,115		)	68,795			121,200
Ending balance	$	4,351,768		$	5,554,013		$	3,929,066
Average fee-earning AUM	$	4,952,890		$	4,747,540		$	2,829,188
Effective annualized management fee rate	1.79		%	2.01		%	2.42		%

The following tables provide a roll-forward of fee-earning AUM by fund strategy for the years ended December 31, 2015, 2014 and 2013 (shown in thousands):



	Year ended December 31, 2015
	FSC			FSFR			FSOF			Senior Loan Funds			Total
Beginning balance	$	4,366,621		$	662,654		$	39,301		$	485,437		$	5,554,013
Commitments and equity raises	—			175,000			5,000			158,182			338,182
Subscriptions, deployments and changes in leverage	(1,408,138		)	5,820			(2,948		)	57,277			(1,347,989		)
Redemptions and distributions	(105,559		)	(31,677		)	(12,367		)	(23,720		)	(173,323		)
Change in fund value	(19,841		)	(4,239		)	601			4,364			(19,115		)
Ending balance	$	2,833,083		$	807,558		$	29,587		$	681,540		$	4,351,768
Average fee-earning AUM	$	3,599,852		$	735,106		$	34,444		$	583,488		$	4,952,890

Fee-earning AUM was $4.4 billion as of December 31, 2015, which represented a $1.2 billion, or 21.6%, decrease from $5.6 billion as of December 31, 2014. The net decrease in fee-earning AUM was primarily comprised of $1.4 billion from the sale of Healthcare Finance Group, LLC and other deleveraging at FSC, which was partially offset by $175.0 million of incremental investment capacity as a result of the closing of FSFR's Citibank credit facility and $158.2 million of incremental investment capacity at the SLFs.



	Year ended December 31, 2014
	Structured Equity			FSC			FSFR			FSOF		Senior Loan Funds			Total
Beginning balance	$	4,001		$	3,776,195		$	148,870		$	—	$	—		$	3,929,066
Commitments and equity raises	—			138,139			276,182			30,100		89,559			533,980
Subscriptions, deployments and changes in leverage	35			555,305			245,135			8,151		391,154			1,199,780
Redemptions and distributions	(4,542		)	(151,183		)	(21,013		)	—		(870		)	(177,608		)
Change in fund value	506			48,165			13,480			1,050		5,594			68,795
Ending balance	$	—		$	4,366,621		$	662,654		$	39,301	$	485,437		$	5,554,013
Average fee-earning AUM	$	2,001		$	4,071,408		$	405,762		$	19,651	$	242,718		$	4,741,540

Fee-earning AUM was $5.6 billion as of December 31, 2014, which represented a $1.6 billion, or 41.4%, increase from $3.9 billion as of December 31, 2013. The net increase in fee-earning AUM was primarily due to $276.2 million and $138.1 million of equity capital raises in connection with follow-on equity offerings at FSFR and FSC, respectively, $800.4 million of utilization of leverage and joint venture investment activity at our BDCs and the closing of SLF I and SLF II which produced $485.4 million of fee-earning AUM at period end.



	Year ended December 31, 2013
	Structured Equity			FSC			FSFR			FSOF		Senior Loan Funds		Total
Beginning balance	$	6,105		$	1,723,206		$	—		$	—	$	—	$	1,729,311
Commitments and equity raises	—			327,187			100,002			—		—		427,189
Subscriptions, deployments and changes in leverage	336			1,741,630			48,195			—		—		1,790,161
Redemptions and distributions	(3,883		)	(133,512		)	(1,400		)	—		—		(138,795		)
Change in fund value	1,443			117,684			2,073			—		—		121,200
Ending balance	$	4,001		$	3,776,195		$	148,870		$	—	$	—	$	3,929,066
Average fee-earning AUM	$	5,053		$	2,749,700		$	74,435		$	—	$	—	$	2,829,188

Fee-earning AUM was $3.9 billion as of December 31, 2013, which represented a $2.2 billion, or 127.2%, increase from $1.7 billion as of December 31, 2012. The net increase in fee-earning AUM was primarily due to $327.2 million of equity capital and $83.4 million of debt capital raised at FSC, in addition to $1.7 billion of deployment of previously raised capital, $100.0 million of equity capital raised as part of FSFR's initial public offering and $117.7 million of net increase in net assets at FSC.

Overview of Results of Operations

Revenues

For the years ended December 31, 2015, 2014 and 2013, 90.5%, 89.8%, and 92.9%, respectively, of our revenues came from management fees (including 31.9%, 34.7% and 41.5%, respectively, of Part I Fees) from the BDCs and private funds.

Management Fees

Base Management Fees

Prior to January 1, 2016, pursuant to our investment advisory agreement with FSC, or the FSC Investment Advisory Agreement, we earned an annual base management fee of 2.0% of the value of FSC's gross assets, which includes any borrowings for investment purposes and excludes cash and cash equivalents. Such base management fee is calculated based on the value of FSC's gross assets at the end of its most recently completed fiscal quarter. The base management fee is payable quarterly in arrears and the fee for any partial month or quarter is appropriately prorated.

On July 14, 2015, FSC announced that FSM, as its investment adviser, voluntarily agreed to a revised base management fee arrangement for the period commencing on July 1, 2015 and remaining in effect until January 1, 2017. The revised management fee is intended to provide for a potential reduction in the base management fee payable by FSC to FSM during

such period. See Note 10 to the Consolidated Financial Statements for additional detail regarding the revised base management fee arrangement.

On January 19, 2016, we amended and restated the FSC Investment Advisory Agreement, which reduced the base management fee payable to us on gross assets, excluding cash and cash equivalents, from 2.00% to 1.75% effective as of January 1, 2016. The other commercial terms of the existing FSC Investment Advisory Agreement relationship with FSC remain unchanged.

Pursuant to our investment advisory agreement with FSFR, or the FSFR Investment Advisory Agreement, we earn an annual base management fee of 1.0% of the value of FSFR's gross assets, which includes any borrowings for investment purposes and excludes cash and cash equivalents. Such base management fee is calculated based on the average value of FSFR's gross assets at the end of its two most recently completed quarters. The base management fee is payable quarterly in arrears and the fee for any partial month or quarter is appropriately prorated.

Pursuant to our investment management agreement with FSOF, we are entitled to receive a quarterly management fee from FSOF that is calculated and payable in advance at an annualized rate generally ranging from 1.0% to 1.5% of the value of a limited partner's investment, based on investment class and excluding affiliates, in FSOF. Capital contributed or withdrawn from FSOF during a quarter is charged a ratable portion of the management fee for the period invested.

Pursuant to CLO Management's investment management agreements with our senior loan funds, we are entitled to receive quarterly management fees from CLO I and CLO II that are calculated and payable in arrears pursuant to a "waterfall" structure. Under this "waterfall" structure, we are entitled to receive a senior collateral management fee at an annualized rate, for both CLO I and CLO II, of 0.25% of the average principal balance during the period and a subordinated collateral management fee at an annualized rate of 0.15%, for CLO I, and 0.13%, for CLO II, of the average principal balance during the period, in each case to the extent there are sufficient funds available for distribution at the applicable level in the hierarchy.

Part I Fees

Pursuant to the FSC and FSFR Investment Advisory Agreements, we earn Part I Fees that are calculated and payable quarterly in arrears based on each BDC's "Pre-Incentive Fee Net Investment Income" for the immediately preceding fiscal quarter. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of each BDC's net assets at the end of the immediately preceding fiscal quarter, will be compared to a specified "hurdle rate" per quarter, subject to a "catch-up" provision measured as of the end of each fiscal quarter. The BDCs' net investment income used to calculate this part of the Part I Fee is also included in the amount of its gross assets used to calculate the base management fee. Such fees are not subject to repayment (or clawback) and are cash settled each quarter.

Pursuant to the FSC Investment Advisory Agreement, the Part I Fee with respect to FSC's Pre-Incentive Fee Net Investment Income for each quarter is as follows:


•	no Part I Fee is payable to Fifth Street Management in any fiscal quarter in which FSC's Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 2.0%, or the "preferred return" or "hurdle";

•

100% of FSC's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any fiscal quarter (10% annualized) is payable to Fifth Street Management. This portion of FSC's Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) is referred to as the "catch-up." The "catch-up" provision is intended to provide Fifth Street Management with an incentive fee of 20% on all of FSC's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when its Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and


•	20% of the amount of FSC's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any fiscal quarter (10% annualized) is payable to Fifth Street Management once the hurdle is reached and the catch-up is achieved.

Pursuant to the FSFR Investment Advisory Agreement, the Part I Fee with respect to FSFR's Pre-Incentive Fee Net Investment Income for each quarter is as follows:


•	no Part I Fee is payable to Fifth Street Management in any fiscal quarter in which FSFR's Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.5%, or the "preferred return" or "hurdle";

•

50% of FSFR's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than or equal to 2.5% in any quarter (10% annualized) is payable to Fifth Street Management. This portion of FSFR's Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) is referred to as the "catch-up." The "catch-up" provision is intended to provide Fifth Street Management with an incentive fee of 20% on all of FSFR's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when its Pre-Incentive Fee Net Investment Income exceeds 2.5% in any quarter; and


•	20% of the amount of FSFR's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any quarter (10% annualized) is payable to Fifth Street Management once the hurdle is reached and the catch-up is achieved.

Performance Fees

Pursuant to the FSC Investment Advisory Agreement and the FSFR Investment Advisory Agreement, we also earn Part II Fees, which are determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date) and equals 20% of each BDC's realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

FSCO GP, FSOF's general partner, is entitled to receive an annual performance allocation from FSOF, generally ranging from 15% to 20% of the increase in value of a limited partner's investment, if any, subject to a loss carryover based on investment class and excluding affiliates. Pursuant to the loss carryover, no performance allocation will be charged on an investor's investment unless the value of such investment (net of any losses, for all years since admission) exceeds the higher of the following amounts: (i) the highest value of such investment through the close of any year since admission; and (ii) the value of such investor's investment on the date of admission. The performance allocation is generally calculated and allocated at the end of each fiscal year or upon a withdrawal occurring prior to the end of any fiscal year. Withdrawals by an investor will result in a proportional reduction of any loss carryover.

Performance fees may be subject to reversal to the extent that the performance fees recorded exceed the amount due to the general partner or investment manager based on a fund's cumulative investment returns.

As compensation for the performance of its obligations under the CLOs' collateral management agreement, Fifth Street Management is entitled to receive a collateral management incentive fee after the subordinated debt issued by each respective CLO has realized a specified internal rate of return.

Other Fees

FSC CT LLC is party to administration agreements with our BDCs and Fifth Street Management under which we provide administrative services for our BDCs and private funds, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreements, we also perform or oversee the performance of our BDCs' and private funds' required administrative services, which includes being responsible for the financial records which our BDCs and private funds are required to maintain and preparing reports to our BDCs' stockholders and reports filed with the SEC. In addition, we assist each of our BDCs in determining and publishing its net asset value, overseeing the preparation and filing of its tax returns and the printing and dissemination of reports to each of our BDC's stockholders, and generally overseeing the payment of each of our BDC's and private fund's expenses and the performance of administrative and professional services rendered to such BDC or private fund by others. For providing these services, facilities and personnel, the private funds reimburse us the allocable portion of direct fund expenses paid on their behalf and the BDCs reimburse us the allocable portion of direct expenses, as well as overhead and other expenses incurred by us in performing our obligations under the administration agreements, including rent and such BDC's allocable portion of the costs of compensation and related expenses of such BDC's chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost with no profit to, or markup by, us. These reimbursements are included in Revenues - Other fees in the consolidated statements of income and the expenses are included in compensation and benefits and general, administrative and other expenses. We may also provide, on our BDCs' behalf, managerial assistance to such BDC's portfolio companies. Each of the administration agreements may be terminated by either us or our BDCs without penalty upon 60 days' written notice to the other party.

Expenses

Compensation and benefits. Compensation generally includes salaries, bonuses and equity-based compensation charges. Bonuses are accrued over the service period to which they relate. All payments made to the managing member of Fifth Street Management since its inception and all payments made to equity members since December 1, 2012 related to their granted or purchased interests are accounted for as distributions on the equity held by such members.

Fund offering and start-up expenses. In certain instances, we may bear offering costs related to capital raising activities of the BDCs, including underwriting commissions, which are expensed as incurred. In addition, we expense all costs associated with starting new investment funds.

General, administrative and other expenses. General, administrative and other expenses primarily include costs related to professional services, occupancy and overhead expenses, travel and related expenses, communication and information systems and other general operating items.

Depreciation and amortization. Depreciation of furniture, fixtures and equipment is computed using the straight-line method over the estimated useful lives of the respective assets (three to eight years). Amortization of improvements to leased

properties is computed using the straight-line method based upon the initial term of the applicable lease or the estimated useful life of the improvements, whichever is shorter, and ranges from five to 10 years.

Income taxes. Prior to our Reorganization and IPO, substantially all of the Fifth Street Management Group's earnings flowed through to its owners without being subject to entity level income taxes. Accordingly, no provision for income taxes has been recorded in historical periods. As a result of these transactions, the portion of our income attributable to Fifth Street Asset Management Inc. and other taxable entities within the post-IPO structure are now subject to U.S. federal, state and local income taxes and is taxed at the prevailing corporate tax rates.

Our effective tax rate includes a rate benefit attributable to the fact that certain of our subsidiaries operate as a series of pass-through entities which are not themselves subject to federal income tax. As a result of the Reorganization, certain subsidiaries were converted from pass-through entities to taxable entities. Accordingly, the portion of our subsidiaries' earnings attributable to non-controlling interests are subject to tax when reported as a component of the non-controlling interests' taxable income on their individual tax returns.

Other income (expense)

Interest income. Interest income is recognized on an accrual basis to the extent that such amounts are expected to be collected.

Interest expense. Interest expense consists primarily of interest expense related to our credit facility and other borrowings, which may have variable interest rates.

Income from equity method investments. Income from equity method investments relates primarily to investment income generated from the underlying investment funds.

Realized loss on beneficial interests in CLOs. Realized gains or losses on beneficial interests in CLOs are realized when we sell all or a portion of our beneficial interests or when we receive a distribution of capital in excess of our cost.

Unrealized loss on beneficial interests in CLOs. Unrealized gains or losses on beneficial interests in CLOs result from changes in the fair value of the beneficial interests in CLOs, as well as the reversal of unrealized gains or losses at the time the beneficial interests in CLOs are realized.

Other Income (Expense), Net. Other income (expense), net primarily consists of dividend income and other miscellaneous non-operational items.

Net income attributable to Predecessor

Net income attributable to Predecessor represents 100% of the net income earned by Fifth Street Management Group, our predecessor, prior to the Reorganization and IPO. Such earnings include all charges related to the Reorganization which was effectuated immediately prior to the closing of our IPO on November 4, 2014.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interests represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests in Fifth Street Holdings that are held by limited partners other than FSAM. The allocable share of income and expense attributable to these interests is accounted for as net income attributable to non-controlling interests.

Results of Operations

Year ended December 31, 2015 compared to year ended December 31, 2014

Revenues

Management fees. Total management fees were $88.5 million for the year ended December 31, 2015, which represented a $3.6 million, or 3.9%, decrease from $92.1 million for the year ended December 31, 2014. The decrease was due to a $4.8 million decrease in BDC Part I fees primarily as a result of an increased level of professional fees at FSC, partially offset by a $1.6 million increase in management fees from our CLOs, as a result of having a full year of operations in 2015 versus a partial year in 2014.

Performance fees. Performance fees of $0.2 million were earned from FSOF and FSFR for the year ended December 31, 2015, which represented a $0.1 million, or 110.6%, increase from $0.1 million for the year ended December 31, 2014. The increase was primarily due Part II fees earned at FSFR.

Other fees. Other fees were $9.1 million for the year ended December 31, 2015, which represented a $1.3 million, or 12.3%, decrease from $10.3 million for the year ended December 31, 2014. The decrease was primarily due to a lower level of

allocable direct fund expenses and general and administrative expenses by us to the Fifth Street BDCs and private funds pursuant to the administration agreements.

Expenses

Compensation and benefits. Compensation and benefits was $36.6 million for the year ended December 31, 2015, which represented a $17.2 million, or 31.9%, decrease from $53.8 million for the year ended December 31, 2014. The decrease was primarily due to $25.0 million compensation charges recorded in 2014 as a result of our IPO (as discussed below), offset by $5.1 million of amortization of incremental equity-based compensation charges in 2015 related to grants under the 2014 Omnibus Incentive Plan in connection with our IPO.

Fund offering and start-up expenses. There were no fund offering and start-up expenses for the year ended December 31, 2015. For the year ended December 31, 2014, fund offering and start-up expenses were $1.2 million which primarily consisted of offering expenses related to an FSC July 2014 follow-on equity offering.

General, administrative and other. General, administrative and other expenses were $17.9 million for the year ended December 31, 2015, which represented a $4.9 million, or 37.3%, increase from $13.0 million for the year ended December 31, 2014. The increase was primarily due to a $3.8 million increase in professional fees, $2.7 million of which related to litigation during the three months ended December 31, 2015.

Depreciation and amortization. Depreciation and amortization expense was $1.7 million and $1.0 million, respectively, for the years ended December 31, 2015 and 2014. The increase was primarily due to depreciation on fixed assets related to the construction of our corporate headquarters in Greenwich, CT.

Other income (expense)

For the three months ended December 31, 2015, other income (expense), net was ($2.5 million), which primarily consisted of interest expense related to our credit facility.

Provision (benefit) for income taxes

The income tax provision (benefit) was $5.1 million and ($2.1 million), respectively, for the years ended December 31, 2015 and December 31, 2014. The increase was primarily due to the tax benefit of net operating loss carryforwards recorded in 2014.

Net income

Net income was $34.0 million for the year ended December 31, 2015, which represented a $1.6 million, or 4.6%, decrease from $35.6 million for the year ended December 31, 2014. The decrease was primarily due to the income and expense variances discussed above.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Revenues

Management fees. Total management fees were $92.1 million for the year ended December 31, 2014, which represented a $23.7 million, or 34.6%, increase from $68.4 million for the year ended December 31, 2013. This increase was primarily due to an increase in average fee-earning AUM at FSC during the year-over-year period of $1.3 billion, which was due to equity offering proceeds and related utilization of leverage, and an increase in average fee-earning AUM at FSFR during the year over year period of $331.3 million, which was due to a full period of AUM related to FSFR's initial public offering in July 2013 and $276.2 million of follow-on equity offering proceeds in August 2014 and related utilization of leverage.

Performance fees. Performance fees earned from FSOF were $0.1 million for the year ended December 31, 2014. There were no performance fees for the year ended December 31, 2013 as FSOF did not have fee-earning AUM during that period.

Other fees. Other fees were $10.3 million for the year ended December 31, 2014, which represented a $5.1 million, or 98.6%, increase from $5.2 million for the year ended December 31, 2013. The increase was primarily due to a higher level of allocable direct fund expenses, compensation and general and administrative expenses by us to the Fifth Street BDCs and private funds pursuant to the administration agreements.

Expenses

Compensation and benefits. Compensation and benefits was $53.8 million for the year ended December 31, 2014, which represented a $31.4 million, or 140.2%, increase from $22.4 million for the year ended December 31, 2013. The increase was primarily due to the following Reorganization, initial public offering and other non-recurring charges:


•	$3.1 million of noncash compensation expense relating to the separation of a former equity member in May 2014;


•	$3.1 million of cash payments to purchase the equity interest from a former member;


•	$15.1 million of noncash compensation expense relating to our Reorganization and initial public offering;


•	$1.1 million of cash bonus awards paid to certain of our employees in connection with our initial public offering;


•	$0.8 million of amortization expense relating to stock-based compensation that was awarded to certain of our employees in connection with our initial public offering; and


•	$1.8 million of amortization expense relating to certain equity-classified compensation awards.

In addition to these charges, we experienced a net increase in headcount of 28 employees during the year-over-year period. Excluding the impact of the above charges in the current year and amortization of equity-based compensation in the prior period, compensation and benefits as a percentage of total revenues decreased to 27.8% for the year ended December 31, 2014 from 28.1% for the year ended December 31, 2013, reflecting increasing operating leverage in our business.

Fund offering and start-up expenses. Fund offering and start-up expenses were $1.2 million for the year ended December 31, 2014, which represented a $4.5 million, or 78.1%, decrease from $5.7 million for the year ended December 31, 2013. The amount for the year ended December 31, 2014 primarily consisted of offering expenses related to a July 2014 FSC follow-on equity offering. The decrease from the year-ago period was primarily due to non-recurring fund offering expenses of $5.7 million associated with FSFR in 2013.

General, administrative and other. General, administrative and other expenses were $13.0 million for the year ended December 31, 2014, which represented a $7.5 million, or 136.6%, increase from $5.5 million for the year ended December 31, 2013. The increase was primarily due to a higher level of allocable direct fund expenses and general and administrative expenses by us to the Fifth Street BDCs and private funds pursuant to the administration agreements, in addition to $1.1 million of professional fees and other expenses associated with our initial public offering, $1.4 million of termination payments and exit costs relating to former office leases, and $1.9 million of occupancy costs associated with our corporate headquarters, that were incurred in 2014.

Depreciation and amortization. Depreciation and amortization expense was $1.0 million for the year ended December 31, 2014, which represented a $0.7 million, or 316.2%, increase from $0.2 million for the year ended December 31, 2013. The increase was primarily due to depreciation on fixed assets related to our corporate headquarters.

Other income (expense)

For the year ended December 31, 2014, other income (expense) primarily consisted of $0.2 million of equity income from certain of our managed funds and $0.1 million of other income, which were partially offset by $0.3 million of interest expense incurred on our credit facility.

Provision (benefit) for income taxes

The income tax benefit of $2.1 million for the year ended December 31, 2014 primarily relates to realizable net operating carry-forwards of certain of our wholly-owned subsidiaries that are subject to entity level tax.

Net income

Net income was $35.6 million for the year ended December 31, 2014, which represented a $4.2 million, or 11.1%, decrease from $39.8 million for the year ended December 31, 2013. The decrease was primarily due to the income and expense variances discussed above.

Liquidity and Capital Resources

Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) net borrowings. As of December 31, 2015, our cash and cash equivalents were $17.2 million, and we had $86.7 million in borrowings outstanding. Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the ordinary course of business for the foreseeable future. In addition, we may generate cash proceeds from the sale of equity securities.

Our primary sources of cash from our operations include (1) management fees, primarily generated from our BDCs, which are collected quarterly, (2) performance fees, which are unpredictable as to amount and timing, and (3) interest and dividends from our investments, including beneficial interest in CLOs and equity securities in the Fifth Street BDCs. Our future sources of cash may change over time. For example, effective January 1, 2016, the FSC base management fee was reduced from 2.00% to 1.75%.

We expect that our primary liquidity needs will continue to be to (1) provide capital to facilitate the growth of our existing asset management businesses, (2) provide capital to facilitate our expansion into businesses that are complementary to our existing asset management businesses, (3) pay operating expenses, including cash compensation to our employees and payments under the tax receivable agreement, (4) fund capital expenditures and litigation matters, (5) repay borrowings and related interest costs, (6) repurchase Class A common stock under our authorized share repurchase program, (7) pay income

taxes, (8) make distributions to our unitholders in accordance with our distribution policy and (9) purchase shares of FSC common stock and settle other obligations under the purchase and settlement agreement with RiverNorth Capital Management, or RiverNorth.

If cash flows from operations were insufficient to fund distributions for a short-term period, we would utilize our credit facility to satisfy such distributions. If cash flows from operations were insufficient to fund distributions over a sustained period of time, we expect that we would suspend paying such distributions.

Cash Flows

Year ended December 31, 2015 compared to year ended December 31, 2014

Net cash provided by operating activities was $67.5 million for the year ended December 31, 2015, which represented a $7.0 million increase from $60.5 million for the year ended December 31, 2014. The increase was primarily due to the timing of the collection of management fees, offset by the timing of annual discretionary bonuses paid to employees.

Net cash used in investing activities was $53.8 million for the year ended December 31, 2015, which represented a $38.7 million increase from $15.1 million for the year ended December 31, 2014. The increase was primarily due to $26.4 million of purchases of investments in available-for-sale securities and $21.5 million of purchases of beneficial interests in CLO, offset by a decreased level of fixed asset purchases.

Net cash provided (used) by financing activities was $0.3 million for the year ended December 31, 2015, which represented a $46.5 million increase from ($46.2 million) for the year ended December 31, 2014. The increase was primarily due to $53.0 million of net borrowings under the credit facility and $13.0 million of net borrowings on the risk retention term loan, offset by $9.0 million of repayments of notes payable and $3.8 million of cash dividends paid to our shareholders.

Year Ended December 31, 2014 compared to December 31, 2013

Net cash provided by operating activities was $60.5 million for the year ended December 31, 2014, which represented a $40.7 million increase from $19.8 million for the year ended December 31, 2013. The increase was primarily due to an increase in net income of $12.9 million (excluding noncash compensation charges of $17.1 million) for the period, the timing of collection of management fees and the timing of annual discretionary bonuses paid to employees.

Net cash used in investing activities was $15.1 million for the year ended December 31, 2014, which represented a $14.2 million increase from $0.9 million for the year ended December 31, 2013. The increase was primarily due to incremental purchases of fixed assets related to our corporate headquarters, as well as our equity investment in SLF I and the purchase of a fractional interest in an aircraft for business use.

Net cash used in financing activities was $46.2 million for the year ended December 31, 2014, which represented a $15.2 million increase from $31.0 million for the year ended December 31, 2013. The increase was due to distributions to our members as a result of increased management fees, expenses paid related to our initial public offering and upfront fees paid on our credit facility, which were partially offset by borrowings under our credit facility.

RiverNorth Settlement

On February 18, 2016, we entered into a purchase and settlement agreement with RiverNorth pursuant to which RiverNorth would withdraw its competing FSC proxy solicitation. In connection with the agreement, we agreed to purchase 9,220,600 shares of FSC's common stock for a per-share purchase price of $6.25 from RiverNorth, and we deposited $10 million in escrow to be credited against the purchase price at closing. In addition, we issued a warrant to RiverNorth that may require us to pay RiverNorth a cash settlement equal to the lesser of (i) $5 million and (ii) the value of the warrant based on the strike price. We may also be subject to additional future payments based on certain terms of the purchase and settlement agreement.

In connection with the execution and delivery of the purchase and settlement agreement, we and Leonard M. Tannenbaum, our Chairman and Chief Executive Officer, have entered into a letter agreement ("Letter Agreement"), that provides that we will purchase the maximum number of shares of FSC’s common stock that we determine, in our sole discretion, we can purchase with immediately available funds and that will not violate any of the terms or conditions of any contractual arrangements or regulations to which we are a party to or our property or assets are subject to. Any additional shares that we are obligated to purchase pursuant to the purchase and sale agreement will be purchased by Mr. Tannenbaum. The Letter Agreement also provides for mutual indemnification of the parties in connection with their obligations under the purchase and sale agreement and the Letter Agreement.

Share Repurchase Program

On May 11, 2015, our Board of Directors authorized a share repurchase program of up to $20.0 million of our Class A common stock. Under the repurchase program, we are authorized to repurchase shares through open market purchases or block

trades, as conditions permit and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The repurchase program will terminate on May 11, 2016, unless earlier terminated or extended by our Board of Directors, and may be suspended for periods or discontinued at any time. Total repurchases under the share repurchase program for the year ended December 31, 2015 were approximately $1.8 million in the aggregate.

Revolving Credit Facility

On November 4, 2014, Fifth Street Holdings entered into a credit agreement, or the Original Credit Agreement, for a revolving credit facility, or the Credit Facility, that was jointly led by Morgan Stanley Senior Funding, Inc. and Sumitomo Mitsui Banking Corporation. On February 29, 2016, Fifth Street Holdings entered into Amendment No. 1 to the Original Credit Agreement, or Amendment No 1. Amendment No. 1 reduces the aggregate revolver commitments of the lenders under the Original Credit Agreement from $176 million to $146 million. Amendment No. 1 also provides, among other things, that certain risk retention debt incurred by subsidiaries engaged solely in managing collateralized loan obligations shall be permitted and excluded from certain financial covenant calculations, including leverage and interest coverage ratios. We refer to the Original Credit Agreement, as amended by Amendment No. 1, as the Credit Agreement. We intend to continue to use the Credit Facility, together with available cash, to, among other things: (i) provide capital to facilitate the growth of our existing businesses and funds, (ii) fund a portion of our commitments to funds that we advise, (iii) provide capital to facilitate our expansion into complementary businesses and funds, (iv) pay operating expenses, including cash compensation to our employees and payments under the tax receivable agreement, (v) provide working capital, and, potentially, seed capital for future investments and (vi) fund distributions to us so that we may pay dividends to our stockholders. As of December 31, 2015 and December 31, 2014, we had $65.0 million and $12.0 million of outstanding borrowings under the Credit Facility, respectively.

The Credit Facility has a five-year term, is an unsecured facility that provides for $146 million of borrowing capacity, with a $100 million accordion feature, and bears interest at a variable rate based on either LIBOR or a base rate plus an applicable margin with an unused commitment fee paid quarterly, which is subject to change based on a total leverage ratio. Borrowings under the Credit Facility accrue interest at an annual rate of LIBOR plus 2.00% per annum and the unused commitment fee under the facility is 0.30% per annum. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of Fifth Street Holdings to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies or transfer all or substantially all of their respective assets, transfer or sell assets, make restricted payments, engage in transactions with affiliates and insiders, and incur restrictions on the payment of dividends or other distributions and certain other contractual restrictions. These covenants are subject to a number of limitations and exceptions set forth in the Credit Agreement. In addition, Fifth Street Holdings must not:


•	permit the Total Leverage Ratio (as defined in the Credit Agreement) to be greater than 3.00 to 1.00 as of the end of any fiscal quarter for the four quarter period ending on such date;


•	permit AUM (as defined in the Credit Agreement) at any time to be less than the sum of $3.25 billion plus (ii) 50% of all New Management Fee Assets (as defined in the Credit Agreement);


•	permit the Interest Coverage Ratio (as defined in the Credit Agreement) to be less than 5.00 to 1.00 as of the end of any fiscal quarter for the four quarter period ending on such date; or


•	waive, permit any of its subsidiaries to waive, or defer due to certain triggering events, payment of management fees by any Fifth Street Fund, equal to 10% or more of all management fees earned in any quarter.

We were in compliance with all covenants under the Credit Facility as of December 31, 2015.

Risk Retention Term Loan

On September 28, 2015, CLO Management, our wholly-owned consolidated subsidiary, entered into a Risk Retention Term Loan to provide financing for its purchase of CLO II senior notes up to $17 million at a variable rate based on either LIBOR or a base rate plus an applicable margin with an unused commitment fee paid quarterly, which is subject to change based on a total leverage ratio. Borrowings under the Risk Retention Term Loan totaled $16,972,614, of which $4,000,000 was repaid, and accrue interest at a rate based on the interest rate on the financed notes and the weighted current cost basis which was 3.78% as of December 31, 2015. Our beneficial interests in CLO II in the aggregate amount of $20,910,115 at fair value are pledged as collateral for the Risk Retention Term Loan. The facility matures on September 29, 2027 with certain lenders party thereto from time to time and Natixis, New York Branch, as administrative agent and joint lead arranger, and Bleachers Finance 1 Limited as syndication agent and joint lead arranger. The Risk Retention Term Loan contains customary affirmative and negative covenants for agreements of this type, including financial maintenance requirements, delivery of financial and other information, compliance with laws, further assurances and limitations with respect to indebtedness, liens, fundamental changes, restrictive agreements, dispositions of assets, acquisitions and other investments, conduct of business and transactions with affiliates. We are in compliance with all covenants as of December 31, 2015 and have $12,972,614 of borrowings outstanding under the Risk Retention Term Loan.

Dividend Policy

We are a holding company and have no material assets other than our approximately 12% limited partnership interest in Fifth Street Holdings and our controlling interest and related rights as its sole general partner. As a result, we depend upon distributions from our subsidiaries to pay any dividends that our Board of Directors may declare to be paid to the holders of our Class A common stock. When our Board of Directors declares dividends, we will cause Fifth Street Holdings to make distributions to us in an amount sufficient to cover the dividends declared. Our dividend policy has certain risks and limitations, particularly with respect to liquidity. We may not pay dividends to the holders of our Class A common stock in amounts that have been paid to them in the past, or at all, if, among other things, we do not have the cash necessary to pay our intended dividends. To the extent we do not have cash on hand sufficient to pay dividends in the future, we may decide not to pay dividends. We may or may not borrow to fund dividends. By paying cash dividends rather than investing that cash in our future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise.

We expect to continue to distribute as dividends to holders of our Class A common stock, on a quarterly basis, substantially all of our allocable share of Fifth Street Holdings' distributable earnings, net of applicable corporate taxes and amounts payable under the tax receivable agreement, in excess of amounts determined to be necessary or appropriate to be retained by Fifth Street Holdings or its subsidiaries to provide for the conduct of our businesses, to make appropriate investments in our businesses and our funds, to comply with the terms of our debt instruments, other agreements or applicable law or to provide for future distributions to us and the Holdings Limited Partners for any ensuing quarter. We intend to fund our dividends from our portion of distributions made to us by Fifth Street Holdings which, in turn, will fund its distributions to us from distributions that it receives from its subsidiaries. Our ability to pay dividends is subject to our Board of Directors' discretion and may be limited by our holding company structure and applicable provisions of Delaware law.

Under the Delaware General Corporation Law (the "DGCL"), we may only pay dividends from legally available surplus or, if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. Under the DGCL, our Board of Directors can use the fair value of assets and liabilities, rather than book value, in making this determination. Under the Delaware Limited Partnership Act, Fifth Street Holdings may not make a distribution to a partner if, after the distribution, all its liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of our assets. If Fifth Street Holdings were to make such an impermissible distribution, any limited partner who received a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Partnership Act would be liable to Fifth Street Holdings for the amount of the distribution for three years.

The following table reflects the dividends per share that we have declared on our common stock for the year ended December 31, 2015:



Date Declared	Record Date	Payment Date	Amount per Share		Cash Distribution
January 15, 2015	March 31, 2015	April 15, 2015	$	0.30	$1.8 million
May 11, 2015	June 30, 2015	July 15, 2015	0.17		1.0 million
August 10, 2015	September 30, 2015	October 15, 2015	0.17		1.0 million
November 23, 2015	December 31, 2015	January 15, 2016	0.17		1.0 million
Total for the year ended December 31, 2015			$	0.81	$4.8 million

Tax Receivable Agreement

Our purchase of Holdings LP Interests concurrent with our initial public offering, and the subsequent and future exchanges by holders of Holdings LP Interests for shares of our Class A common stock pursuant to the Exchange Agreement resulted in, and is expected to continue to result in, increases in our share of the tax basis of the tangible and intangible assets of Fifth Street Holdings, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that we would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the TRA Recipients that requires us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax that we actually realize (or, under certain circumstances, are deemed to realize) as a result of the increases in tax basis in connection with exchanges by the TRA Recipients described above and certain other tax benefits attributable to payments under the tax receivable agreement.

In connection with the finalization of the 2014 tax returns, FSAM paid $340,713, representing the initial payment associated with the TRA liability and we have reduced the tax benefit associated with the TRA by $289,606. Within the next 12 month period, we expect to pay $2,051,341 of the total amount of estimated TRA liability. Such amount was determined by estimating the amount of taxable income and specified deductions subject to the TRA which are expected to be realized by FSAM for the related tax year. These calculations are performed pursuant to the terms of the TRAs.

Off-Balance Sheet Arrangements

In the normal course of business, we may engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, commitments, indemnifications and potential contingent repayment obligations.

Contractual Obligations, Commitments and Contingencies

The following table sets forth information relating to our contractual obligations as of December 31, 2015 on a consolidated basis:



	Payments Due by Period (in thousands)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations (1)	$	20,502	$	2,391	$	4,782	$	4,650	$	8,679
Loan payable - State of Connecticut DECD (2)(3)	4,503		100		870		1,437		2,096
MMKT Notes	4,983		4,983		—		—		—
Credit Facility payable (2)(4)	71,413		1,673		3,346		66,394		—
Loan payable - Risk Retention Term Loan (2)(5)	19,344		490		980		980		16,894
Payable to related parties pursuant to tax receivable agreements (2)	45,486		2,051		4,252		4,577		34,606
Total	$	166,231	$	11,688	$	14,230	$	78,038	$	62,275

____________________

(1) Consists primarily of leases for office space under agreements with expirations ranging from month-to-month contracts to lease commitments through 2024.

(2) These amounts include future contractual interest payments.

(3) Under the terms of the agreement, we may be eligible for forgiveness of up to $3,000,000 of the principal amount of the loan based on certain job creation milestones, as mutually agreed to by the DECD and us.

(4) As of December 31, 2015, $65,000,000 was outstanding under the Credit Facility.

(5) As of December 31, 2015, $12,972,614 was outstanding under the Risk Retention Term Loan.

As of December 31, 2015, we did not have any unfunded capital commitments.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See "Forward-Looking Statements."

Principles of Consolidation

The consolidated financial statements include the entities in which we, directly or indirectly, are determined to have a controlling financial interest under ASC 810. Under the variable interest model, we determine whether, if by design, an entity has equity investors who lack substantive participating or kick-out rights. If equity investors do not have such rights, the entity is considered a variable interest entity ("VIE") and must be consolidated by its primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as: (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine: (a) whether an entity in which we hold a variable interest is a VIE and (b) whether our involvement, through holding interests directly or indirectly in the entity, would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment.

Under the consolidation guidance, we determine whether we are the primary beneficiary of a VIE at the time we become involved with a VIE and reconsider that conclusion continually. In evaluating whether we are the primary beneficiary, we evaluate our economic interests in the entity held either directly or indirectly by us. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that we are not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by us, affiliates of ours or third parties) or amendments to the governing documents of the respective investment funds could affect an entity's status as a VIE or the determination of the primary beneficiary. At each reporting date, we assess whether we are the primary beneficiary and will consolidate or deconsolidate accordingly.

For equity investments where we do not control the investee, and where we are not the primary beneficiary of a variable interest entity, but can exert significant influence over the financial and operating policies of the investee, we follow the equity method of accounting. The evaluation of whether we exert control or significant influence over the financial and operational policies of its investees requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms and structure of the investment agreement, including investor voting or other rights, the terms of our investment advisory agreement or other agreements with the investee, any influence we may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund's operating documents and the relationship between us and other investors in the entity.

Base Management Fees

Base Management Fees earned from our funds are generally based on a fixed percentage of gross or net asset value based on the governing documents for each respective fund. For purposes of calculating management fees, such funds' investments are generally measured at fair value, and thus, management fee revenue are directly affected by significant estimates and assumptions used when determining the fair value of the underlying investments within the funds. These fair value measurements may vary depending on the valuation methodology that is used. See "— Fair Value Measurements" below for further discussion related to significant estimates and assumptions used for determining fair value of the underlying investments in our funds.

Part I Fees

Part I Fees earned from our funds are generally based on a fixed percentage of pre-incentive fee net investment income, which is calculated and paid quarterly, and subject to certain specified performance hurdles. Part I Fees are classified as management fees as they are predictable and are recurring in nature, are not subject to repayment (or clawback) and are generally cash-settled each quarter.

Performance Fees

Performance fees are earned from the funds managed by us based on the performance of the respective funds. We have elected to adopt Method 2 of ASC 605-20 for revenue based on a formula. Under this method, we record revenue when we are entitled to performance-based fees, subject to certain hurdles or benchmarks. The performance fees for any period are based upon an assumed liquidation of the fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund's income allocation provisions. The performance fees may be subject to reversal to the extent that the performance fees recorded exceed the amount due to the general partner or investment manager based on a fund's cumulative investment returns. Part II Fees are calculated and payable in arrears as of the end of each fiscal year of the BDCs and equal 20% of the BDCs' realized capital gains, if any, on a cumulative basis since inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. Accordingly, the amount recognized as performance fees reflects our share of the fair value gains and losses of the associated funds, and thus, are dependent on subjective judgments in determining the funds' fair value measurements.

Performance fees could continue to increase in the future as we increase our fundraising efforts for private fund vehicles. We may be required to return realized performance fees if such funds' investment values decline below certain levels. When the fair value of a fund's investments fall below certain return hurdles, previously recognized performance fees are reduced. In all cases, each fund is considered separately in that regard, and for a given fund, performance fees can never be negative over the life of a fund. Upon a hypothetical liquidation of a fund's investments at the then current fair values, previously recognized and distributed performance fees would be required to be returned, and a liability would be established for the potential giveback obligation. Part I Fees are not subject to such provisions.

Equity Based Compensation

We account for stock-based compensation in accordance with ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision of this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.

We recognize expense related to equity-based compensation transactions in which we receive employee services in exchange for: (a) our equity instruments or (b) liabilities that are based on the fair value of our equity instruments. Equity-based compensation expense represents expenses associated with the: (i) granting of Part I Fee-sharing arrangements prior to the Reorganization; (ii) conversion of and acceleration in vesting of interests in the Predecessor in connection with the Reorganization, and (iii) the granting of restricted stock units, options to purchase Class A common shares and stock appreciation rights granted in connection with our initial public offering.

Stock-based compensation expense recognized is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The effect of such change in estimated forfeitures is recognized through a cumulative catch-up adjustment that is included in the period of the change in estimate.

The value of the portion of the award that is ultimately expected to vest on a straight-line basis over the requisite service period is included within compensation and benefits (except for grants to non-employees which are included in general, administrative and other expenses) in our Consolidated Statements of Income.

We record deferred tax assets or liabilities for equity compensation plan awards based on deductions for income tax purposes of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which we are expected to receive a tax deduction. In addition, differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded as adjustments to additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces the pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase the income tax expense.

Historically, the grant date fair value of equity-based awards has been determined by independent third party appraisals. If we were to issue other share based compensation, such as stock options or restricted stock units, we would make judgments in order to determine the awards' grant date fair value, including volatility assumptions and estimated forfeiture rates. Each of these elements, particularly the forfeiture assumptions used in valuing any equity awards, create significant variability to fair value measurements, and the impact of changes in such elements on equity-based compensation expense could be material.

Fair Value Measurements

Available-for-sale securities consist of investments in FSC and FSFR common stock. Investments in available-for sale-securities are measured and carried at fair value and all unrealized gains and losses are recorded in accumulated other comprehensive income.

We elected the fair value option on all beneficial interests in CLOs and the MMKT Notes. Unrealized gains and losses resulting from changes in fair value of these instruments are reflected as a component of other income (expense) in the consolidated statements of income. The fair value option permits the irrevocable election of fair value on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. We believe that by electing the fair value option for these financial instruments, it provides consistent measurement with our peers in the asset management industry.

The carrying amounts of cash and cash equivalents, management and performance fees receivable from affiliates, prepaid expenses, due from/to affiliates, accounts payable and accrued expenses, accrued compensation and benefits, income taxes payable and dividend payable approximate fair value due to the immediate or short-term maturity of these financial instruments.

ASC 820 - Fair Value Measurements and Disclosures ("ASC 820") - defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount

that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity. We engage an independent third party valuation firm to assist in the fair value measurement for our beneficial interest in CLO.

Assets and liabilities recorded at fair value in our consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors are the most significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated by external sources).

When determining the fair value of our beneficial interests in CLOs, we utilize a discounted cash flow model that takes into consideration prepayment and loss assumptions, based on projected performance, economic factors, the characteristics and condition of the underlying collateral, comparable yields for similar securities and recent trading activity. When determining the fair value of our investments in FSC and FSFR common stock, we use the unadjusted closing price as of the valuation date on the primary market or exchange on which they trade. The fair value of the MMKT notes is based on recent market transactions.

Income Taxes

Prior to the completion of our initial public offering, substantially all of our earnings flowed through to the former members of Fifth Street Management without being subject to entity level income taxes. Accordingly, no provision for income taxes has been recorded in the consolidated financial statements prior to our initial public offering.

We account for income taxes under the asset and liability method prescribed by ASC 740, Income Taxes. As a result of our acquisition of limited partnership interests in Fifth Street Holdings, we expect to benefit from amortization and other tax deductions reflecting the step-up in tax basis in the acquired assets. Those deductions will be used by us and will be taken into account in determining our taxable income. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset and changes in applicable tax laws and other factors. If management determines that it is not probable that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the amount expected to be recoverable in the future. The allowance will result in a charge to our Consolidated Statements of Income. Further, we record our income taxes receivable and payable based upon our estimated income tax liability.

Fifth Street Holdings complies with the requirements of the Internal Revenue Code that are applicable to limited partnerships, which allow for the complete pass-through of taxable income or losses to Fifth Street Holdings limited partners, including us, who are individually responsible for any federal tax consequences. Therefore, no federal tax provision is required in Fifth Street Holdings' consolidated financial statements in the periods prior to November 4, 2014. Subsequent to our initial public offering, the tax provision includes the federal income tax obligation related to our allocated portion of Fifth Street Holdings' income. Fifth Street Holdings is subject to certain state and local taxes and certain of its subsidiaries are subject to entity level taxes.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We recognize interest and penalties associated with tax matters such as franchise tax liabilities, if applicable, as general and administrative and other expenses.

Recent Accounting Pronouncements

See Note 3 to the consolidated financial statements for a description of recent accounting pronouncements including those adopted during the year ended December 31, 2015.

Recent Developments

See Note 15 to the consolidated financial statements for a description of recent developments that have occurred subsequent to December 31, 2015.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk is related to our role as general partner or investment adviser to our investment funds, and to the sensitivity to movements in the fair value of the investments of such funds, including the effect on management fees and investment income.

The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions that are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.

Effect on Management Fees

Base management fees are generally based on a defined percentage of the value of our funds' assets. Base management fees may be affected by changes in the market value of our funds' underlying investments.

The overall impact of a short-term change in market value may be mitigated by a number of factors including, but not limited to, fee definitions that are not based on market value including invested capital and committed capital, market value definitions that exclude the impact of realized and/or unrealized gains and losses, market value definitions based on beginning of the period values or a form of average market value including daily, monthly or quarterly averages as well monthly or quarterly payment terms.

Assuming an incremental 10% change in fair value of the funds' investments as of December 31, 2015, we calculated an increase in base management fees earned of $4.6 million in the case of an increase in value and a decrease in base management fees earned of $4.6 million in the case of a decline in value for the years ended December 31, 2015. Such a change in fair value would not have a material impact on Part I Fees.

Effect on Performance Fees

Performance fees are based on certain specific hurdle rates as defined in the funds' applicable investment management or partnership agreements. The performance fees for any period are based upon an assumed liquidation of the fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund's income allocation provisions which can result in a performance-based fee to us, subject to certain hurdles and benchmarks. The performance fees may be subject to reversal to the extent that the performance fees recorded exceeds the amount due to the general partner or investment manager based on a fund's cumulative investment returns.

Changes in the fair values of funds' investments may materially impact performance fees depending on the respective funds' performance relative to applicable hurdles or benchmarks. Based on an incremental 10% change in fair value of the funds' investments as of December 31, 2015, there would be no material impact on performance fees for the year ended December 31, 2015.

Effect on Other Income (Expense)

Other income (expense) includes unrealized gain (loss) from our beneficial interests in CLOs. Unrealized gain (loss) on beneficial interests in CLOs results from changes in fair value as well as the reversal of unrealized gain (loss) at the time the beneficial interests are realized. Assuming an incremental 10% change in fair value of our beneficial interests in CLOs as of December 31, 2015, we calculated an increase to other income (expense) of $2.4 million in the case of an increase in value and a decrease to other income (expense) of $2.4 million in the case of a decrease in value.

Credit Risk

We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.

Interest Rate Risk

The funds we manage are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect our funds' costs of funding and their interest income from portfolio investments, cash and cash equivalents and idle funds' investments. Risk management systems and procedures at our funds are designed to identify and analyze our risk, 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. Investment income at our funds will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent their debt investments include floating interest rates. In addition, investments of our BDCs are carried at fair value as determined in good faith by each BDC's respective board of directors in accordance with the 1940 Act.

Our Revolving Credit Facility and Risk Retention Term Loan bear interest at a variable rate, and as such, we may be exposed to increased interest expense with higher market interest rates. However, an incremental 10% change in LIBOR would not have a material effect on our consolidated financial results.

Item 8. Consolidated Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)



Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP	61
Report of Independent Registered Public Accounting Firm - CohnReznick LLP	62
Consolidated Statements of Financial Condition as of December 31, 2015 and 2014	63
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013	64
Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013	65
Consolidated Statement of Changes in Equity for the Years Ended December 31, 2015, 2014 and 2013	66
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013	67
Notes to Consolidated Financial Statements	69

Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders of Fifth Street Asset Management Inc.:

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income and comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Fifth Street Asset Management Inc. and its subsidiaries (the “Company”) at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 18, 2016

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Fifth Street Asset Management Inc.:

We have audited the accompanying consolidated statements of income, comprehensive income, changes in equity and cash flows of Fifth Street Asset Management Inc. (the Company) for the year ended December 31, 2013. Fifth Street Asset Management Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Fifth Street Asset Management Inc. for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ CohnReznick LLP

Roseland, New Jersey

July 22, 2014, except for the last

two paragraphs of Note 1, as to

which the date is September 5, 2014 and

Except for the retrospective adjustment discussed

in paragraphs two and three in the basis of presentation

section of Note 3, as to which the date is March 27, 2015

Fifth Street Asset Management Inc.

Consolidated Statements of Financial Condition



	As of
	December 31, 2015			December 31, 2014
Assets				(see Note 2)
Cash and cash equivalents	$	17,185,204		$	3,238,008
Management fees receivable (includes Part I Fees of $(555,663) and $7,974,042 at December 31, 2015 and December 31, 2014, respectively)	4,879,785			23,528,749
Performance fees receivable	224,618			106,635
Prepaid expenses (includes $676,789 and $185,580 related to income taxes at December 31, 2015 and December 31, 2014, respectively)	1,284,759			1,395,882
Investments in equity method investees	6,427,272			4,115,429
Investments in available-for-sale securities (cost: $26,389,015)	26,771,258			—
Beneficial interests in CLOs at fair value: (cost: $24,617,568)	23,537,629			—
Due from affiliates	3,943,384			3,799,542
Fixed assets, net	9,893,521			10,274,263
Deferred tax assets	51,180,237			57,972,039
Deferred financing costs	1,929,433			2,432,764
Other assets	3,976,420			4,197,358
Total assets	$	151,233,520		$	111,060,669
Liabilities and Equity
Liabilities
Accounts payable and accrued expenses	$	5,324,842		$	3,045,651
Accrued compensation and benefits	10,448,260			11,095,548
Income taxes payable	28,559			361,052
Loans payable (including $4,738,026 of MMKT Notes at fair value)	21,710,640			4,000,000
Credit facility payable	65,000,000			12,000,000
Dividend payable	1,748,062			—
Due to Principal	—			9,063,792
Due to affiliates	24,257			62,781
Deferred rent liability	3,146,210			3,261,434
Payable to related parties pursuant to tax receivable agreements	45,486,114			47,373,245
Total liabilities	152,916,944			90,263,503
Commitments and contingencies
Equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued and outstanding as of December 31, 2015 and December 31, 2014	—			—
Class A common stock, $0.01 par value 500,000,000 shares authorized; 5,822,672 and 6,000,033 shares issued and 5,798,614 and 6,000,033 shares outstanding as of December 31, 2015 and December 31, 2014, respectively	58,227			60,000
Class B common stock, $0.01 par value 50,000,000 shares authorized; 42,856,854 shares issued and outstanding as of December 31, 2015 and December 31, 2014	428,569			428,569
Additional paid-in capital	2,661,253			4,975,073
Accumulated other comprehensive income	27,276			—
Retained earnings	—			1,214,949
	3,175,325			6,678,591
Less: Treasury stock, at cost: 24,058 shares as of December 31, 2015	(180,064		)	—
Total stockholders' equity, Fifth Street Asset Management Inc.	2,995,261			6,678,591
Non-controlling interests	(4,678,685		)	14,118,575
Total equity (deficit)	(1,683,424		)	20,797,166
Total liabilities and equity	$	151,233,520		$	111,060,669

All management and performance fees are earned from affiliates of the Company. See notes to Consolidated Financial Statements.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Consolidated Statements of Income



	For the Years Ended December 31,
	2015			2014			2013
Revenues				(see Note 2)
Management fees (includes Part I Fees of $31,172,071, $35,618,257 and $30,573,056 for the years ended December 31, 2015, 2014 and 2013, respectively)	$	88,473,650		$	92,092,369		$	68,417,218
Performance fees	224,618			106,635			—
Other fees	9,068,020			10,337,588			5,204,820
Total revenues	97,766,288			102,536,592			73,622,038
Expenses
Compensation and benefits	36,636,264			53,826,682			22,411,155
Fund offering and start-up expenses	—			1,247,923			5,701,831
General, administrative and other expenses	17,887,419			13,029,436			5,506,680
Depreciation and amortization	1,693,080			985,845			236,892
Total expenses	56,216,763			69,089,886			33,856,558
Other income (expense)
Interest income	653,130			13,031			17,575
Interest expense	(2,143,817		)	(323,363		)	(11,233		)
Income from equity method investments	20,630			246,361			—
Unrealized loss on beneficial interests in CLOs	(1,079,939		)	—			—
Realized loss on beneficial interests in CLOs	(249,033		)	—			—
Other income (expense), net	279,405			90,049			—
Total other income (expense), net	(2,519,624		)	26,078			6,342
Income before provision (benefit) for income taxes	39,029,901			33,472,784			39,771,822
Provision (benefit) for income taxes	5,065,420			(2,123,627		)	—
Net income	33,964,481			35,596,411			39,771,822
Less: Net income attributable to Predecessor	—			(25,631,089		)	(39,771,822		)
Less: Net income attributable to non-controlling interests	(31,556,455		)	(9,527,661		)	—
Net income attributable to Fifth Street Asset Management Inc.	$	2,408,026		$	437,661		$	—

Net income per share attributable to Fifth Street Asset Management Inc. Class A common stock: Basic and Diluted	$	0.41		$	0.07
Weighted average shares of Class A common stock outstanding - Basic	5,913,125			6,000,033
Weighted average shares of Class A common stock outstanding - Diluted	5,915,174			6,000,033

All revenues are earned from affiliates of the Company. See notes to consolidated financial statements.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Consolidated Statements of Comprehensive Income



	For the Years Ended December 31,
	2015			2014			2013

Net income	$	33,964,481		$	35,596,411		$	39,771,822
Other comprehensive income (loss):
Adjustment for change in fair value on available-for-sale securities	382,242			—			—
Tax effect on adjustment for change in fair value on available-for-sale securities	(18,003		)	—			—
Total comprehensive income	34,328,720			35,596,411			39,771,822
Less: Comprehensive income attributable to Predecessor	—			(25,631,089		)	(39,771,822		)
Less: Comprehensive income attributable to non-controlling interests	(31,893,418		)	(9,527,661		)	—
Comprehensive income attributable to Fifth Street Asset Management Inc.	$	2,435,302		$	437,661		$	—

See notes to consolidated financial statements.

Fifth Street Asset Management Inc.

Consolidated Statement of Changes in Equity

For the Years Ended December 31, 2015, 2014 and 2013



	Members' Equity of Predecessor			Class A Common Stock					Class B Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Non-Controlling Interests			Total Equity
	Members' Equity of Predecessor			Shares		Amount			Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Non-Controlling Interests			Total Equity

Balance, December 31, 2012	$	14,476,947		—		$	—		—	$	—	$	—				$	—		$	—		$	—		$	14,476,947
Capital contributions	6,147,257			—		—			—	—		—					—			—			—			6,147,257
Amortization of equity-based compensation	1,739,360			—		—			—	—		—					—			—			—			1,739,360
Distributions	(41,110,872		)	—		—			—	—		—					—			—			—			(41,110,872		)
Net income	39,771,822			—		—			—	—		—					—			—			—			39,771,822
Balance, December 31, 2013	21,024,514			—		—			—	—		—					—			—			—			21,024,514
Capital contributions	12,405,868			—		—			—	—		—					—			—			—			12,405,868
Amortization of equity-based compensation	1,487,646			—		—			—	—		—					—			—			—			1,487,646
Reclassification of distributions to former members	800,381			—		—			—	—		—					—			—			—			800,381
Purchase of former member interests	2,327,548			—		—			—	—		—					—			—			—			2,327,548
Distributions	(73,686,241		)	—		—			—	—		—					—			—			—			(73,686,241		)
Issuance of Class A common shares	—			33		—			—	—		1,000					—			—			—			1,000
Net income	43,343,034			—		—			—	—		—					—			—			—			43,343,034
Balance, November 4, 2014	7,702,750			33		—			—	—		1,000					—			—			—			7,703,750
Net loss from effects of Reorganization and IPO	(17,711,945		)	—		—			—	—		—					—			—			—			(17,711,945		)
Other adjustments related to Reorganization and IPO	15,377,397			—		—			—	—		—					—			—			—			15,377,397
Allocation of pre-IPO earnings	(5,368,202		)	—		—			—	—		—					760,418			—			4,607,784			—
Balance, November 4, 2014. as adjusted	—			33		—			—	—		1,000					760,418			—			4,607,784			5,369,202
Issuance of Class A common shares in IPO	—			6,000,000		60,000			—	—		95,820,000					—			—			—			95,880,000
Issuance of Class B common shares	—			—		—			42,856,854	428,569		(428,569		)			—			—			—			—
Purchase of Fifth Street Holdings L.P. limited partner interests	—			—		—			—	—		(95,880,000		)			—			—			—			(95,880,000		)
Amortization of equity-based compensation	—			—		—			—	—		984,344					—			—			—			984,344
Net tax benefit in connection with tax receivable agreements	—			—		—			—	—		8,359,984					—			—			—			8,359,984
IPO costs	—			—		—			—	—		(3,881,686		)			—			—			—			(3,881,686		)
Special allocation of adjustments related to Revision	—			—		—			—	—		—			—		16,870			—			(16,870		)	—
Net income	—			—		—			—	—		—					437,661			—			9,527,661			9,965,322
Balance, December 31, 2014 (see Note 2)	—			6,000,033		60,000			42,856,854	428,569		4,975,073			—		1,214,949			—			14,118,575			20,797,166
Capital contributions	—			—		—			—	—		—			—		—			—			4,112,873			4,112,873
Distributions to Holdings limited partners	—			—		—			—	—		—			—		—			—			(59,683,696		)	(59,683,696		)
Accrued and paid dividends - $0.81 per Class A common share	—			—		—			—	—		(1,262,774		)	—		(3,533,161		)	—			—			(4,795,935		)
Accrual of dividends on restricted stock units	—			—		—			—	—		—			—		(89,814		)	—			(668,394		)	(758,208		)
Issuance of Class A common shares	—			16,222		162			—	—		—			—		—			—			—			162
Repurchase and retirement of Class A common shares	—			(193,583	)	(1,935		)	—	—		(1,667,141		)	—		—			—			—			(1,669,076		)
Repurchase of Class A common shares	—			—		—			—	—		—			—		—			(180,064		)	—			(180,064		)
Amortization of equity-based compensation	—			—		—			—	—		616,095			—		—			—			5,548,539			6,164,634
Change in fair value on available-for-sale securities, net of tax	—			—		—			—	—		—			27,276		—			—			336,963			364,239
Net income	—			—		—			—	—		—			—		2,408,026			—			31,556,455			33,964,481
Balance, December 31, 2015	—			5,822,672		$	58,227		42,856,854	$	428,569	$	2,661,253		$	27,276	$	—		$	(180,064	)	$	(4,678,685	)	$	(1,683,424	)

See notes to consolidated financial statements.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Consolidated Statements of Cash Flows



	For the years ended December 31,
	2015			2014			2013
Cash flows from operating activities							(see Note 1)
Net income	$	33,964,481		$	35,596,411		$	39,771,822
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,409,987			752,144			207,794
Amortization of fractional interests in aircrafts	283,093			233,701			29,098
Amortization of deferred financing costs	503,331			83,888			—
Amortization of equity-based compensation	6,185,588			4,953,078			1,739,360
Compensation charges related to Reorganization and IPO	—			13,856,529			—
Unrealized loss on beneficial interests in CLOs	1,079,939			—			—
Interest income accreted on beneficial interest in CLOs	(652,132		)	—			—
Interest expense on MMKT Notes	138,026			—			—
Realized loss on beneficial interests in CLOs	249,033			—			—
Income from equity method investments	(83,405		)	(246,361		)	—
Deferred taxes	5,178,675			(2,238,810		)	—
Deferred rent	(115,224		)	1,281,288			23,971
Reclassification of distributions to former member	—			1,919,569			—
Losses on sale and disposal of assets	—			41,951			—
Lease termination charges	—			657,584			—
Fair value adjustment – due to former member	—			270,538			(89,057		)
Changes in operating assets and liabilities:
Management fees receivable	18,648,964			(2,118,986		)	(18,631,509		)
Performance fees receivable	(117,983		)	(106,635		)	—
Prepaid expenses	111,123			(1,068,269		)	(20,950		)
Due from affiliates	(143,842		)	48,949			(1,397,005		)
Other assets	(62,155		)	—			(2,132,757		)
Accounts payable and accrued expenses	2,279,191			909,639			835,138
Accrued compensation and benefits	(647,288		)	10,557,513			(14,429		)
Income taxes payable	(332,493		)	175,472			—
Due to Principal	(16,863		)	—			—
Due to affiliates	20,792			(2,671,334		)	339,809
Due to former member	(59,316		)	(2,363,975		)	(896,937		)
Payables related to TRA	(340,714		)	—			—
Net cash provided by operating activities	67,480,808			60,523,884			19,764,348
Cash flows from investing activities
Purchases of fixed assets	(404,733		)	(9,506,416		)	(941,782		)
Purchases of capitalized software	(624,512		)	—			—
Purchases of equity method investments	(7,500,000		)	(3,956,813		)	—
Redemptions of equity method investments	1,200,000			—			—
Distributions received from equity method investments	225,282			87,745			—
Distributions from beneficial interest in CLO	528,853			—			—
Proceeds from sale of beneficial interest in CLO	653,900			—			—
Purchases of fractional interest in aircraft	—			(1,763,674		)	—
Purchases of investments in available-for-sale securities	(26,389,016		)	—			—
Purchases of beneficial interest in CLO	(21,523,027		)	—			—
Net cash used in investing activities	(53,833,253		)	(15,139,158		)	(941,782		)
Cash flows from financing activities
Proceeds from sale of Class A common shares	—			1,000			—
Proceeds from sale of Class A common shares	—			95,880,000			—
Initial public offering costs paid	—			(3,741,134		)	—
Purchase of limited partner interests in Fifth Street Holdings L.P.	—			(95,880,000		)	—
Proceeds from loan payable	—			—			4,000,000
Proceeds from borrowings under credit facility	78,000,000			12,000,000			—
Repayments under credit facility	(25,000,000		)	—			—
Repayments of notes payable	(9,046,929		)	—			—
Proceeds from risk retention term loan	16,972,614			—			—
Repayments of risk retention term loan	(4,000,000		)	—			—
Proceeds from issuance of MMKT notes	4,600,000			—			—
Deferred financing costs paid	—			(2,516,652		)	—
Capital contributions from members	—			2,222,560			447,640

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Consolidated Statements of Cash Flows



Capital contributions from non-controlling interests	20,000			—			—
Distributions to members	(55,590,824		)	(54,128,220		)	(35,411,255		)
Dividends to Class A shareholders	(3,806,080		)	—			—
Repurchases of Class A common shares	(1,849,140		)	—			—
Net cash provided (used) in financing activities	299,641			(46,162,446		)	(30,963,615		)
Net increase (decrease) in cash and cash equivalents	13,947,196			(777,720		)	(12,141,049		)
Cash and cash equivalents, beginning of year	3,238,008			4,015,728			16,156,777
Cash and cash equivalents, end of year	$	17,185,204		$	3,238,008		$	4,015,728



Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,311,367		$	100,000		$	11,233
Cash paid during the period for income taxes	$	915,510		$	—		$	—
Non-cash investing activities:
Fixed asset purchases included in accounts payable	$	—		$	139,671		$	—
Non-cash exchange of other assets	$	—		$	(673,826	)	$	—
Non-cash financing activities:
Non-cash conversion of MMKT Notes	$	2,950,000		$	—		$	—
Accrued dividends	$	(1,748,062	)	$	—		$	—
Non-cash capital contribution by members	$	4,092,873		$	10,183,308		$	5,699,617
Non-cash distribution to members	$	(4,092,873	)	$	(19,428,769	)	$	(5,699,617	)
Issuance of Class A common shares	$	198,056		$	—		$	—
Due to Principal and Affiliates for distributions to former members of Predecessor	$	—		$	9,123,108		$	—
Establishment of deferred tax assets related to tax receivable agreements	$	—		$	(55,733,229	)	$	—
Initial recording of amounts payable to related parties pursuant to tax receivable agreements	$	—		$	47,373,245		$	—
IPO costs included in accounts payable	$	—		$	140,552		$	—
Issuance of Class B common shares	$	—		$	428,569		$	—

All management and performance fees are earned from affiliates of the Company. See notes to consolidated financial statements.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Note 1. Organization

Fifth Street Asset Management Inc. ("FSAM"), together with its consolidated subsidiaries (collectively, the "Company"), is a leading alternative asset management firm headquartered in Greenwich, CT that provides asset management services to its investment funds (referred to as the "Fifth Street Funds" or the "funds"), which, to date, consist primarily of Fifth Street Finance Corp. (formed on January 2, 2008, "FSC") and Fifth Street Senior Floating Rate Corp. (formed on May 22, 2013, "FSFR"), both publicly-traded business development companies regulated under the Investment Company Act of 1940 (together, the "BDCs"). The Company conducts all of its operations through its consolidated subsidiaries, Fifth Street Management LLC ("FSM"), Fifth Street CLO Management LLC ("CLO Management") and FSCO GP LLC ("FSCO GP").

The Company's primary sources of revenues are management fees, primarily from the BDCs, which are driven by the amount of the assets under management and quarterly investment performance of the Fifth Street Funds. The Company conducts substantially all of its operations through one reportable segment that provides asset management services to the Fifth Street Funds. The Company generates all of its revenues in the United States.

Reorganization

In anticipation of its initial public offering (the "IPO") that closed November 4, 2014, FSAM was incorporated in Delaware on May 8, 2014 as a holding company with its primary asset expected to be a limited partnership interest in Fifth Street Holdings L.P. ("Fifth Street Holdings"). Fifth Street Holdings was formed on June 27, 2014 by Leonard M. Tannenbaum and another member of FSM (the "Principals") as a Delaware limited partnership. Prior to the transactions described below, the Principals were the general partners and limited partners of Fifth Street Holdings. Fifth Street Holdings has a single class of limited partnership interests (the "Holdings LP Interests"). Immediately prior to the IPO:


•	The Principals contributed their general partnership interests in Fifth Street Holdings to FSAM in exchange for 100% of FSAM's Class B common stock;


•	The members of FSM contributed 100% of their membership interests in FSM to Fifth Street Holdings in exchange for Holdings LP Interests; and


•	The members of FSCO GP, a Delaware limited liability company, formed on January 6, 2014 to serve as the general partner of Fifth Street Opportunities Fund, L.P. (''FSOF,'' formerly Fifth Street Credit Opportunities Fund, L.P.) contributed 100% of their membership interests in FSCO GP to Fifth Street Holdings in exchange for Holdings LP Interests.

These collective actions are referred to herein as the "Reorganization."

Initial Public Offering

Immediately following the Reorganization and the closing of the IPO on November 4, 2014:


•	The Principals held 42,856,854 shares of FSAM Class B common stock and 42,856,854 Holdings LP Interests.


•	FSAM held 6,000,000 Holdings LP Interests and the former members of FSM and FSCO GP, including the Principals, held 44,000,000 Holdings LP Interests.


•	The Principals, through their holdings of FSAM Class B common stock in the aggregate, had approximately 97.3% of the voting power of FSAM's common stock.

Exchange Agreement

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

in the public markets. As of December 31, 2015, FSAM held approximately 11.6% of Fifth Street Holdings after taking into account the repurchase of 217,641 Class A common shares during the year ended December 31, 2015, of which, 193,583 were retired. FSAM’s percentage ownership in Fifth Street Holdings will continue to change as Holdings LP Interests are exchanged for Class A common stock of FSAM or when FSAM otherwise issues or repurchases FSAM common stock.

FSAM's purchase of Holdings LP Interests concurrent with its IPO, and the subsequent and future exchanges by holders of Holdings LP Interests for shares of FSAM's Class A common stock pursuant to the Exchange Agreement are expected to result in increases in its share of the tax basis of the tangible and intangible assets of Fifth Street Holdings, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to FSAM. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that FSAM would otherwise be required to pay in the future. FSAM entered into a tax receivable agreement ("TRA") with certain limited partners of Fifth Street Holdings (the "TRA Recipients") that requires FSAM to pay the TRA Recipients 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax that FSAM actually realizes (or, under certain circumstances, is deemed to realize) as a result of the increases in tax basis in connection with exchanges by the TRA Recipients described above and certain other tax benefits attributable to payments under the tax receivable agreement.

Revision of Statement of Cash Flows for the Year Ended December 31, 2013

The Company identified a revision to its previously issued 2013 combined financial statements resulting from the presentation of noncash capital contributions and noncash distributions to members of approximately $5,700,000 within cash flows from financing activities rather than as noncash financing activities. The revision to correct the presentation had no net effect on cash flows from financing activities or cash and cash equivalents.

The Company reviewed this item utilizing SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”) and determined that the impact was immaterial. The accompanying 2013 consolidated financial statements reflect the correction of this item.

Note 2. Revision of Previously Issued Financial Statements

Revision

During 2015, the Company identified errors in the calculation of Part I Fees that were originally recognized as revenue in the first quarter of 2012 through the third quarter of 2015. The cumulative adjustment of $739,594 related to the years ended 2012 and 2013, was not considered material to those years and as a result was recorded as an out-of-period adjustment in the three months ended March 31, 2014. The identified errors related to incorrect information used by FSC CT LLC, the Company's administrator, a wholly-owned subsidiary of the Company. The errors related primarily to the timing of when Part I fees should have been recognized. The Company also incorrectly recorded certain reimbursements from the BDCs on a net basis during the interim periods of 2015 and year ended December 31, 2014, respectively. This error had no impact on net income as the correction was to gross-up revenue - other fees and general, administrative and other expenses by the same amounts. The Company assessed the materiality of the errors on its prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin ("SAB") No. 99 and SAB No. 108 and concluded that the errors were not material to any of its previously issued financial statements. However, the Company concluded the cumulative corrections of these errors would be material to the Company's 2015 financial statements and, therefore, it was not appropriate to recognize the cumulative corrections in the current year. Consequently, the Company revised the 2014 financial statements to correct these errors (the "Revision") as well as other unrelated, immaterial out-of-period adjustments that had been previously recorded. The Revision had no net impact on the Company’s net cash provided by operating activities for any period presented.

The Holdings Limited Partners have refunded all of the prematurely paid fees to the Company, including interest, and therefore none of the expense was borne by the Class A stockholders of FSAM.

Set forth below is a summary of the financial statement line items impacted by the Revision for the year ended December 31, 2014 presented in this Form 10-K.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013



	December 31, 2014
Consolidated Statements of Financial Condition:	As previously reported (1)		Adjustment			As revised
Management fees receivable	$	23,363,901	$	164,848		$	23,528,749
Prepaid expenses	1,335,593		60,289			1,395,882
Total assets	$	110,835,532	$	225,137		$	111,060,669
Retained earnings	1,273,485		(58,536		)	1,214,949
Total stockholders' equity, Fifth Street Asset Management Inc.	6,737,127		(58,536		)	6,678,591
Non-controlling interests	13,834,902		283,673			14,118,575
Total equity	20,572,029		225,137			20,797,166
Total liabilities and equity	$	110,835,532	$	225,137		$	111,060,669

_____________

(1) Amounts were previously revised in the September 30, 2015 Form 10-Q filed on November 24, 2015.



	Year Ended December 31, 2014
Consolidated Statements of Income:	As previously reported			Adjustment			As revised
Management fees	$	95,425,407		$	(3,333,038	)	$	92,092,369
Other fees	7,674,019			2,663,569			10,337,588
Total revenues	103,206,061			(669,469		)	102,536,592
Compensation and benefits	53,697,430			129,252			53,826,682
General, administrative and other expenses	10,365,867			2,663,569			13,029,436
Total expenses	66,297,065			2,792,821			69,089,886
Income before provision for income taxes	36,935,074			(3,462,290		)	33,472,784
Income tax benefit	(1,877,758		)	(245,869		)	(2,123,627		)
Net income	38,812,832			(3,216,421		)	35,596,411
Net income attributable to non-controlling interests	(38,284,255		)	3,125,505			(35,158,750		)
Net income attributable to Fifth Street Asset Management Inc.	$	528,577		$	(90,916	)	$	437,661
Net income per share attributable to Fifth Street Asset Management Inc. Class A common stock: Basic and Diluted	$	0.09		$	(0.02	)	$	0.07

Note 3. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and the requirements for reporting on Form 10-K and Regulation S-X. All significant intercompany transactions and balances have been eliminated in consolidation.

Prior to the completion of the Reorganization and the IPO, the historical financial statements consisted of the combined results of Fifth Street Management LLC, FSC, Inc., FSC CT, Inc., FSC Midwest, Inc., Fifth Street Capital West, Inc. and their wholly-owned subsidiaries and certain combined funds (collectively referred to as the "Fifth Street Management Group"), which were affiliated entities that were either wholly or substantially owned and/or under the voting control of Leonard M. Tannenbaum.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

consolidated by FSAM in the consolidated financial statements. All income attributable to the Company's Predecessor prior to the Reorganization are recorded as "Net income attributable to Predecessor" within the Consolidated Statements of Income. Subsequent to November 4, 2014, the portion of net income attributable to the limited partners of Fifth Street Holdings, excluding FSAM, is recorded as "Net income attributable to non-controlling interests" on the Consolidated Statements of Income.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and entities in which it, directly or indirectly, is determined to have a controlling financial interest under ASC 810, as amended by ASU No. 2015-02. Under the variable interest model, the Company determines whether, if by design, an entity has equity investors who lack substantive participating or kick-out rights. If equity investors do not have such rights, the entity is considered a variable interest entity ("VIE") and must be consolidated by its primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (a) whether an entity in which the Company holds a variable interest is a VIE and (b) whether the Company's involvement, through holding interests directly or indirectly in the entity, would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment.

Under the consolidation guidance, the Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continually. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly or indirectly by the Company. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Company, affiliates of the Company or third parties) or amendments to the governing documents of the respective investment funds could affect an entity's status as a VIE or the determination of the primary beneficiary. At each reporting date, the Company assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

For equity investments where the Company does not control the investee, and where it is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting. The evaluation of whether the Company exerts control or significant influence over the financial and operational policies of its investees requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms and structure of the investment agreement, including investor voting or other rights, the terms of the Company's investment advisory agreement or other agreements with the investee, any influence the Company may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund’s operating documents and the relationship between the Company and other investors in the entity.

Consolidated Variable Interest Entities

Fifth Street Holdings

FSAM is the sole general partner of Fifth Street Holdings and, as such, it operates and controls all of the business and affairs of Fifth Street Holdings and its wholly-owned subsidiaries, FSM, CLO Management and FSCO GP. Under ASC 810, Fifth Street Holdings meets the definition of a VIE because the limited partners do not hold substantive kick-out or participating rights. Since FSAM has the obligation to absorb expected losses that could be significant to Fifth Street Holdings and is the sole general partner, FSAM is considered to be the primary beneficiary of Fifth Street Holdings.

As a result, the Company consolidates the financial results of Fifth Street Holdings and its wholly-owned subsidiaries and records the economic interests in Fifth Street Holdings held by the limited partners other than FSAM as "Non-controlling interests" on the Consolidated Statements of Financial Condition and "Net income attributable to non-controlling interests" on the Consolidated Statements of Income.

As of December 31, 2015 and December 31, 2014, the Company has recorded the following amounts in its Consolidated Statements of Financial Condition relating to Fifth Street Holdings:

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013



	December 31, 2015			December 31, 2014 (as revised)
Assets
Cash and cash equivalents	$	16,030,340		$	3,236,830
Management fees receivable	4,879,785			23,528,749
Performance fees receivable	224,618			106,635
Prepaid expenses	633,016			1,395,882
Investments in equity method investees	6,427,272			4,115,429
Investments in available-for-sale securities (cost: $26,389,015)	26,771,258			—
Beneficial interests in CLOs at fair value: (cost: $24,617,568)	23,537,629			—
Due from affiliates (1)	8,469,671			8,369,501
Fixed assets, net	9,893,521			10,274,263
Deferred tax assets	—			2,705,934
Deferred financing costs	1,929,433			2,432,764
Other assets	3,972,330			4,197,358
Total assets	$	102,768,873		$	60,363,345

Liabilities
Accounts payable and accrued expenses	$	5,324,842		$	2,830,052
Accrued compensation and benefits	10,448,260			11,095,548
Income taxes payable	214,681			—
Loans payable	21,710,640			4,000,000
Credit facility payable	65,000,000			12,000,000
Dividend payable	758,208			—
Due to Principal	—			9,063,792
Due to affiliates (2)	715,401			747,505
Deferred rent liability	3,146,209			3,261,434
Deferred tax liability	200,937			—
Total liabilities	107,519,178			42,998,331
Equity	(4,750,305		)	17,365,014
Total liabilities and equity	$	102,768,873		$	60,363,345

_____________

(1) The amounts due from affiliates include $4,526,287 that is eliminated in consolidation.

(2) The amounts due to affiliates include $691,144 that is eliminated in consolidation.

The liabilities recognized as a result of consolidating Fifth Street Holdings do not represent additional claims on FSAM’s general assets; rather, they represent claims against the specific assets of Fifth Street Holdings and its subsidiaries. Conversely, assets recognized as a result of consolidating Fifth Street Holdings do not represent additional assets that could be used to satisfy claims against FSAM's general assets.

Voting Interest Entities

For entities that are not VIEs, the Company consolidates those entities in which it has an equity investment of greater than 50% and has control over significant operating, financial and investing decisions of the entity. Additionally, the Company consolidates entities in which the Company is a substantive, controlling general partner and the limited partners have no substantive rights to participate in the ongoing governance and operating activities.

On December 22, 2014, FSM entered into a limited liability company agreement, as majority member, with Leonard Tannenbaum’s brother, as minority member, for the purpose of forming MMKT Exchange LLC (previously IMME LLC), a Delaware limited liability company ("MMKT"). MMKT is a financial technology company that seeks to bring increased liquidity and transparency to middle market loans. FSM made a capital contribution of $80,000 for an 80% membership interest in MMKT. MMKT is consolidated by FSAM in the consolidated financial statements.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Unconsolidated Variable Interest Entities

The Company holds interests in certain VIEs that are not consolidated because the Company is not deemed the primary beneficiary. The Company's interest in such entities generally is in the form of direct interests and fixed fee arrangements. The maximum exposure to loss represents the potential loss of assets by the Company relating to these non-consolidated entities. The Company's interests in these non-consolidated VIEs and their respective maximum exposure to loss relating to non-consolidated VIEs as of December 31, 2015 is $24,178,207, which represents the fair value of beneficial interests as well as management fees receivable at such date.

Deconsolidation of Combined Funds

During the year ended December 31, 2014, the Company formed the following entities (collectively referred to as the "Combined Funds") whose financial results were included in the Company’s combined financial statements in previous filings with the SEC:


•	FSCO GP, a Delaware limited liability company, formed on January 6, 2014 to serve as the general partner of FSOF, which primarily invests in yield-oriented corporate credit assets and equities;


•	Fifth Street EIV, LLC ("Fifth Street EIV"), a Delaware limited liability company formed on February 7, 2014 to hold FSM's equity interest in Fifth Street Senior Loan Fund I, LLC ("SLF I"), which primarily invests in senior secured loans to middle-market companies; and


•	Fifth Street EIV II, LLC ("Fifth Street EIV II"), a Delaware limited liability company formed on July 10, 2014 to hold certain of the Company's employees' equity interests in SLF II, which primarily invests in senior secured loans to middle market companies.

Such Combined Funds were included in the financial statements previously filed with the SEC through periods ended September 30, 2014 based on the then existing consolidation guidance. In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis ("ASU 2015-02"). As of December 31, 2014, the Company elected to early adopt such guidance, which resulted in deconsolidation of the Combined Funds. The Company determined that these entities were variable interest entities and that the Company was not the primary beneficiary because under ASU 2015-02, the Company's fee arrangements, which are commensurate with the level of effort performed and include only customary terms, do not represent variable interests. There was no gain or loss recognized as a result of the deconsolidation of the Combined Funds and the Company will continue to earn management and/or performance fees from these funds. Although total assets and equity significantly decreased as a result of the Combined Funds' deconsolidation, it did not change net income or equity attributable to controlling interests in FSAM.

CLOs

In February 2015, the Company closed a securitization of the senior secured loans warehoused in Fifth Street Senior Loan Fund I, LLC ("CLO I"). In September 2015, Fifth Street Senior Loan II, LLC merged into Fifth Street SLF II Ltd. ("CLO II"), and the Company closed a securitization of the senior secured loans previously warehoused in Fifth Street Senior Loan Fund II, LLC. Fifth Street CLO Management LLC ("CLO Management"), a wholly owned-consolidated subsidiary of Fifth Street Holdings, is the collateral manager of CLO I and CLO II (collectively referred to as the "CLOs"), and as such, it operates and controls all of the business and affairs of the CLOs. Under ASC 810, the CLOs meet the definition of a VIE because the total equity at risk is not sufficient to finance it activities.

The Company determined that it did not have an obligation to absorb expected losses that could be significant to CLO I. Therefore, FSM was not considered to be the primary beneficiary of CLO I. As a result, the Company did not consolidate the financial results of CLO I during the year ended December 31, 2015.

As of September 30, 2015, the Company determined that it had an obligation to absorb expected losses that could be significant to CLO II. Therefore, the Company was considered to be the primary beneficiary of CLO II. As a result, the Company consolidated the financial results of CLO II for the three and nine months ended September 30, 2015. However, during the three months ended December 31, 2015, the Company reconsidered its consolidation conclusion for CLO II as a result of a recent SEC speech which clarified the application of ASU 2015-02 regarding the assessment of related parties. Based on the reconsideration, the Company determined that it did not have an obligation to absorb expected losses that could be significant to CLO II. Therefore, the Company was not considered to be the primary beneficiary of CLO II. As a result, the Company did not consolidate CLO II during the year ended December 31, 2015.

As of December 31, 2015, investments held by the Company in the senior secured and subordinated notes of the CLOs are included within "Beneficial interests in CLOs at fair value" on the Consolidated Statements of Financial Condition.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions affecting amounts reported in the consolidated financial statements and accompanying notes. The most significant of these estimates are related to: (i) the valuation of equity-based compensation, (ii) the estimate of future taxable income, which impacts the carrying amount of the Company’s deferred income tax assets, (iii) the determination of net tax benefits in connection with the Company's tax receivable agreements and (iv) the valuation of the Company's investments. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions and conditions.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-credit quality financial institutions.

For the years ended December 31, 2015, 2014 and 2013, substantially all revenues and receivables were earned or derived from advisory or administrative services provided to the BDCs and other affiliated entities.

The Company is dependent on its chief executive officer, Leonard M. Tannenbaum, who holds over 90% of the combined voting power of the Company through his ownership of shares of common stock. If for any reason the services of the Company's chief executive officer were to become unavailable, there could be a material adverse effect on the Company's operations, liquidity and profitability.

Fair Value Measurements

Cash and Cash Equivalents

Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. The Company places its cash and cash equivalents with U.S. financial institutions and, at times, amounts may exceed federally insured limits. The Company monitors the credit standing of these financial institutions.

Investments in Equity Method Investees

Investments over which the Company exercises significant influence, but which do not meet the requirements for consolidation, are accounted for using the equity method of accounting, whereby the Company records its share of the underlying income or losses of equity method investees.

Investments in equity method investees consists of the Company's general partner interests in unconsolidated funds. As the underlying investments held by the unconsolidated funds are reported at fair value, the carrying value of the Company’s investments in equity method investees approximates fair value.

Investment in Available-for-Sale Securities

Available-for-sale securities consist of investments in FSC and FSFR common stock. All unrealized gains and losses are recorded in Accumulated Other Comprehensive Income. The cost of investments in available-for-sale securities is determined on a specific identification basis. Realized gains or losses and declines in value judged to be other than temporary, if any, are reported in other income, net. The Company evaluates its investments periodically for possible impairment and reviews factors such as the length of time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value.

Beneficial Interest in CLOs

Beneficial interests in CLOs meet the definition of a debt security under ASC 325-40, Beneficial Interest in Securitized Financial Assets. Income from the beneficial interest in CLOs is recorded using the effective interest method based upon an estimation of an effective yield to maturity utilizing assumed cash flows. The Company monitors the expected residual payments, and effective yield is determined and updated periodically, as needed. Any distributions received from the beneficial interests in CLOs in excess of the calculated income using the effective yield are treated as a reduction of the cost.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

The Company earned interest income of $652,132 from beneficial interests in CLOs for the year ended December 31, 2015.

Fair Value Option

During the year ended December 31, 2015, the Company elected the fair value option, upon initial recognition, for all beneficial interests in CLOs, which had a cost of $24,617,568. There were $1,079,939 of unrealized losses and $249,033 of realized losses recorded on beneficial interests in CLOs for the year ended December 31, 2015.

During the year ended December 31, 2015, the Company also elected the fair value option, upon initial recognition, on the MMKT Notes, which had a cost of $4,738,026, included in loans payable on the Consolidated Statements of Financial Condition. There was no gain (loss) recognized on MMKT Notes during the year ended December 31, 2015.

The fair value option permits the irrevocable election of fair value on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company believes that by electing the fair value option for these financial instruments, it provides consistent measurement with its peers in the asset management industry. Changes in the fair value of these assets and liabilities and related interest income/expense are recorded within other income (expense) in the Consolidated Statements of Income. Refer to Note 4 for a description of valuation methodologies for each of the financial instruments mentioned above.

Fixed Assets

Fixed assets consist of furniture, fixtures and equipment (including automobiles, computer hardware and purchased software), software developed for internal use and leasehold improvements, and are recorded at cost, less accumulated depreciation and amortization. Depreciation of furniture, fixtures and equipment is computed using the straight-line method over the estimated useful lives of the respective assets (three to eight years). Software developed for internal use, which is amortized over three years, consists of costs incurred during the application development stage of software developed for the Company's proprietary use and includes costs of company personnel who are directly associated with the development. Amortization of improvements to leased properties is computed using the straight-line method based upon the initial term of the applicable lease or the estimated useful life of the improvements, whichever is shorter, and ranges from five to 10 years. Routine expenditures for repairs and maintenance are charged to expense when incurred. Major betterments and improvements are capitalized. Upon retirement or disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the Consolidated Statements of Income. The Company evaluates fixed assets for impairment whenever events or changes in circumstances indicate that an asset's carrying value may not be fully recovered. During the years ended December 31, 2015, 2014 and 2013, there were no impairments recognized.

Offering Costs

Offering costs consist of fees and expenses incurred in connection with the public offering and sale of Company's common stock, including legal, accounting and printing fees. Offering costs are recorded as a charge to capital. The Company incurred offering costs of approximately $3.9 million for the year ended December 31, 2014. There were no offering costs during the years ended December 31, 2015 and December 31, 2013.

Fund Offering and Start-up Expenses

In certain instances, the Company may bear offering costs related to capital raising activities of the Fifth Street Funds, including underwriting commissions, which are expensed as incurred. In addition, the Company expenses all costs associated with starting new investment funds. Included in the Consolidated Statement of Income for the year ended December 31, 2014 is approximately $910,000 and $1,200,000 of expenses associated with the formation of FSOF and SLF I, respectively. Included in the Consolidated Statement of Income for the year ended December 31, 2014, is approximately $822,000 of expenses associated with a follow-on equity offering of FSC. Included in the Consolidated Statement of Income for the year ended December 31, 2013 is approximately $5,700,000 of expenses associated with the initial public offering of FSFR. For the year ended December 31, 2015, there were no fund offering costs or start-up expenses.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of Fifth Street Holdings' credit facility and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facility and are included in interest expense on the Consolidated Statements of Income.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Deferred Rent

The Company recognizes rent expense on a straight-line basis over the expected lease term. Within the provisions of certain leases, there are free rent periods and escalations in payments over the base lease term. The effects of these items have been reflected in rent expense on a straight-line basis over the expected lease term. Landlord contributions and tenant allowances are included in the straight-line calculations and are being deferred over the lease term and are reflected as a reduction in rent expense.

Revenue Recognition

The Company has three principal sources of revenues: management fees, performance fees and other fees. These revenues are derived from the Company's agreements with the funds it manages, primarily the BDCs. The investment advisory agreements on which revenues are based are generally renewable on an annual basis by the general partner or the board of directors of the respective funds.

Management Fees

Management fees are generally based on a defined percentage of fair value of assets, total commitments, invested capital, net asset value, net investment income, total assets or par value of the investment portfolios managed by the Company. All management fees are earned from affiliated funds of the Company. The contractual terms of management fees vary by fund structure and investment strategy and range from 0.40% to 1.75% for base management fees, which are asset or capital-based.

Management fees from affiliates also include quarterly incentive fees on the net investment income from the BDCs ("Part I Fees"). Part I Fees are generally equal to 20.0% of the BDCs' net investment income (before Part I Fees and performance fees payable based on capital gains), subject to fixed "hurdle rates" as defined in the respective investment advisory agreement. No fees are recognized until the BDCs' net investment income exceeds the respective hurdle rate, with a "catch-up" provision that serves to ensure the Company receives 20.0% of the BDCs' net investment income from the first dollar earned. Such fees are classified as management fees as they are paid quarterly, predictable and recurring in nature, not subject to repayment (or clawback) and cash settled each quarter. Management fees from affiliates are recognized as revenue in the period investment advisory services are rendered, subject to the Company's assessment of collectability.

Performance Fees

Performance fees are earned from the funds managed by the Company based on the performance of the respective funds. The contractual terms of performance fees vary by fund structure and investment strategy and are generally 15.0% to 20.0%.

The Company has elected to adopt Method 2 of ASC 605-20, Revenue Recognition for Revenue Based on a Formula. Under this method, the Company records revenue when it is entitled to performance-based fees, subject to certain hurdles or benchmarks. The performance fees for any period are based upon an assumed liquidation of the fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund's income allocation provisions. The performance fees may be subject to reversal to the extent that the performance fees recorded exceed the amount due to the general partner or investment manager based on a fund's cumulative investment returns.

Performance fees related to the BDCs ("Part II Fees") are calculated and payable in arrears as of the end of each fiscal year of the BDCs and equal 20.0% of the BDCs' realized capital gains, if any, on a cumulative basis since inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

Other Fees

The Company also provides administrative services to the Fifth Street Funds. These fees are reported within Revenues - Other fees. These fees generally represent reimbursable compensation, overhead and other expenses incurred by the Company on behalf of the funds. The Company is considered the principal under these arrangements and is required to record the expense and related reimbursement revenue on a gross basis.

Other Income (Expense)

Other income (expense) includes the following:

Interest income

Interest income is recognized on an accrual basis to the extent that such amounts are expected to be collected.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Interest expense

Interest expense consists primarily of interest expense related to the Company's credit facility and other borrowings, which may have variable interest rates.

Income from equity method investments

Income from equity method investments relates primarily to investment income generated from the underlying investment funds.

Realized loss on beneficial interests in CLOs

Realized gains or losses on beneficial interests in CLOs are realized when the Company sells all or a portion of its beneficial interests or when the Company receives a distribution of capital in excess of its cost.

Unrealized loss on beneficial interests in CLOs

Unrealized gains or losses on beneficial interests in CLOs result from changes in the fair value of the beneficial interests in CLOs, as well as the reversal of unrealized gains or losses at the time the beneficial interests in CLOs are realized.

Other Income (Expense), Net

Other income (expense), net primarily consists of dividend income and other miscellaneous non-operational items.

Compensation and Benefits

Compensation generally includes salaries, bonuses and equity-based compensation charges. Bonuses are accrued over the service period to which they relate. All payments made to the Predecessor's managing member since inception and all payments made to the Predecessor's equity members since December 1, 2012 (see Note 11) related to their granted or purchased interests are accounted for as distributions on the equity held by such members.

Equity-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation – Stock Compensation." Under the fair value recognition provision of this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.

The Company recognizes expense related to equity-based compensation transactions in which it receives employee services in exchange for: (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments. Equity-based compensation expense represents expenses associated with the: (i) granting of Part I Fee-sharing arrangements prior to the Reorganization; (ii) conversion of and acceleration in vesting of interests in the Predecessor in connection with the Reorganization; and (iii) the granting of restricted stock units, options to purchase shares of FSAM Class A common stock and stock appreciation rights granted in connection with the IPO.

Stock-based compensation expense is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The effect of such change in estimated forfeitures is recognized through a cumulative catch-up adjustment that is included in the period of the change in estimate.

The Company records deferred tax assets or liabilities for equity compensation plan awards based on deductions for income tax purposes of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company is expected to receive a tax deduction. In addition, differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Company's income tax returns are recorded as adjustments to additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces the pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase the income tax expense.

Income Taxes

Prior to the completion of the IPO, substantially all of the Company's earnings flowed through to the former members of FSM without being subject to entity level income taxes. Accordingly, no provision for income taxes has been recorded in the consolidated financial statements prior to the IPO.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Fifth Street Holdings complies with the requirements of the Internal Revenue Code that are applicable to limited partnerships, which allow for the complete pass-through of taxable income or losses to Fifth Street Holdings limited partners, including FSAM, who are individually responsible for any federal tax consequences. Subsequent to the IPO, the tax provision includes the income tax obligation related to FSAM's allocated portion of Fifth Street Holdings' income, which is net of any tax incurred at Fifth Street Holdings' subsidiaries that are subject to income tax.

Also, as a result of the Reorganization, certain subsidiaries were converted from pass-through entities to taxable entities. Accordingly, the portion of the Company's subsidiaries' earnings attributable to non-controlling interests are subject to tax when reported as a component of the non-controlling interests' taxable income on their individual tax returns.

The Company accounts for income taxes under the asset and liability method prescribed by ASC 740, "Income Taxes." As a result of the Company's acquisition of limited partnership interests in Fifth Street Holdings, the Company expects to benefit from amortization and other tax deductions reflecting the step-up in tax basis in the acquired assets. Those deductions will be used by the Company and will be taken into account in determining the Company's taxable income. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset and changes in applicable tax laws and other factors. If management determines that it is not probable that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the amount expected to be recoverable in the future. The allowance will result in a charge to the Company’s Consolidated Statements of Income. Further, the Company records its income taxes receivable and payable based upon its estimated income tax liability.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company recognizes interest and penalties associated with tax matters such as franchise tax liabilities, if applicable, as general and administrative and other expenses.

Class A Earnings per Share

The Company computes basic earnings per share attributable to FSAM’s Class A common stockholders by dividing income attributable to FSAM by the weighted-average Class A common shares outstanding for the period. Diluted earnings per share reflects the potential dilution beyond shares for basic earnings per share that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in the Company's earnings. Potentially dilutive securities include outstanding options to acquire Class A common shares, unvested restricted stock units and Fifth Street Holdings limited partnership interests which are exchangeable for shares of Class A common stock. The dilutive effect of stock options and restricted stock units is reflected in diluted earnings per share of Class A common stock by application of the treasury stock method.

Under the treasury stock method, if the average market price of a share of Class A common stock increases above the option's exercise price, the proceeds that would be assumed to be realized from the exercise of the option would be used to acquire outstanding shares of Class A common stock. The dilutive effect of awards is directly correlated with the fair value of the shares of Class A common stock. However, the awards may be anti-dilutive when the market price of the underlying shares exceeds the option's exercise price. This result is possible because the compensation expense attributed to future services but not yet recognized is included as a component of the assumed proceeds upon exercise.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018 and early adoption is permitted on the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of this standard on its consolidated financial statements and its ongoing financial reporting.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the requisite service period, which clarifies the recognition of stock-based compensation over the required service period, if it is probable that the performance condition will be achieved. This guidance

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and should be applied prospectively. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements and its ongoing financial reporting.

In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity ("CFE"). This guidance requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure the financial assets and the financial liabilities of a CFE when a CFE is initially consolidated. It permits entities to make an accounting policy election to apply this same measurement approach after initial consolidation or to apply other GAAP to account for the consolidated CFE's financial assets and financial liabilities. It also prohibits all entities from electing to use the fair value option in ASC 825 to measure either the financial assets or financial liabilities of a consolidated CFE that is within the scope of this issue. This guidance is effective for fiscal years beginning after December 15, 2015, and interim periods therein. Early adoption is permitted using a modified retrospective transition approach as described in the pronouncement. The Company did not early adopt the new guidance during the year ended December 31, 2015. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements and its ongoing financial reporting.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which requires management to evaluate, at each annual and interim reporting period, a company's ability to continue as a going concern within one year of the date the financial statements are issued and provide related disclosures. This accounting guidance is effective for the Company on a prospective basis beginning in the first quarter of fiscal 2016 and is not expected to have a material effect on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, which changes the presentation of debt issuance costs in a reporting entity's financial statements. Under this new guidance, debt issuance costs will be presented as a direct deduction from the related debt liability instead of an asset. This accounting change is consistent with the current presentation under GAAP for debt discounts and it also converges the guidance under GAAP with that in the International Financial Reporting Standards. Debt issuance costs will reduce the proceeds from debt borrowings in the statement of cash flows instead of being presented as a separate caption in the financing section of that statement. Amortization of debt issuance costs will continue to be reported as interest expense in the statement of income. This accounting update does not affect the current accounting guidance for the recognition and measurement of debt issuance costs. This update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. This guidance is not expected to have a material effect on the consolidated financial statements as it will result in a reclassification on the Consolidated Statements of Financial Condition. Accordingly, there will be no impact on total equity or net income as a result of adoption of this guidance. Additionally, in August 2015, the FASB issued ASU 2015-15, which provides further clarification on the same topic and states that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Removing these investments from the fair value hierarchy will eliminate diversity in current practice resulting from the way in which investments measured at net asset value per share with future redemption dates are classified and ensure that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share, but for which the practical expedient is not applied, will continue to be included in the fair value hierarchy. ASU 2015-07 is effective for public entities for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods and should be applied retrospectively to all periods presented. Early adoption of the amendments is permitted. The Company did not early adopt the new guidance during the year ended December 31, 2015. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The objective of the guidance in ASU 2015-16 is to simplify the accounting for adjustments made to provisional amounts recognized at acquisition in a business combination by requiring an acquirer to recognize adjustments to the provisional amounts during the measurement period in the reporting period in which the amount is determined, which may be the reporting period for the fiscal year after the acquisition. An acquirer also is required to recognize in the same financial reporting period the effect of changes in depreciation, amortization, or other effects on income, if any, as a result of changes to provisional amounts, which would be calculated as if the accounting had been completed at the acquisition date. The guidance should be applied prospectively to adjustments made to provisional amounts that occur after the effective date of the guidance. ASU 2015-15 is effective for public entities for

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall, which makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption is permitted specifically for the amendments pertaining to the presentation of certain fair value changes for financial liabilities measured at fair value. Early adoption of all other amendments is not permitted. Upon adoption, the Company will be required to make a cumulative-effect adjustment to the Consolidated Statement of Assets and Liabilities as of the beginning of the first reporting period in which the guidance is effective. The Company did not early adopt the new guidance during the three months ended December 31, 2015. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." The guidance in this ASU supersedes the leasing guidance in Topic 840, "Leases." Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. The amendments in ASU No. 2016-02 are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The Company did not early adopt the new guidance during the year ended December 31, 2015. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

Note 4. Investments and Fair Value Measurements

ASC 820 – Fair Value Measurements and Disclosures ("ASC 820") – defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity. The Company engages an independent third party valuation firm to assist in the fair value measurement for its beneficial interest in CLO.

Assets and liabilities recorded at fair value in the Company's consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:


•	Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


•	Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.


•	Level 3 — Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

When determining the fair value of beneficial interests in CLOs, the Company utilizes a discounted cash flow model that takes into consideration prepayment and loss assumptions, based on projected performance, economic factors, the characteristics and condition of the underlying collateral, comparable yields for similar securities and recent trading activity.

When determining the fair value of publicly traded equity securities, the Company uses the unadjusted closing price as of the valuation date on the primary market or exchange on which they trade.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

The following tables present the financial instruments carried at fair value as of December 31, 2015, by caption on the Company's Consolidated Statement of Financial Condition for each of the levels of hierarchy established by ASC 820:



Assets	Level 1		Level 2		Level 3		Total
Investments in available-for-sale securities	$	26,771,258	$	—	$	—	$	26,771,258
Beneficial interests in CLOs	—		—		23,537,629		23,537,629
	$	26,771,258	$	—	$	23,537,629	$	50,308,887



Liabilities	Level 1		Level 2		Level 3		Total
MMKT Notes	$	—	$	—	$	4,738,026	$	4,738,026
	$	—	$	—	$	4,738,026	$	4,738,026

The following tables provide a roll-forward in the changes in fair value for all financial instruments for which the Company determines fair value using unobservable (Level 3) factors for the year ended December 31, 2015:



	Beneficial interests in CLOs			MMKT Notes
Fair value at December 31, 2014	$	—		$	—
Purchases of investments	25,397,222			—
Proceeds from issuance of notes payable	—			4,600,000
Proceeds from partial sale of beneficial interest in CLO	(653,900		)	—
Distributions	(528,853		)	—
Interest income accreted	652,132			138,026
Unrealized losses	(1,079,939		)	—
Realized losses	(249,033		)	—
Fair value at December 31, 2015	$	23,537,629		$	4,738,026

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Significant Unobservable Inputs for Level 3 Financial Instruments

The following table provides quantitative information related to the significant unobservable inputs for Level 3 financial instruments, which are carried at fair value as of December 31, 2015:



Assets	Fair Value		Valuation Technique	Unobservable Input	Input Value
Beneficial interests in CLOs	$	23,537,629	Discounted Cash Flow	Constant prepayment rate	15%
				Constant default rate	2%
				Loss severity rate	30%
Total	$	23,537,629

Liabilities	Fair Value		Valuation Technique	Unobservable Input	Input Value
MMKT Notes	$	4,738,026	Recent market transactions	N/A	N/A
Total	$	4,738,026

Under the discounted cash flow approach, the significant unobservable inputs used in the fair value measurement of the Company's beneficial interests in the CLOs are the constant prepayment rate, constant default rate and loss severity. Significant increases or decreases in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The cost of the MMKT Notes approximated fair value as there were recent market transactions.

The Company did not have any financial instruments carried at fair value as of December 31, 2014.

Investments in Available-for-Sale Securities

The following table provides information about the Company's investments in available-for-sale securities for the year ended December 31, 2015:



Securities	Shares	Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
FSC Common Stock	3,988,282	$	25,009,336	$	25,445,239	$	435,903	$	—
FSFR Common Stock	154,728	1,379,679		1,326,019				(53,660		)
Total	4,143,010	$	26,389,015	$	26,771,258	$	435,903	$	(53,660	)

The Company determined that the unrealized losses from FSFR Common Stock are not other-than-temporary. This was due to the fact that the unrealized losses were not severe, and the Company intends to hold the securities for a period of time sufficient for an anticipated recovery in value. In addition, all unrealized losses have been present for less than a year. No other-than-temporary impairment charges related to the Company’s investments in available-for-sale securities were recorded during the year ended December 31, 2015.

Financial Instruments Disclosed, But Not Carried At Fair Value

The following table presents the carrying value and fair value of the Company's financial assets and liabilities disclosed, but not carried, at fair value as of December 31, 2015 and the level of each financial asset and liability within the fair value hierarchy:



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Risk Retention Term Loan	$	12,972,614	$	12,972,614	$	—	$	—	$	12,972,614
Loan payable - DECD loan	4,000,000		4,040,214						4,040,214
Credit facility payable	65,000,000		65,000,000		—		—		65,000,000
Payables to related parties pursuant to tax receivable agreements	45,486,114		40,015,336		—		—		40,015,336
Total	$	127,458,728	$	122,028,164	$	—	$	—	$	122,028,164

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

The following table presents the carrying value and fair value of the Company's financial assets and liabilities disclosed, but not carried, at fair value as of December 31, 2014 and the level of each financial asset and liability within the fair value hierarchy:



	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Loan payable - DECD loan	$	4,000,000	$	4,049,110	$	—	$	—	$	4,049,110
Credit facility payable	12,000,000		12,000,000		—		—		12,000,000
Note payable included in Due to Principal	5,564,451		5,564,451		—		—		5,564,451
Payables to related parties pursuant to tax receivable agreements	47,373,245		42,352,014		—		—		42,352,014
Total	$	68,937,696	$	63,965,575	$	—	$	—	$	63,965,575

The Company utilizes a bond yield approach to estimate the fair value of its DECD loan, which is included in Level 3 of the hierarchy. Under the bond yield approach, the Company uses its incremental borrowing rate to determine the present value of the future cash flow streams related to the liability.

The carrying values of the Risk Retention Term Loan, credit facility payable and the notes payable included in Due to Principal approximate their fair value and are included in Level 3 of the hierarchy.

The Company utilizes a discounted cash flow approach to estimate the fair value of its payables to related parties pursuant to TRAs, which is included in Level 3 of the hierarchy. Under the discounted cash flow approach, the Company estimates the present value of estimated future tax benefits pursuant to the TRA discounted using a market interest rate.

Note 5. Due from Affiliates

In connection with administration agreements that are in place (see Note 10), the Company provides certain administrative services for the funds, including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. For providing these services, facilities and personnel, the Fifth Street Funds reimburse the Company for direct fund expenses and the BDCs reimburse the Company for the allocable portion of overhead and other expenses incurred by the Company in performing its obligations under the administration agreements.

Also, in the normal course of business, the Company pays certain expenses on behalf of the BDCs, primarily for travel and other costs associated with particular portfolio company holdings of the BDCs, for which it is reimbursed.

Note 6. Fixed Assets

Fixed assets consist of the following:



	December 31, 2015			December 31, 2014
Furniture, fixtures and equipment	$	1,519,742		$	3,563,172
Capitalized software costs	624,512			—
Leasehold improvements	10,312,968			7,864,805
Fixed assets, cost	12,457,222			11,427,977
Less: accumulated depreciation and amortization	(2,563,701		)	(1,153,714		)
Fixed assets, net book value	$	9,893,521		$	10,274,263

Depreciation and amortization expense related to fixed assets for the years ended December 31, 2015, 2014 and 2013 was $1,409,987, $752,144 and $207,794, respectively.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Note 7. Other Assets

Other assets consist of the following:



	December 31, 2015		December 31, 2014
Security deposits	$	499,835	$	453,375
Fractional interests in aircrafts (a)	3,302,190		3,585,283
Other	174,395		158,700
	$	3,976,420	$	4,197,358

__________________

(a)

In November 2013, the Company entered into an agreement that entitled it to the use of a corporate aircraft for five years. The amount paid, less the estimated trade-in value, is being amortized on a straight-line basis over the expected five-year term of the agreement. In December 2014, the Company sold half of this interest and entered into an agreement for a second corporate aircraft for five years. Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $283,093, $233,701 and $29,098, respectively.

Note 8. Debt

Loans Payable

Loans payable consist of the following:



	December 31, 2015		December 31, 2014
DECD loan	$	4,000,000	$	4,000,000
MMKT Notes (a)	4,738,026		—
Risk Retention Term Loan	12,972,614		—
	$	21,710,640	$	4,000,000

__________________

(a) Includes accrued interest in the amount of $138,026.

DECD Loan

On October 7, 2013, the Company borrowed $4,000,000 from the Department of Economic and Community Development (the "DECD") of the State of Connecticut. Proceeds from the loan were utilized to partially fund the build-out costs of the Company's new headquarters in Greenwich, CT. The loan bears interest at a fixed rate of 2.5% per annum, matures on November 21, 2023 and requires interest-only payments through November 1, 2017, at which point monthly payments of principal and interest are required until maturity or such time that the loan is repaid in full. As security for the loan, the Company has granted the State of Connecticut a blanket interest in the Company's personal property, subject only to prior security interests permitted by the State of Connecticut. For the years ended December 31, 2015, 2014 and 2013, interest expense related to this loan was $100,000, $100,000 and $11,233, respectively.

Under the terms of the agreement, the Company is eligible for forgiveness of up to $3,000,000 of the principal amount of the loan based on certain job creation milestones, as mutually agreed to by the Company and the DECD. If the Company is unable to meet these job creation milestones, the DECD may impose a penalty upon the Company in an amount equal to $78,125 per job below the required amount. To date, no penalties have been assessed by the DECD.

MMKT Notes

On February 24, 2015, MMKT issued $800,000 in aggregate principal amount of Convertible Promissory Notes (the "MMKT Original Notes") due August 31, 2016, bearing interest at a rate of 8% per annum due upon maturity, prepayment or conversion to the Company. On each of February 27, 2015, April 1, 2015 and August 5, 2015, MMKT issued additional MMKT Original Notes in the amounts of $50,000, $100,000 and $2,000,000, under the same terms as the MMKT Original Notes issued to the Company.

On each of August 28, 2015 and September 4, 2015, MMKT issued new Convertible Promissory Notes, due August 5, 2016 and bearing interest at a rate of 8% per annum due upon maturity, prepayment or conversion ("MMKT Notes") to the Company and additional investors. The MMKT Notes also were issued to all existing holders in exchange for their outstanding MMKT Original Notes (the "Exchange"). The Exchange was a non-cash transaction and the principal amounts of the existing MMKT Notes issued to the previous holders were increased to account for the interest accrued over the period prior to the

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Exchange in the amount of $2,950,000. Additionally, MMKT issued $2,950,000 in aggregate principal amount of MMKT Notes to new investors.

In the event of a "Qualified Financing," in which MMKT sells, in a single or series of related transactions, equity securities in an aggregate amount of at least $4,000,000, or an equity financing in a lesser amount if approved in writing by at least 60% of the outstanding principal amount of MMKT Notes (the "Majority Holder Threshold"), the principal amount of and accrued interest on the MMKT Notes shall automatically be converted into the identical class or series of equity issued by MMKT in the Qualified Financing. The number or amount of Qualified Financing securities to be issued to holders upon such conversion shall be calculated by dividing (i) the entire principal amount of such holder’s MMKT Notes plus accrued interest by (ii) the lesser of (x) the price paid per Qualified Financing security multiplied by the applicable "Qualified Financing Conversion Price" or (y) the price per Qualified Financing security implied by a pre-money valuation of $100,000,000 calculated on a fully diluted basis. The Qualified Financing Conversion Price ranges from 80-85% on a descending monthly basis from October 31, 2015 through March 1, 2016 and is dependent upon the date of the Qualified Financing. In the event of the closing of an acquisition, merger or sale of all or substantially all of MMKT, each holder may elect to convert its MMKT Notes into common equity of MMKT or accelerate the maturity date of its MMKT Notes to the date of closing of such transaction, and MMKT must repurchase the MMKT Notes at par plus accrued interest. Holders may also declare the MMKT Notes in default and immediately due and payable in full if MMKT: (i) fails to pay any principal or interest payment on the date due, and payment is not made within 5 days of the MMKT's receipt of written notice of failure to pay, (ii) materially breaches any covenant in the MMKT Notes and such failure continues for 15 days after MMKT receives written notice, (iii) voluntarily files for bankruptcy protection or makes a general assignment for the benefit of creditors, or (iv) is the subject of an involuntary bankruptcy petition and such petition is not dismissed within 60 days. If an event of default occurs, and until any applicable MMKT Note is paid in full or converted, the MMKT Notes shall bear interest at a rate equal to the lower of (i) the sum of the interest rate plus 12% per annum or (ii) the highest rate allowed by law.

The foregoing terms are substantially identical to those contained in the Original MMKT Notes (provided that the Majority Holder Threshold in the Original MMKT Notes was 50%), with the addition of one optional conversion clause to the MMKT Notes. This clause gives each holder the option at any time to convert the entire principal amount and accrued interest on its MMKT Notes into MMKT common equity, where the number or amount of common equity to be issued upon conversion shall be calculated by dividing (i) the entire principal amount of the MMKT Notes plus accrued interest by (ii) the implied per share price assuming a pre-money valuation of $100,000,000 calculated on a fully diluted basis.

Due to the substantive conversion feature added to the MMKT Notes, the Company has determined that the Original MMKT Notes were extinguished. There was no gain or loss on the issuance as the transaction value was equivalent to principal plus accrued interest on the previous notes. The Company has elected the fair value option on the MMKT Notes.

FSM holds $1,300,000 of MMKT Notes as of December 31, 2015, which are eliminated in consolidation. For the year ended December 31, 2015, interest expense related to the MMKT Notes was $138,026.

Risk Retention Term Loan

On September 28, 2015, CLO Management, a wholly-owned consolidated subsidiary of the Company, entered into a Risk Retention Term Loan to provide financing for its purchase of CLO II senior notes up to $17 million at a variable rate based on either LIBOR or a base rate plus an applicable margin. Borrowings under the Risk Retention Term Loan totaled $16,972,614, of which $4,000,000 was repaid, and accrue interest at a rate based on the interest rate on the financed notes and the weighted current cost basis which was 3.78% as of December 31, 2015. The Company's beneficial interests in CLO II in the aggregate amount of $20,910,115 at fair value are pledged as collateral for the Risk Retention Term Loan. The facility matures on September 29, 2027 with certain lenders party thereto from time to time and Natixis, New York Branch, as administrative agent and joint lead arranger, and Bleachers Finance 1 Limited as syndication agent and joint lead arranger. The Risk Retention Term Loan contains customary affirmative and negative covenants for agreements of this type, including financial maintenance requirements, delivery of financial and other information, compliance with laws, further assurances and limitations with respect to indebtedness, liens, fundamental changes, restrictive agreements, dispositions of assets, acquisitions and other investments, conduct of business and transactions with affiliates. The Company is in compliance with all covenants as of December 31, 2015 and has $12,972,614 of borrowings outstanding under the Risk Retention Term Loan which approximated fair value. For the year ended December 31, 2015, interest expense related to the Risk Retention Term Loan was $127,770.

Credit Facility

On November 4, 2014, Fifth Street Holdings entered into an unsecured revolving credit facility which matures on November 4, 2019 with certain lenders party thereto from time to time and Sumitomo Mitsui Banking Corporation, as administrative agent and joint lead arranger, and Morgan Stanley Senior Funding, Inc., as syndication agent and joint lead

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

arranger. The revolving credit facility provides for $176 million of borrowing capacity, with a $100 million accordion feature, and bears interest at a variable rate based on either LIBOR or a base rate plus an applicable margin with an unused commitment fee paid quarterly, which is subject to change based on a total leverage ratio. Borrowings under the revolving credit facility accrue interest at an annual rate of LIBOR plus 2.00% per annum and the unused commitment fee under the facility is 0.30% per annum. The revolving credit facility contains customary affirmative and negative covenants for agreements of this type, including financial maintenance requirements, delivery of financial and other information, compliance with laws, further assurances and limitations with respect to indebtedness, liens, fundamental changes, restrictive agreements, dispositions of assets, acquisitions and other investments, conduct of business and transactions with affiliates. The revolving credit facility has a term of five years. As of December 31, 2015 and December 31, 2014, the Company had $65,000,000 and $12,000,000, respectively, of borrowings outstanding under the credit facility, at cost and fair value. For the years ended December 31, 2015 and December 31, 2014, interest expense related to the credit facility was $1,709,239 and $213,625, respectively. At December 31, 2015, the Company was in compliance with all debt covenants.

Outstanding principal amounts related to debt maturing over the next five years are as follows:



2016	$	4,600,000
2017	51,551
2018	627,050
2019	65,642,908
2020	659,166

Note 9. Commitments and Contingencies

Leases

The Company leases office space in various locations throughout the United States and maintains its headquarters in Greenwich, CT. On July 22, 2013, the Company entered into a lease agreement with a related party (see Note 10) for office space in Greenwich, CT that expires on September 30, 2024. Other non-cancelable office leases in other locations expire through 2020. The Company's rental lease agreements are generally subject to escalation provisions on base rental payments, as well as certain costs incurred by the property owner and are recognized on a straight-line basis over the term of the lease agreements.

In July 2014, the Company terminated the operating lease for its White Plains, NY office. Under the terms of the agreement with the landlord, the Company paid an early termination fee of $616,852 at that time and was obligated to pay rent through November 30, 2015. Accordingly, upon lease termination, the Company had recognized an additional expense in the amount of $460,658 representing the fair value of the remaining lease obligation. During March 2015, the Company reached an agreement with its landlord to cancel a significant portion of its remaining lease obligation which resulted in a reduction of rent expense in the amount of $341,044.

As of December 31, 2015, future minimum lease payments under noncancelable leases are as follows:



2016	$	2,391,068
2017	2,364,775
2018	2,417,349
2019	2,328,936
2020	2,321,095
Thereafter	8,678,999
	$	20,502,222

Capital Commitments

As of December 31, 2015, the Company does not have any unfunded capital commitments.

Litigation

From time to time, the Company may be involved in litigation and claims incidental to the conduct of the Company's business. The Company may also be subject, from time to time, to reviews, inquiries and investigations by regulatory agencies that have regulatory authority over the Company's business activities.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Neither the outcome of the litigation matters discussed below nor an estimate of any reasonable possible losses is determinable at this time. No provisions for any losses related to the lawsuits have been recorded in the accompanying consolidated financial statements as of December 31, 2015. An adverse judgment for monetary damages could have a material adverse effect on the operations and liquidity of the Company.

In connection with the matters described below, the Company has incurred professional fees of $2.7 million for the three months ended December 31, 2015. Certain of the expenses associated with defense of the lawsuits may also be covered by insurance, and the Company may seek reimbursement from the appropriate carriers. We cannot assure you, however, that these expenses will ultimately be reimbursed in whole, or at all.

FSC class-action lawsuits

The Company has been named as a defendant in three putative securities class-action lawsuits arising from its role as investment adviser to FSC. The first lawsuit was filed on October 1, 2015, in the United States District Court for the Southern District of New York and is captioned Howard Randall, Trustee, Howard & Gale Randall Trust FBO Kimberly Randall Irrevocable Trust UA Feb 15, 2000 v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-07759-LAK. The second lawsuit was filed on October 14, 2015, in the United States District Court for the District of Connecticut and is captioned Lynn Waters-Cottrell v. Fifth Street Finance Corp., et al., Case No. 3:15-cv-01488. The case was later transferred to the United States District Court for the Southern District of New York, where it is pending as Case No. 16-cv-00088-LAK. The third lawsuit was filed on November 12, 2015, in the United States District Court for the Southern District of New York and is captioned Robert J. Hurwitz v. Fifth Street Finance Corp., et al., Case No. 1:15-cv-08908-LAK. The defendants in all three cases are Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Todd G. Owens, Ivelin M. Dimitrov, and Richard Petrocelli, FSC, and the Company.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

moot and that he was withdrawing his motions for a preliminary injunction and expedited proceedings. On February 18, 2016, FSC announced that it had entered into an agreement with RiverNorth pursuant to which RiverNorth would withdraw its competing proxy solicitation.

FSC shareholder derivative actions

The Company believes that the claims are without merit and intends vigorously to defend itself against the plaintiffs’ allegations.

FSAM class-action lawsuits

The Company has been named as a defendant in two putative securities class-action lawsuits filed by purchasers of the Company’s shares. The suit is related to the above shareholder class actions brought by shareholders of FSC, for which Fifth Street Management serves as investment adviser.

The first lawsuit by the Company’s shareholders was filed on January 7, 2016 in the United States District Court for the District of Connecticut and is captioned Ronald K. Linde, etc. v. Fifth Street Asset Management, Inc., et al., Case No. 1:16-cv-00025. The defendants are the Company, Leonard M. Tannenbaum, Bernard D. Berman, Alexander C. Frank, Steven M. Noreika, Wayne Cooper, Mark J. Gordon, Thomas L. Harrison, and Frank C. Meyer. The lawsuit asserts claims under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 on behalf of a putative class of persons and entities who purchased common stock in or pursuant to the Company’s October 30, 2014 IPO. The complaint alleges that the defendants engaged in a fraudulent scheme and course of conduct to artificially inflate FSC’s assets and investment income and, in turn, the Company’s valuation at the time of its IPO, thereby rendering the Company’s IPO Registration Statement and Prospectus materially false and misleading. The plaintiffs have not quantified their claims for relief. On February 25, 2016, the court granted the Company’s unopposed motion to transfer the case to the United States District Court for the Southern District of New York, where the case can be coordinated with the securities class actions filed by FSC shareholders.

The Company believes that the claims are without merit and intends vigorously to defend itself against the plaintiffs’ allegations.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Note 10. Related Party Transactions

Due to Principal

On October 29, 2014, the Company issued notes payable to a Principal in the amount of $5,564,451 representing an initial estimate of the undistributed earnings of the Predecessor as of the IPO. Such notes bore interest at 1.0% per annum and were due no later than June 30, 2015. In addition to the notes, the Company accrued an additional $3,482,478 representing the finalization of the amount of undistributed earnings of the Predecessor to the Principal as of the IPO. The entire amount was paid in April 2015 in full satisfaction of all obligations under the notes payable.

Payments Pursuant to Tax Receivable Agreements

FSAM's purchase of Holdings LP Interests concurrent with its IPO, and the subsequent and future exchanges by holders of Holdings LP Interests for shares of FSAM's Class A common stock pursuant to the Exchange Agreement resulted in increases in its share of the tax basis of the tangible and intangible assets of Fifth Street Holdings, which increased the tax depreciation and amortization deductions that otherwise would not have been available to FSAM. These increases in tax basis and tax depreciation and amortization deductions reduce the amount of cash taxes that FSAM would otherwise be required to pay. FSAM entered into a TRA with certain limited partners of Fifth Street Holdings TRA Recipients that requires it to pay them 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax that FSAM actually realizes (or, under certain circumstances, is deemed to realize) as a result of the increases in tax basis in connection with exchanges by the TRA Recipients described above and certain other tax benefits attributable to payments under the TRA. As of December 31, 2015 and December 31, 2014, payments due to the TRA Recipients under the TRA totaled $45,486,114 and $47,373,245, respectively.

In connection with the finalization of the 2014 tax returns, FSAM paid $340,713, representing the initial payment associated with the TRA liability and the Company has reduced the tax benefit associated with the TRA by $289,606. Within the next 12 month period, the Company expects to pay $2,051,341 of the total amount of estimated TRA liability. Such amount was determined by estimating the amount of taxable income and specified deductions subject to the TRA which are expected to be realized by FSAM for the related tax year. These calculations are performed pursuant to the terms of the TRAs.

Payments are anticipated to be made under the TRAs indefinitely, and are due within 45 calendar days after the date FSAM files its federal income tax return. The payments are to be made in accordance with the terms of the TRAs. The timing of the payments is subject to certain contingencies including the Company having sufficient taxable income to utilize all of the tax benefits defined in the TRAs.

Obligations pursuant to the TRAs are obligations of FSAM. They do not impact the non-controlling interests in Fifth Street Holdings. These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes. In general, items of income, gain, loss and deduction are allocated on the basis of the limited partners' ownership interests pursuant to the Fifth Street Holdings limited partnership agreement after taking into consideration all relevant sections of the Internal Revenue Code.

Estimated amounts related to the TRA liability due over the next five years are as follows:



2016	$	2,051,341
2017	2,097,352
2018	2,154,682
2019	2,248,563
2020	2,328,737

Other Related Party Transactions

Revenues

All of the Company's revenue is earned from its affiliates, including management fees, performance fees and other fees.

For the years ended December 31, 2015, 2014 and 2013, the Company earned $86,065,752, $91,505,765 and $68,308,323, respectively, in management fees relating to services provided to the BDCs. As of December 31, 2015 and December 31, 2014, management fees receivable in the amounts of $4,239,207 and $23,174,975, were due from the BDCs. For the years ended December 31, 2015, 2014 and 2013, the Company voluntarily waived $531,015, $952,945 and $2,321,986 of management fees from the BDCs, respectively.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

On July 14, 2015, FSC announced that FSM, its investment adviser, voluntarily agreed to a revised base management fee arrangement for the period commencing on July 1, 2015 and remaining in effect until January 1, 2017. The revised management fee is intended to provide for a potential reduction in the base management fee payable by FSC to FSM during such period. The revised management fee will be calculated quarterly and will be equal to FSC’s gross assets, including assets acquired with borrowed funds, but excluding any cash and cash equivalents, multiplied by 0.25 multiplied by the sum of (x) and (y), expressed as a percentage, where (x) is equal to 2% multiplied by the Baseline NAV Percentage, and (y) is equal to 1% multiplied by the Incremental NAV Percentage.

The “Baseline NAV Percentage” is the percentage derived by dividing FSC’s net asset value as of March 31, 2015 (i.e., $1,407,774,000) (the “Baseline NAV”), by the net asset value of FSC at the beginning of the fiscal quarter for which the fee is being calculated (the “New NAV”). The “Incremental NAV Percentage” is the percentage derived by dividing the New NAV in excess of the Baseline NAV by the New NAV.

FSM’s letter agreement modifies the base management fee payable to FSM pursuant to the investment advisory agreement by and between FSC and FSM and results in a blended annual base management fee rate that will not be less than 1%, or greater than 2%. The initial computation of the Revised Management Fee will occur at the end of the quarter following the quarter in which FSC issues or sells shares of its common stock, including new shares issued as dividends or pursuant to the FSC’s dividend reinvestment plan, but excluding certain non-ordinary course transactions as outlined below. Prior to that time, the annual base management fee rate will remain at 2%. Moreover, if any recalculation of the base management fee rate would otherwise result in an increase of the blended rate used, the blended rate in effect immediately prior to such recalculation would remain in effect until such time, if any, as a recalculation following an equity issuance would result in a lower base management fee rate. The waiver discussed above has not impacted the management fees earned from FSC as its net asset value has been below the Baseline NAV per the agreement.

On January 19, 2016, the Company amended and restated the FSC Investment Advisory Agreement, which reduced the base management fee payable to the Company on gross assets, excluding cash and cash equivalents, from 2.00% to 1.75% effective as of January 1, 2016. See Note 15 for further detail.

Performance fees earned for the years ended December 31, 2015 and 2014 were $224,618 and $106,635, respectively. No performance fees were earned during the year ended December 31, 2013.

The Company also has entered into administration agreements under which the Company provides administrative services for the BDCs and private funds (collectively, the "Fifth Street Funds"), including office facilities and equipment, and clerical, bookkeeping and recordkeeping services at such facilities. Under the administration agreements, the Company also performs or oversees the performance of the BDCs' required administrative services, which includes being responsible for the financial records which the BDCs are required to maintain and preparing reports to the BDCs' stockholders and reports filed with the SEC. In addition, the Company assists each of the BDCs in determining and publishing its net asset value, overseeing the preparation and filing of its tax returns and the printing and dissemination of reports to the each of the BDC's stockholders, and generally overseeing the payment of each Fifth Street Fund's expenses and the performance of administrative and professional services rendered to the funds. For providing these services, facilities and personnel, the Fifth Street Funds reimburse the Company for direct fund expenses and the BDCs reimburse the Company for the allocable portion of overhead and other expenses incurred by the Company in performing its obligations under the administration agreements, including rent and such BDC's allocable portion of the costs of compensation and related expenses of such BDC's chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost with no profit to, or markup by, the Company. Included in Revenues — other fees in the Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 was $9,068,020, $10,337,588 and $5,204,820, respectively, was recorded related to amounts charged for the above services provided to the Fifth Street Funds. The Company may also provide, on the BDCs' behalf, managerial assistance to such BDC's portfolio companies. Each of the administration agreements may be terminated by either the Company or the BDC without penalty upon 60 days' written notice to the other party.

Receivables for reimbursable expenses from the Fifth Street Funds are included within Due from Affiliates and totaled $3,755,729 and $3,723,160 at December 31, 2015 and December 31, 2014, respectively.

MMKT

On December 22, 2014, FSM entered into a limited liability company agreement, as majority member, with Leonard Tannenbaum’s brother, as minority member, for the purpose of forming MMKT. The purpose of MMKT is to develop technology related to the financial services industry. FSM made a total capital contribution of $80,000 for an 80% membership interest in MMKT. The Company has consolidated MMKT in its consolidated financial statements since it holds a controlling financial interest in MMKT. The Company has consolidated MMKT in its consolidated financial statements based on its 80%

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

membership interest. In that regard, the Company's allocable portion of the operating loss attributable to MMKT was $1,136,432 for the year ended December 31, 2015. As of December 31, 2015, FSM holds $1,300,000 in the aggregate principal amount of convertible promissory notes, which is eliminated in consolidation.

FSOF

As of December 31, 2015, the Company has made capital contributions (net of redemptions) of $6,412,635 to FSOF through its investment in FSCO GP, which is recorded in investments in equity method investees in the Consolidated Statements of Financial Condition. For the year ended December 31, 2015, the Company recorded income from its investment in FSOF of $14,637.

CLO I and CLO II

During the year ended December 31, 2015, the Company made investments in senior and subordinated notes in CLO I and CLO II, which had a cost and fair value of $24,617,568, which had a fair value of $23,537,629, respectively, as of December 31, 2015.

Other

On July 22, 2013, the Company entered into a lease agreement for office space for its headquarters in Greenwich, CT. The landlord is an entity controlled by Leonard M. Tannenbaum, the Company's chairman and chief executive officer. The lease agreement requires monthly rental payments at market rates, expires on September 30, 2024 and can be renewed at the request of the Company for two additional five year periods. Rental payments under this lease of approximately $2,000,000 per year began on October 11, 2014.

The Company's fractional interests in corporate aircrafts are used primarily for business purposes. Occasionally, certain of the members of management have used the aircraft for personal use. The Company charges these members of management for such personal use based on market rates. There were no such charges for the years ended December 31, 2015, 2014 and 2013.

During the year ended December 31, 2015, the Company purchased 154,728 shares of FSFR common stock in the open market for $1,379,679, which represented a weighted average price of $8.92 per share. Dividend income for the year ended December 31, 2015 related to this investment was $46,418.

During the year ended December 31, 2015, the Company purchased 3,988,282 shares of FSC common stock in the open market for $25,009,336, which represented a weighted average price of $6.27 per share. Dividend income for the year ended December 31, 2015 related to this investment was $110,986.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

As of December 31, 2015 and December 31, 2014 amounts due to and from affiliates were comprised of the following:



	As of December 31, 2015			As of December 31, 2014 (as revised)
Management fees receivable:
Base management fees receivable - BDCs	$	4,794,870		$	15,200,933
Part I Fees receivable (payable) - BDCs	(555,663		)	7,974,042
Collateral management fees receivable - CLO I and CLO II	640,578			351,274
Management fees receivable - FSOF	—			2,500
	$	4,879,785		$	23,528,749

Performance fees receivable:
Performance fees receivable - FSOF	$	78,720		$	106,635
Part II fees receivable - BDCs	145,898			—
	$	224,618		$	106,635

Due from affiliates:
Reimbursed expenses due from the BDCs	$	3,355,875		$	3,596,975
Reimbursed expenses due from private funds	399,854			126,185
Due from employees	51,167			59,489
Other amounts due from affiliated entities	136,488			16,893
	$	3,943,384		$	3,799,542

Due to affiliates:
Distribution payable to former members of Predecessor	$	—		$	59,316
SARs liability	24,257			3,465
	$	24,257		$	62,781

Note 11. Equity and Equity-based Compensation

FSAM Ownership Structure

Subsequent to the Reorganization and IPO as described in Note 1, FSAM has two classes of common stock, Class A common stock and Class B common stock, which are described as follows:

Class A common stock

Holders of shares of Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Additionally, holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Board of Directors, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.

Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A common stock would be entitled to receive the Company's remaining assets available for distribution on pro rata basis.

Holders of shares of Class A common stock do not have preemptive, subscription, redemption or conversion rights.

Class B common stock

Holders of Class B common stock are entitled to five votes for each share held of record on all matters submitted to a vote of stockholders. Shares of Class B common stock have voting but no economic rights and were issued in equal proportion to the number of Holdings LP Interests issued in the Reorganization to the Principals.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Holders of Class B common stock do not have any right to receive dividends (other than dividends consisting of shares of Class B common stock or in rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class B common stock paid proportionally with respect to each outstanding share of Class B common stock) or to receive a distribution upon the dissolution, liquidation or sale of all or substantially all of the Company's assets with respect to their Class B common stock other than the par value of the Class B common stock held.

FSAM's amended and restated certificate of incorporation does not provide for any restrictions on transfer of shares of Class B common stock, however, in the event that an outstanding share of Class B common stock ceases to be held by a holder of a corresponding Holdings LP Interest, such share shall automatically be retired and canceled. In addition, when a Holdings LP Interest is exchanged for a share of Class A common stock by a Principal, the corresponding share of Class B common stock will be retired and canceled.

Preferred Stock

FSAM's amended and restated certificate of incorporation authorizes its Board of Directors to establish one or more series of preferred stock (including convertible preferred stock). Unless required by law or by any stock exchange, the authorized shares of preferred stock will be available for issuance without further action by holders of Class A common stock. FSAM's Board of Directors is able to determine, with respect to any series of preferred stock, the terms and rights of the series of preferred stock.

FSAM could issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of its stockholders may believe is in their best interests or in which they may receive a premium for their Class A common stock over the market price of the Class A common stock.

Allocation of pre-IPO Earnings

In connection with the IPO, the previous members of FSM agreed to allocate to the limited partners of Fifth Street Holdings, including FSAM, the Company's earnings (excluding the compensation charges related to the Reorganization) from October 1, 2014 through the date of the IPO.

Dividends

The following table reflects the dividends per share that the Company has declared on its common stock for the year ended December 31, 2015:



Date Declared	Record Date	Payment Date	Amount per Share		Cash Distribution
January 15, 2015	March 31, 2015	April 15, 2015	$	0.30	$1.8 million
May 11, 2015	June 30, 2015	July 15, 2015	0.17		1.0 million
August 10, 2015	September 30, 2015	October 15, 2015	0.17		1.0 million
November 23, 2015	December 31, 2015	January 15, 2016	0.17		1.0 million
Total for the year ended December 31, 2015			$	0.81	$4.8 million

Share Repurchase Program

On May 11, 2015, the Company's Board of Directors authorized a share repurchase program of up to $20.0 million of the Company’s Class A common stock. Under the repurchase program, the Company is authorized to repurchase shares through open market purchases or block trades, as conditions permit and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The repurchase program will terminate on May 11, 2016, unless earlier terminated or extended by the Company's Board of Directors, and may be suspended for periods or discontinued at any time. For the year ended December 31, 2015, FSAM repurchased and retired 217,641 and 193,583 shares, respectively, of its Class A common stock at a weighted average price of $8.47 per share pursuant to this program. The aggregate cash consideration paid for these repurchases was $1,849,140 after brokerage commissions. Upon the completion of each Class A common stock repurchase transaction, Fifth Street Holdings repurchased an equivalent number of Holdings LP Interests held by FSAM. Accordingly, Fifth Street Holdings repurchased 217,641 Holdings LP Interests during the year ended December 31, 2015.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Equity-based Compensation

Prior to the Reorganization, the Company historically had fee sharing arrangements whereby certain employees or members were granted interests to a share of Part I Fees. Upon consummation of the Reorganization such interests were exchanged for Holdings LP Interests. In addition, upon consummation of the IPO, the Company granted certain equity instruments to Holdings Limited Partners, employees and directors.

Part I Fees

Prior to December 1, 2012, interests in the Company's Part I Fees that were granted and/or sold to members (other than the managing member) were accounted for as liabilities using the intrinsic-value method as these interests are subject to repurchase in the event of the member's termination of employment, at a formula-based price (as defined in the then existing operating agreement) determined by the member's pro rata share of Part I Fees. In addition, the redemption amounts were exclusive of any accumulated undistributed earnings associated with the member's interests, which were also required to be paid to a former member.

Effective December 1, 2012, the Fifth Street operating agreement was amended to include a retirement eligibility vesting clause for then existing members (“equity members”). Members admitted after December 1, 2012, were considered non-equity members as their interests did include the retirement eligibility clause and were accounted for as liabilities using the intrinsic-value method consistent with the above. The amounts paid by the equity members prior to December 1, 2012 for these interests, totaling $2,065,664, which had been accounted for as a liability, were reclassified to members' equity with payments subsequent to December 1, 2012 being accounted for as distributions from equity. The fair value of these awards at that date in the amount of $15,187,787, net of cash paid for the awards, as determined by an independent third party appraisal, was amortized on a straight-line basis over the period to retirement eligibility.

Conversion and Vesting of Member Interests in Predecessor and Fifth Street Holdings L.P.

On November 4, 2014, in connection with the Reorganization, existing interests held by the members of the Predecessor (Part I fee-sharing arrangements discussed above) were exchanged for Holdings LP Interests. As part of this exchange, one of the members' Holdings LP Interests became immediately vested and expensed in full and the other members' vesting was modified and their Holdings LP Interests vest over a period of eight years from the IPO. There was no change in the fair value of these converted interests as a result of the modification in vesting.

The following table summarizes activity for the years ended December 31, 2015, 2014 and 2013 with respect to the Company's equity classified awards:



Balance at December 31, 2012	$	15,057,283
Fair value of granted and purchased interest	5,925,572
Cash received for purchased interest	(1,000,097		)
Amortization of granted and purchased interests	(1,739,360		)
Balance at December 31, 2013	18,243,398
Fair value of purchased interest	4,035,926
Cash received for purchased interest	(1,708,378		)
Amortization of granted and purchased interests	(3,965,269		)
Balance at November 14, 2014	16,605,677
Impact of conversion and change in vesting of member interests in Predecessor	(8,391,490		)
Amortization of Holdings LP Interests	(171,129		)
Balance at December 31, 2014	8,043,058
Amortization of Holdings LP Interests	(1,026,772		)
Balance at December 31, 2015	$	7,016,286

Included in compensation expense for the years ended December 31, 2015, 2014 and 2013 was $1,026,772, $1,808,850 and $1,739,360, respectively, of amortization relating to the above equity-classified awards. All of such compensation expense is allocated to the Predecessor for periods prior to the Reorganization and to the non-controlling interests thereafter in the Consolidated Statements of Income.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

As of December 31, 2015, unrecognized compensation cost in the amount of $7,016,286 relating to these equity-based awards is expected to be recognized over a period of approximately 6.9 years.

The following table summarizes activity for the years ended December 31, 2015, 2014 and 2013 with respect to the Company's liability classified awards, including stock appreciation rights discussed below:



Balance at December 31, 2012	$	—
Cash received for purchased interests	129,001
Compensation expense	123,019
Payment of liabilities	(123,019		)
Balance at December 31, 2013	129,001
Cash received for purchased interests	14,129
Compensation expense	228,140
Payment of liabilities	(228,140		)
Impact of conversion of member interests in Predecessor	(143,130		)
Issuance of stock appreciation rights - see below	3,465
Balance at December 31, 2014	3,465
Compensation expense	20,792
Balance at December 31, 2015	$	24,257

Fifth Street Asset Management Inc. 2014 Omnibus Incentive Plan

In connection with the IPO, FSAM's Board of Directors adopted the 2014 Omnibus Incentive Plan pursuant to which the Company granted options to its non-employee directors, executive officers and other employees to acquire 5,658,970 shares of Class A common stock, 1,174,748 restricted stock units to be settled in shares of Class A common stock and 90,500 stock appreciation rights to be settled in cash. During the year ended December 31, 2015, there were additional grants under the 2014 Omnibus Incentive Plan as discussed below.

Equity-based compensation expense, net of assumed forfeitures, is as follows:



	Year Ended December 31, 2015		Year Ended December 31, 2014
Restricted stock units to be settled in Class A common stock	$	2,808,876	$	429,626
Options to acquire shares of Class A common stock	2,329,148		383,589
Stock appreciation rights to be settled in cash	20,792		3,465
Total	$	5,158,816	$	816,680

Restricted Stock Units

Each restricted stock unit represents an unfunded, unsecured right of the holder to receive a Class A common share on the vesting dates. The restricted stock units will not vest for three years and subsequently vest at a rate of one-third per year on the fourth, fifth and sixth anniversary of the grant date. These awards will become saleable at a rate of one-quarter (¼) per year, beginning on the sixth, seventh, eighth and ninth anniversary of the grant date. Upon vesting, shares of Class A common stock will be delivered to the participant.

Additionally, if the Company pays dividends on its outstanding shares of Class A common stock, the holder of the restricted stock units will be credited with dividend equivalents. For stock dividends, the dividend equivalents will be in the form of additional restricted stock units. For cash dividends, the dividend equivalents will be in the form of cash (without interest or earnings). Dividend equivalents are subject to the same terms and conditions as the original restricted stock unit award, and are not paid until the vesting and settlement of the underlying shares of Class A common stock to which such dividend equivalents relate. During the year ended December 31, 2015, the Company granted 65,952 restricted stock units to employees under substantially similar terms to the IPO grant. For the year ended December 31, 2015, the Company declared cash dividends of $0.81 per share and accrued dividends in the amount of $758,208 related to unvested restricted stock units which are forfeitable.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

The following table presents unvested restricted stock units' activity during the period from November 4, 2014 through December 31, 2014 and for the year ended December 31, 2015:



	Restricted Units		Weighted Average Grant Date Fair Value Per Unit
Balance - November 4, 2014	—		$	—
Granted - IPO	1,174,748		17.00
Granted - Post-IPO	—		—
Vested	—		—
Forfeited	—		—
Balance - December 31, 2014	1,174,748		17.00
Granted	65,952		10.23
Vested	(16,222	)	17.00
Forfeited	(22,684	)	17.00
Balance - December 31, 2015	1,201,794		$	16.64

Compensation expense associated with these restricted stock units is being recognized on a straight-line basis during the service period of the respective grant. During the year ended December 31, 2015, 16,222 restricted stock units vested resulting in compensation expense of $172,078. No previously granted restricted stock units vested during the year ended December 31, 2014. The total compensation expense expected to be recognized in all future periods associated with the restricted stock units, considering assumed annual forfeitures of 5.0%, is $12,757,905 at December 31, 2015, which is expected to be recognized over the remaining weighted average period of 4.8 years.

Options

The fair value of each option granted during the year ended December 31, 2015 is measured on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:



Risk-free interest rate	1.42	%
Expected dividend yield	8.10	%
Expected volatility factor	30.00	%
Expected life in years	5.00

Each option entitles the holders to purchase from the Company, upon exercise thereof, one Class A common share at the stated exercise price. Since all of the options granted either restrict saleability upon vesting or have strike prices in excess of the IPO price, the use of standard option pricing models such as Black-Scholes is precluded by ASC 718. As such, the Company has utilized a Monte Carlo pricing simulation, a statistical pricing technique or similar method to measure the fair value of option awards on the date of grant.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

A summary of unvested options activity during the period from November 4, 2014 through December 31, 2014 and for the year ended December 31, 2015 is presented below:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (in years)	Aggregate Intrinsic Value
Balance - November 4, 2014	—		$	—	—
Granted - IPO	5,658,970		18.70		8.3
Vested	—		—		—
Forfeited or expired	—		—		—
Balance - December 31, 2014	5,658,970		$	18.70	8.3
Exercisable at December 31, 2014	—		$	—	—	$	—
Expected to vest after December 31, 2014	4,654,091		$	18.70	8.3	$	—

Balance - December 31, 2014	5,658,970		$	18.70	8.3
Granted	30,000		8.01		4.7
Vested	(23,389	)	18.70		7.5
Forfeited	(102,715	)	$	18.70	7.5
Balance - December 31, 2015	5,562,866		$	18.64	7.5
Exercisable at December 31, 2015	—		$	—	—	$	—
Expected to vest after December 31, 2015	4,617,951		$	18.64	7.5	$	—

Aggregate intrinsic value represents the value of the Company's closing share price on the last trading day of the year in excess of the weighted average exercise price multiplied by the number of options exercisable or expected to vest. As of December 31, 2015, the Company's closing share price was lower than the weighted average exercise price of the options exercisable or expected to vest. As a result, the options are out of the money and have no intrinsic value.

Compensation expense associated with these options is being recognized on a straight-line basis during the service period of the respective grant. During the year ended December 31, 2015, options to purchase 23,389 Class A common shares vested resulting in compensation expense of $25,978. As of December 31, 2015, there was $5,416,911 of total unrecognized compensation expense, net of assumed annual forfeitures of 5%, that is expected to be recognized over the remaining weighted average period of 3.6 years.

Stock Appreciation Rights (“SARs”)

Each SAR represents an unfunded, unsecured right of the holder to receive an amount in cash equal to the excess of the closing price of a Class A common share over the exercise price. The SARs terms and conditions are substantially similar to the provisions of the ten year option grants discussed above and had a grant date fair value of $1.78 per unit. Upon vesting, they will be settled in cash. The fair value of the SARs are re-measured each reporting period until settlement and changes in fair value are charged to compensation expense as the SARs vest over the remaining service period. The amount of the adjustment has been derived based on a grant date fair value using the IPO price of $17.00 per share, multiplied by the number of unvested shares, and expensed over the six year service period. Additionally, the calculation of the expense assumes a forfeiture rate of 5%. The total compensation expense expected to be recognized in all future periods associated with the SARs, considering assumed forfeitures, is approximately $100,501. No SARs were issued during the years ended December 31, 2015.

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

A summary of unvested SARs activity during the period from November 4, 2014 through December 31, 2014 and for the year ended December 31, 2015 is presented below:



	SARs		Weighted Average Grant Date Fair Value Per SAR
Balance November 4, 2014	—		$	—
Granted - IPO	90,500		1.78
Vested	—		—
Forfeited	—		—
Balance December 31, 2014	90,500		1.78
Granted	—		—
Vested	—		—
Forfeited	(19,500	)	$	1.78
Balance December 31, 2015	71,000		$	1.78

Due to Former Member

On November 5, 2010, the Company entered into a separation agreement with a member that provided for (i) the repurchase of the member's pro rata share of Part I Fees based on a formula, as defined in the separation agreement, over a five year period ending on September 30, 2015, and (ii) upon the closing of a sale transaction of the Company, the allocation by the managing member to the former member of any proceeds from the sale up to a maximum of $6,000,000. Accordingly, the Company recorded a liability for the present value of the expected future payments of the member's pro rata share of Part I Fees as of the date of the separation agreement and adjusted this liability to fair value at each reporting date. All amounts due to this former member were paid in November 2014. Included in compensation expense for the years ended December 31, 2014 and December 31, 2013 were fair value adjustments related to this liability that increased (decreased) compensation expense in the amount of $270,358 and $(89,057), respectively.

On May 17, 2014, the Company entered into a separation agreement with a member that provided for (i) the repurchase of the member's pro rata share of Part I Fees for $1,713,802, and (ii) upon the closing of a sale transaction of the Company, the allocation by the managing member to the former member of a portion of net proceeds from the sale. In connection with the agreement to repurchase the former member's interest, the Company recognized compensation expense in the amount of $2,599,803, representing the amount paid and the reclassification of amounts previously recorded as distributions since December 1, 2012, as the award was forfeited prior to vesting. In addition, the Company recognized compensation expense in the amount of approximately $2,327,548 in connection with the reallocation to the managing member of the former member's forfeited interest. Such amount represents the fair value of the interest in the amount of $4,035,926, as determined by an independent third party appraisal, net of the cash paid on July 3, 2014 in the amount of $1,713,802.

Note 12. Income Taxes

Components of the provision (benefit) for income taxes consist of the following:



	Year Ended December 31,
		2015			2014			2013
Current:
Federal		$	(100,348	)	$	94,835		$	—
State and local		(56,343		)	20,348			—
Total current expense (benefit)		(156,691		)	115,183			—
Deferred:
Federal		4,377,404			(1,992,191		)	—
State and local		844,707			(246,619		)	—
Total deferred provision (benefit)		5,222,111			(2,238,810		)	—
Income tax provision (benefit)		$	5,065,420		$	(2,123,627	)	$	—

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Prior to November 4, 2014, the Company had not been subject to U.S. Federal income taxes as the Predecessor was organized as a limited liability company. As a result of the Reorganization and IPO, the portion of Fifth Street Holdings income attributable to FSAM is now subject to U.S. Federal, state and local income taxes and is taxed at the prevailing corporate tax rates.

A reconciliation of the U.S. statutory income tax rate of 34% to the Company's effective tax rate is as follows:



	Year Ended December 31,
		2015			2014			2013
Provision at Federal statutory tax rate		$	13,326,215		$	12,557,925		$	—
State and local taxes, net of federal benefit		484,914			(116,882		)	—
Change in tax status		—			(1,089,600		)	—
Income attributable to Predecessor and noncontrolling interests not subject to tax		(10,151,310		)	(13,426,245		)	—
Transfer pricing allocations (1)		1,087,879			—			—
Other		317,722			(48,825		)	—
Income tax provision (benefit)		$	5,065,420		$	(2,123,627	)	$	—

_____________

(1) As part of the Company's inter-company management agreements, certain expenses are allocated between flow through entities that are not subject to tax and corporate entities that are subject to taxation. The above expense allocations and the associated transfer pricing adjustments and reimbursements, had an impact on the overall effective tax rate reconciliation.

The Company's effective tax rate includes a rate benefit attributable to the fact that certain of the Company's subsidiaries operate as a series of pass-through entities which are not themselves subject to federal income tax. As a result of the Reorganization, certain subsidiaries were converted from pass-through entities to taxable entities. Accordingly, the portion of the Company's subsidiaries' earnings attributable to non-controlling interests are subject to tax when reported as a component of the non-controlling interests' taxable income on their individual tax returns.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and are reported in the accompanying Consolidated Statement of Financial Condition.

These temporary differences result in taxable or deductible amounts in future years. Details of the Company's deferred tax assets and liabilities are summarized as follows:



	As of December 31,
	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	331,201		$	3,443,350
Reserves and accruals	1,135,627			1,649,929
Share-based compensation	2,373,219			340,339
Step-up related to purchase of interest in Fifth Street Holdings	51,422,225			55,312,497
Other	1,409			3,320
Total deferred tax assets	55,263,681			60,749,435
Deferred tax liabilities:
Property and equipment and other long-lived assets	(1,918,267		)	(2,269,026		)
Unearned revenue	(2,032,881		)	—
Other	(132,296		)	(508,370		)
Total deferred liabilities	(4,083,444		)	(2,777,396		)
Total net deferred tax assets	$	51,180,237		$	57,972,039

Deferred tax assets are primarily the result of an increase in the tax basis of certain intangible assets resulting from FSAM's investment in Fifth Street Holdings. Net deferred tax assets are also recorded related to differences between the financial reporting basis and the tax basis of FSAM's proportionate share of the net assets of Fifth Street Holdings. Based on the Company's historical taxable income and its expected future earnings, management evaluates the uncertainty associated

100

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

with booking tax benefits and determined that the deferred tax assets are more likely than not to be realized, including evaluation of deferred tax liabilities and the expectation of future taxable income.

As of December 31, 2015 and December 31, 2014, the Company had net operating loss carryforwards for Federal and state purposes of approximately $0.5 million and $8.8 million, respectively, portions of which begin to expire in 2034.

The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Fifth Street Holdings is not subject to federal income taxes as it is a flow-through entity. With respect to state and local jurisdictions, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed.

The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2015, 2014 and 2013. In the future, if uncertain tax positions arise, interest and penalties will be accrued and included in the Provision for Income Taxes.

Note 13. Earnings Per Share

Prior to the Reorganization and the IPO, the Company's businesses were conducted through multiple operating businesses rather than a single holding entity. As such, there was no single capital structure upon which to calculate historical earnings per common share information. Accordingly, earnings per Class A common share information has not been presented for historical periods prior to the IPO.

Basic earnings per share ("EPS") measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options and restricted stock units.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shares and per share information):



	Year Ended December 31, 2015		Period from November 4, 2014 through December 31, 2014
Numerator for basic and diluted net income per share of Class A common stock:
Net income attributable to Fifth Street Asset Management Inc.	$	2,408,026	$	437,661
Denominator for basic net income per share of Class A common stock:
Weighted average shares of Class A common stock outstanding	5,913,125		6,000,033
Denominator for diluted net income per share of Class A common stock:
Weighted average shares of Class A common stock outstanding	5,913,125		6,000,033
Dilutive effects of restricted stock units	2,049		—
Weighted average shares of Class A common stock outstanding - diluted	5,915,174		6,000,033
Earnings per share of Class A common stock:
Net income attributable to Fifth Street Asset Management Inc. per share of Class A common stock, basic	$	0.41	$	0.07
Net income attributable to Fifth Street Asset Management Inc. per share of Class A common stock, diluted	$	0.41	$	0.07

Shares of Class B common stock have no impact on the calculation of net income per share of Class A common stock as holders of Class B common stock do not participate in net income or dividends, and thus, are not participating securities.

101

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

The treasury stock method is used to calculate incremental Class A common shares on potentially dilutive Class A common shares resulting from options and unvested restricted units granted in connection with the IPO. Potentially dilutive securities representing an incremental 1,180,353 restricted stock units and 5,556,255 options to acquire Class A common shares for the period from October 1, 2014 to December 31, 2014 and for the year ended December 31, 2015 were excluded from the computation of diluted earnings per Class A common share for the period because their impact would have been anti-dilutive.

The EPS calculation excludes the assumed conversion of 44,000,000 Holdings LP interests and the MMKT Notes into Class A common shares as their impact would have been anti-dilutive.

102

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

Note 14. Quarterly Financial Information (unaudited)

The unaudited quarterly results for the years ended December 31, 2015 and 2014 are summarized below. The adjustments represent the impact of the errors described in Note 2 and disclosed in previous filings. For periods prior to the Reorganization and IPO, the financial information reflects the consolidated financial results of the Predecessor and the deconsolidation of the previously Combined Funds:



	For the quarter ended March 31, 2015 - As previously reported			Adjustments			For the quarter ended March 31, 2015 - As Revised			For the quarter ended June 30, 2015 - As previously reported			Adjustments			For the quarter ended June 30, 2015 - As Revised

Revenues	$	24,870,124		$	88,491		$	24,958,615		$	24,166,163		$	232,163		$	24,398,326
Net income	$	10,828,332		$	(349,786	)	$	10,478,546		$	10,347,919		$	(805,507	)	9,542,412
Net income attributable to non- controlling interests in Fifth Street Holdings L.P.	$	(9,519,002	)	$	337,058		$	(9,181,944	)	$	(9,141,173	)	$	705,943		$	(8,435,230	)
Net income attributable to Fifth Street Asset Management Inc.	$	1,309,330		$	(12,728	)	$	1,296,602		$	1,206,746		$	(99,564	)	$	1,107,182
Net income per share attributable to Fifth Street Management Inc. Class A common stock - Basic and Diluted	$	0.22		$	—		$	0.22		$	0.20		$	(0.01	)	$	0.19
Weighted average shares of Class A common stock outstanding - Basic	6,000,033						6,000,033			5,968,353						5,968,353
Weighted average shares of Class A common stock outstanding - Diluted	6,042,777						6,042,777			5,976,746						5,976,746



	For the quarter ended September 30, 2015 - As previously reported			Adjustments			For the quarter ended September 30, 2015 - As Revised			For the quarter ended December 31, 2015

Revenues	$	24,959,203		$	530,038		$	25,489,241		$	22,920,106
Net income	$	9,513,295		$	(285,814	)	$	9,227,481		$	4,716,042
Net income attributable to non-controlling interests in Fifth Street Holdings L.P.	$	(8,341,728	)	$	264,616		$	(8,077,112	)	$	(5,862,168	)
Net income attributable to Fifth Street Asset Management Inc.	$	1,171,567		$	(21,199	)	$	1,150,368		$	(1,146,126	)
Net income per share attributable to Fifth Street Management Inc. Class A common stock - Basic and Diluted	$	0.20		$	(0.01	)	$	0.19		$	(0.19	)
Weighted average shares of Class A common stock outstanding - Basic	5,901,718						5,901,718			5,929,627
Weighted average shares of Class A common stock outstanding - Diluted	5,908,463						5,908,463			5,929,627

103

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013



	For the quarter ended March 31, 2014 - As previously reported			Adjustments			For the quarter ended March 31, 2014 - As Revised			For the quarter ended June 30, 2014 - As previously reported			Adjustments			For the quarter ended June 30, 2014 - As Revised

Revenues	$	23,767,365		$	(354,991	)	$	23,412,374		$	23,405,083		$	299,552		$	23,704,635
Net income	$	14,488,514		$	(895,363	)	$	13,593,151		$	9,060,459		$	(240,473	)	8,819,986
Net income attributable to non- controlling interests in Predecessor	$	(14,488,514	)	$	895,363		$	(13,593,151	)	$	(9,060,459	)	$	240,473		$	(8,819,986	)
Net income attributable to Fifth Street Asset Management Inc.	$	—		$	—		$	—		$	—		$	—		$	—



	For the quarter ended September 30, 2014 - As previously reported (1)			Adjustments			For the quarter ended September 30, 2014 - As Revised			For the quarter ended December 31, 2014 - As previously reported			Adjustments			For the quarter ended December 31, 2014 - As Revised

Revenues	$	25,314,880		$	1,165,751		$	26,480,631		$	30,343,024		$	(1,404,072	)	$	28,938,952
Net income	$	14,179,402		$	413,677		$	14,593,079		$	708,748		$	(2,118,553	)	$	(1,409,805	)
Net income attributable to non- controlling interests in Predecessor	$	(14,179,402	)	$	(413,677	)	$	(14,593,079	)	$	11,375,127		$	—		$	11,375,127
Net income attributable to non- controlling interests in Fifth Street Holdings L.P.	$	—		$	—		$	—		$	(11,555,298	)	$	2,027,637		$	(9,527,661	)
Net income attributable to Fifth Street Asset Management Inc.	$	—		$	—		$	—		$	528,577		$	(90,916	)	$	437,661
Net income per share attributable to Fifth Street Management Inc. Class A common stock - Basic and Diluted										$	0.07					$	0.07
Weighted average shares of Class A common stock outstanding - Basic and Diluted										6,000,033						6,000,033

_____________

(1) Amounts were previously revised in the September 30, 2015 Form 10-Q filed on November 24, 2015.

Note 15. Subsequent Events

Amended and Restated Investment Advisory Agreement

On January 19, 2016, FSM, a subsidiary of the Company, entered into an amended and restated investment advisory agreement with FSC. The amended and restated investment advisory agreement reduces the base management fee payable to FSM on gross assets, excluding cash and cash equivalents, from 2.00% to 1.75% effective as of January 1, 2016. The other commercial terms of FSM’s existing investment advisory relationship with FSC remain unchanged.

RiverNorth

On February 18, 2016, the Company entered into a purchase and settlement agreement with RiverNorth pursuant to which RiverNorth would withdraw its competing FSC proxy solicitation. In connection with the agreement, the Company agreed to purchase 9,220,600 shares of FSC’s common stock for a per-share purchase price of $6.25 from RiverNorth, and the Company deposited $10 million in escrow to be credited against the purchase price at closing. In addition, the Company issued a warrant to RiverNorth that may require the Company to pay RiverNorth a cash settlement equal to the lesser of (i) $5 million and (ii) the value of the warrant based on the strike price. The Company may also be subject to additional future payments based on certain terms of the purchase and settlement agreement.

104

Fifth Street Asset Management Inc.

(Prior to November 4, 2014 - Fifth Street Management Group)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2015, 2014 and 2013

In connection with the execution and delivery of the purchase and settlement agreement, the Company and Leonard M. Tannenbaum, Chairman and Chief Executive Officer of the Company, have entered into a letter agreement ("Letter Agreement"), that provides that the Company will purchase the maximum number of shares of FSC’s common stock that the Company determines, in its sole discretion, it can purchase with immediately available funds and that will not violate any of the terms or conditions of any contractual arrangements or regulations to which the Company is a party to or its property or assets are subject to. Any additional shares that the Company is obligated to purchase pursuant to the purchase and sale agreement will be purchased by Mr. Tannenbaum. The Letter Agreement also provides for mutual indemnification of the parties in connection with their obligations under the purchase and sale agreement and the Letter Agreement.

Credit Facility Amendment

On February 29, 2016, Fifth Street Holdings entered into an amendment to its existing revolving credit facility which reduces the aggregate revolver commitments of the lenders from $176 million to $146 million. The amendment also provides, among other things, that certain risk retention debt incurred by subsidiaries engaged solely in managing collateralized loan obligations shall be permitted and excluded from certain financial covenant calculations, including leverage and interest coverage ratios.

Dividend Declaration

On March 14, 2016, the Company's Board of Directors declared a quarterly dividend of $0.10 per share of Class A common stock. The declared dividend is payable on April 15, 2016 to stockholders of record at the close of business on March 31, 2016.

105

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weaknesses in our internal control over financial reporting described below.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making its assessment, management used the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In connection with this assessment, we identified material weaknesses in our internal control over financial reporting.

We identified the following control deficiencies, each of which has been determined to be a material weakness:


•	We did not maintain sufficient accounting resources with technical accounting knowledge, experience and training in the application of U.S. GAAP and for effective preparation and review of our financial statements.

•

This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

106

Remediation of Material Weaknesses in Internal Control Over Financial Reporting

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

FSC Agreement with RiverNorth Capital Management, LLC

As previously disclosed, on February 18, 2016, FSC entered into an agreement with RiverNorth Capital Management, LLC, or RiverNorth. Under the terms of the agreement, RiverNorth agreed to not contest FSC’s slate of director nominees at FSC’s 2016 Annual Meeting of Stockholders. Additionally, RiverNorth agreed to withdraw its binding proposal to terminate FSC’s Investment Advisory Agreement with us. In addition, RiverNorth agreed to abide by certain standstill provisions through FSC’s 2017 Annual Meeting of Stockholders, and also agreed to vote its shareholdings in FSFR in accordance with the recommendation of FSFR’s Board of Directors in connection with the FSFR 2016 Annual Meeting of Stockholders. Additional details concerning the agreement and related documents are set forth below.

Purchase and Settlement Agreement

On February 18, 2016, the Company entered into a Purchase and Settlement Agreement, or the PSA, by and among FSC, Holdings, Leonard M. Tannenbaum, Chairman and Chief Executive Officer of the Company (together with Holdings, the "Buyers"), and RiverNorth, RiverNorth Capital Partners, L.P., RiverNorth Institutional Partners, L.P., RiverNorth Core Opportunity Fund, RiverNorth/DoubleLine Strategic Income Fund, Randy I. Rochman, Fred G. Steingraber and Murray R. Wise (collectively, the "Sellers").

Purchase and Sale of FSC Common Stock

On the terms and subject to the conditions of the PSA, the Buyers agreed to purchase 9,220,600 shares of FSC’s issued and outstanding common stock, par value $0.01 per share, each an FSC Share, from the Sellers, which FSC Shares (when combined with the FSC Shares Sellers are economically exposed to via cash-settled total return swaps) constituted all of the FSC Shares beneficially owned by the Sellers, for a per-share purchase price of $6.25, without interest. Under certain circumstances in connection with a breach of the PSA by the Buyers, Holdings and Mr. Tannenbaum may be liable for a $5,000,000 fee payable to Sellers. The parties have agreed to an outside closing date of March 31, 2016, for the purchase of the Shares from the Sellers, or the Closing Date. In connection with the PSA, Holdings and RiverNorth entered into an escrow agreement with JPMorgan Chase Bank, N.A., as escrow agent, pursuant to which a portion of the aggregate purchase price for the FSC Shares is being held in escrow.

Swaps

In the PSA, Holdings and certain Sellers also agreed to terms that may require Holdings, on the one hand, or such Sellers, on the other hand, to make certain payments to the other in connection with the settlement (or other payments) of certain cash-settled total return swaps held by such Sellers in respect of FSC Shares. In addition, the PSA requires such Sellers to request and use their best efforts to cause the counterparty to such swaps to vote the FSC Shares held by such counterparty, as of the record date for any meeting of FSC’s stockholders, in accordance with the recommendations of FSC’s board of directors.

Annual Meeting Matters

The PSA provides that RiverNorth has irrevocably withdrawn and rescinded each proposal and each director nomination that it had put forth for consideration at FSC’s 2016 Annual Meeting of Stockholders.

Standstill

In the PSA, the Sellers have agreed to certain standstill obligations with respect to FSC and FSFR, until the later of the certification of votes for FSC’s 2017 Annual Meeting of Stockholders or the certification of votes for FSFR’s 2017 Annual Meeting of Stockholders, as applicable.

107

Amendment

On February 23, 2016, the Company entered into an amendment, or the Amendment, to the previously PSA with the other parties thereto. The Amendment amended certain provisions of the PSA relating to the voting of the shares of FSFR’s common stock. In addition, the Amendment amended certain standstill provisions related to 40,000 shares of FSC’s common stock beneficially owned by Randy I. Rochman.

Warrant

In connection with the execution and delivery of the PSA, on February 18, 2016, the Company issued a warrant, or the Warrant, to RiverNorth. RiverNorth may exercise the Warrant, in whole but not in part, at any time after April 16, 2016, and prior to March 18, 2017. If RiverNorth duly exercises the Warrant, the Company must pay RiverNorth a cash settlement amount equal to the lesser of (i) $5,000,000 and (ii) the "Spread Value" determined pursuant to the following formula: Spread Value = the product of (a) the difference between the fair market value of one share of the Company’s Class A common stock, par value $0.01 per share ("Class A Common Stock"), and the warrant strike price, each as determined in accordance with the Warrant, multiplied by (b) the number shares of Class A Common Stock subject to the Warrant (i.e., the number of shares of Class A Common Stock equal to the quotient of $10,000,000 divided by the warrant strike price).

Instead of paying the cash settlement amount described above, the Company may elect, prior to December 18, 2016, to settle all or part of the Warrant by delivering to RiverNorth a number of shares of Class A Common Stock equal to the quotient of (i) the settlement amount that the Company elects to settle in shares of Class A Common Stock divided by (ii) the exercise price, as determined in accordance with the Warrant. In addition, the Company’s election to settle the Warrant by delivery of shares of its Class A Common Stock is subject to (a) approval by the Company’s board of directors, including a majority of the independent directors thereof if such approval by a majority of the independent directors thereof is required by applicable law or the rules of the NASDAQ Stock Market, or if the Company’s board of directors, after taking into account the advice of outside counsel, reasonably believes that such approval by a majority of the independent directors thereof is reasonably necessary in the discharge of its fiduciary duties and (b) any approval of the Company’s stockholders that is required pursuant to the rules of the NASDAQ Stock Market.

Letter Agreement

In connection with the execution and delivery of the PSA, Holdings and Mr. Tannenbaum have entered into a letter agreement, or the Letter Agreement, that provides that Holdings will purchase the maximum number of Shares that the Company determines, in its sole discretion, Holdings can purchase with immediately available funds and that will not violate any of the terms or conditions of any debt or other contractual arrangement to which Holdings is a party or its property or assets are subject or cause Holdings to be an "investment company" (as such term is defined in the Investment Company Act of 1940, as amended). Any additional Shares that Buyers are obligated to purchase pursuant to the PSA will be purchased by Mr. Tannenbaum. The Letter Agreement also provides for mutual indemnification of the parties in connection with their obligations under the PSA and the Letter Agreement.

108

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

Item 11. Executive Compensation

The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

Item 14. Principal Accountant Fees and Services

The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2016 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as a part of this Form 10-K:

1. Financial Statements: The Consolidated Financial Statements, the Notes to Consolidated Financial Statements, and the Reports of Independent Registered Public Accounting Firms for Fifth Street Asset Management Inc. are presented in Item 8. Financial Statements and Supplementary Data of this Form 10-K.

2. Financial Schedules: All financial statement schedules have been omitted because they are inapplicable, not required, or shown in the consolidated financial statements and notes in Item 8. Financial Statements and Supplementary Data of this Form 10-K.

3. Exhibits: A list of the exhibits required to be filed as part of this report is set forth in the Index to Exhibits and is incorporated by reference.

(b) See Index to Exhibits.



			Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation, as amended on October 13, 2014	10-Q	001-36701	3.1	12/15/2014
3.2	Second Amended and Restated Bylaws, as adopted on December 14, 2015	8-K	001-36701	3.1	12/16/2015
4.1	Form of Class A Common Stock Certificate	S-1	333-196813	4.1	09/22/2014
4.2	Warrant, dated February 18, 2016, by and between Fifth Street Asset Management Inc. and RiverNorth Capital Management, LLC	8-K	001-36701	10.2	02/19/2016
10.1	Amended and Restated Limited Partnership Agreement of Fifth Street Holdings, L.P., dated of October 29, 2014	8-K	001-36701	10.1	11/04/2014
10.3	Exchange Agreement by and among Fifth Street Asset Management, Fifth Street Holdings and the limited partners of Fifth Street Holdings party thereto, dated as of November 4, 2014.	8-K	001-36701	10.2	11/04/2014

109



10.4	Tax Receivable Agreement, dated as of October 29, 2014, by and among Fifth Street Asset Management, Fifth Street Holdings and the Principals, as defined therein, dated as of October 29, 2014.	8-K	001-36701	10.3	11/04/2014
10.5	Registration Rights Agreement, by and among Fifth Street Asset Management, Fifth Street Holdings and the Covered Persons party thereto, dated as of November 4, 2014.	8-K	001-36701	10.4	11/04/2014
10.6	Third Amended and Restated Investment Advisory Agreement between the Fifth Street Management LLC and Fifth Street Finance Corp., dated as of January 19, 2016	8-K	001-36701	10.1	01/20/2016
10.7	Investment Advisory Agreement between the Fifth Street Management LLC and Fifth Street Senior Floating Rate Corp, dated as of June 27, 2013	S-1	333-196813	10.7	09/22/2014
10.11	The Fifth Street Deferred Bonus and Retention Plan, as amended and restated January 2015 †	8-K	001-36701	10.1	01/22/2015
10.12	Fifth Street Asset Management Inc. 2014 Omnibus Incentive Plan †	8-K	001-36701	10.10	11/04/2014
10.13	Amended and Restated Employment Offer, by and among Fifth Street Management LLC, FSC CT, Inc. and Todd G. Owens, dated as of October 30, 2014. †	8-K	001-36701	10.6	11/04/2014
10.14	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Bernard D. Berman, dated as of October 29, 2014. †	8-K	001-36701	10.7	11/04/2014
10.15	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Alexander C. Frank, dated as of October 29, 2014. †	8-K	001-36701	10.8	11/04/2014
10.16	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Ivelin M. Dimitrov, dated as of October 29, 2014. †	8-K	001-36701	10.9	11/04/2014
10.17	Form of Non-Competition, Non-Solicitation and Non-Disclosure Agreement by and between FSC CT, Inc. and each of Bernard D. Berman, Alexander C. Frank, Ivelin M. Dimitrov and Todd G. Owens †	S-1	333-196813	10.17	09/25/2014
10.18	Credit Agreement, dated as of November 4, 2014, by and among Fifth Street Holdings L.P., the subsidiary guarantors party thereto, the lenders party thereto, and Sumitomo Mitsui Banking Corporation, as administrative agent.	8-K	001-36701	10.5	11/04/2014
10.19	Form of Indemnification Agreement for non-employee directors and officers†	8-K	001-36701	10.1	12/16/2015
10.20	Purchase and Settlement Agreement, dated as of February 18, 2016, by and among Fifth Street Finance Corp., Fifth Street Holdings L.P., Leonard M. Tannenbaum, Fifth Street Asset Management Inc., RiverNorth Capital Management, LLC, RiverNorth Capital Partners, L.P., RiverNorth Institutional Partners, L.P., RiverNorth Core Opportunity Fund, RiverNorth/DoubleLine Strategic Income Fund, Randy I. Rochman, Fred G. Steingraber and Murray R. Wise.	8-K	001-36701	10.1	02/19/2016
10.21	Amendment No. 1 to the Purchase and Settlement Agreement, dated as of February 23, 2016, by and among Fifth Street Finance Corp., Fifth Street Holdings L.P., Leonard M. Tannenbaum, Fifth Street Asset Management Inc., RiverNorth Capital Management, LLC, RiverNorth Capital Partners, L.P., RiverNorth Institutional Partners, L.P., RiverNorth Core Opportunity Fund and RiverNorth/DoubleLine Strategic Income Fund, Randy I. Rochman, Fred G. Steingraber and Murray R. Wise.	8-K/A	001-36701	10.4	02/24/2016
10.22	Letter Agreement, dated February 18, 2016, by and between Fifth Street Holdings L.P. and Leonard M. Tannenbaum.	8-K	001-36701	10.3	02/19/2016

110



10.23	Amendment No. 1 to Credit Agreement, dated as of February 29, 2016, by and among Fifth Street Holdings L.P., the Guarantors party thereto, the Lenders party thereto and Sumitomo Mitsui Banking Corporation, as administrative agent.	X
21.1	List of Subsidiaries of Fifth Street Asset Management Inc.	X
23.1	Consent of PricewaterhouseCoopers LLP	X
23.2	Consent of CohnReznick LLP	X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

__________________



†	Management or compensatory arrangement.

111

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




FIFTH STREET ASSET MANAGEMENT INC.

By:		/s/ Leonard M. Tannenbaum
		Leonard M. Tannenbaum
		Chief Executive Officer

Date: March 18, 2016

Each person whose signature appears below constitutes and appoints Leonard M. Tannenbaum and Alexander C. Frank his true and lawful attorneys-in-fact and agents, with full power to act separately and full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 2015 and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:




Signature	Title	Date

/s/ LEONARD M. TANNENBAUM Leonard M. Tannenbaum	Chairman and Chief Executive Officer (principal executive officer)	March 18, 2016

/s/ ALEXANDER C. FRANK Alexander C. Frank	Chief Operating Officer and Financial Officer (principal financial and accounting officer)	March 18, 2016

/s/ THOMAS H. BRANDT Thomas H. Brandt	Director	March 18, 2016

/s/ WAYNE COOPER Wayne Cooper	Director	March 18, 2016

/s/ THOMAS L. HARRISON Thomas L. Harrison	Director	March 18, 2016

/s/ JAMES F. VELGOT James F. Velgot	Director	March 18, 2016

112

EXHIBIT INDEX



			Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation, as amended on October 13, 2014	10-Q	001-36701	3.1	12/15/2014
3.2	Second Amended and Restated Bylaws, as adopted on December 14, 2015	8-K	001-36701	3.1	12/16/2015
4.1	Form of Class A Common Stock Certificate	S-1	333-196813	4.1	09/22/2014
4.2	Warrant, dated February 18, 2016, by and between Fifth Street Asset Management Inc. and RiverNorth Capital Management, LLC	8-K	001-36701	10.2	02/19/2016
10.1	Amended and Restated Limited Partnership Agreement of Fifth Street Holdings, L.P., dated of October 29, 2014	8-K	001-36701	10.1	11/04/2014
10.3	Exchange Agreement by and among Fifth Street Asset Management, Fifth Street Holdings and the limited partners of Fifth Street Holdings party thereto, dated as of November 4, 2014.	8-K	001-36701	10.2	11/04/2014
10.4	Tax Receivable Agreement, dated as of October 29, 2014, by and among Fifth Street Asset Management, Fifth Street Holdings and the Principals, as defined therein, dated as of October 29, 2014.	8-K	001-36701	10.3	11/04/2014
10.5	Registration Rights Agreement, by and among Fifth Street Asset Management, Fifth Street Holdings and the Covered Persons party thereto, dated as of November 4, 2014.	8-K	001-36701	10.4	11/04/2014
10.6	Third Amended and Restated Investment Advisory Agreement between the Fifth Street Management LLC and Fifth Street Finance Corp., dated as of January 19, 2016	8-K	001-36701	10.1	01/20/2016
10.7	Investment Advisory Agreement between the Fifth Street Management LLC and Fifth Street Senior Floating Rate Corp, dated as of June 27, 2013	S-1	333-196813	10.7	09/22/2014
10.11	The Fifth Street Deferred Bonus and Retention Plan, as amended and restated January 2015 †	8-K	001-36701	10.1	01/22/2015
10.12	Fifth Street Asset Management Inc. 2014 Omnibus Incentive Plan †	8-K	001-36701	10.10	11/04/2014
10.13	Amended and Restated Employment Offer, by and among Fifth Street Management LLC, FSC CT, Inc. and Todd G. Owens, dated as of October 30, 2014. †	8-K	001-36701	10.6	11/04/2014
10.14	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Bernard D. Berman, dated as of October 29, 2014. †	8-K	001-36701	10.7	11/04/2014
10.15	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Alexander C. Frank, dated as of October 29, 2014. †	8-K	001-36701	10.8	11/04/2014
10.16	Employment Agreement by and among Fifth Street Management LLC, FSC CT, Inc. and Ivelin M. Dimitrov, dated as of October 29, 2014. †	8-K	001-36701	10.9	11/04/2014
10.17	Form of Non-Competition, Non-Solicitation and Non-Disclosure Agreement by and between FSC CT, Inc. and each of Bernard D. Berman, Alexander C. Frank, Ivelin M. Dimitrov and Todd G. Owens †	S-1	333-196813	10.17	09/25/2014
10.18	Credit Agreement, dated as of November 4, 2014, by and among Fifth Street Holdings L.P., the subsidiary guarantors party thereto, the lenders party thereto, and Sumitomo Mitsui Banking Corporation, as administrative agent.	8-K	001-36701	10.5	11/04/2014
10.19	Form of Indemnification Agreement for non-employee directors and officers†	8-K	001-36701	10.1	12/16/2015

113



10.20	Purchase and Settlement Agreement, dated as of February 18, 2016, by and among Fifth Street Finance Corp., Fifth Street Holdings L.P., Leonard M. Tannenbaum, Fifth Street Asset Management Inc., RiverNorth Capital Management, LLC, RiverNorth Capital Partners, L.P., RiverNorth Institutional Partners, L.P., RiverNorth Core Opportunity Fund, RiverNorth/DoubleLine Strategic Income Fund, Randy I. Rochman, Fred G. Steingraber and Murray R. Wise.	8-K	001-36701	10.1	02/19/2016
10.21	Amendment No. 1 to the Purchase and Settlement Agreement, dated as of February 23, 2016, by and among Fifth Street Finance Corp., Fifth Street Holdings L.P., Leonard M. Tannenbaum, Fifth Street Asset Management Inc., RiverNorth Capital Management, LLC, RiverNorth Capital Partners, L.P., RiverNorth Institutional Partners, L.P., RiverNorth Core Opportunity Fund and RiverNorth/DoubleLine Strategic Income Fund, Randy I. Rochman, Fred G. Steingraber and Murray R. Wise.	8-K/A	001-36701	10.4	02/24/2016
10.22	Letter Agreement, dated February 18, 2016, by and between Fifth Street Holdings L.P. and Leonard M. Tannenbaum.	8-K	001-36701	10.3	02/19/2016
10.23	Amendment No. 1 to Credit Agreement, dated as of February 29, 2016, by and among Fifth Street Holdings L.P., the Guarantors party thereto, the Lenders party thereto and Sumitomo Mitsui Banking Corporation, as administrative agent.					X
21.1	List of Subsidiaries of Fifth Street Asset Management Inc.					X
23.1	Consent of PricewaterhouseCoopers LLP					X
23.2	Consent of CohnReznick LLP					X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

__________________



†	Management or compensatory arrangement.

114

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