Unassociated Document
 
As filed with the Securities and Exchange Commission on February 23, 2007

Registration No. 333-138051
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM N-2
(Check Appropriate box or boxes)
 
o
Registration Statement under the Securities Act of 1933
x
Pre-Effective Amendment No. 4
o
Post-Effective Amendment No.
   
and/or
   
o
Registration Statement under the Investment Company Act of 1940
o
Amendment No.
 
GSC Investment LLC(1)
(Exact name of Registrant as specified in its charter)
 
12 East 49th Street, Suite 3200
New York, New York 10017
(Address of Principal Executive Offices)
(212) 884-6200
(Registrant’s Telephone Number, Including Area Code)
 
Thomas V. Inglesby
GSC Investment LLC
12 East 49th Street, Suite 3200
New York, New York 10017
(Name and Address of Agent for Service)
 
Copies to:
   
Winthrop B. Conrad, Jr.
Danforth Townley
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4890
(212) 450-3890 (fax)
Jay L. Bernstein, Esq.
Richard I. Horowitz, Esq.
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
(212) 878-8000
(212) 878-8375 (fax)
   
 

 
Approximate Date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend reinvestment plans, please check the following box……o
 
It is proposed that this filing will become effective (check appropriate box):
o When declared effective pursuant to Section 8(c).
If appropriate, check the following box:
o This amendment designates a new effective date for a previously filed registration statement.
o This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration number of   the earlier effective registration statement for the same offering is __________________________.
 

     
Title of Each Class of
Securities to be Registered
Proposed Maximum
Aggregate Offering Price(1)(2)
Amount of
Registration
Fee(3)
Common Stock, $0.0001 par value per share
$201,000,000
$17,585
(1)
To be merged into GSC Investment Corp. as described in the Explanatory Note on the next page.
 

 
(2)
Includes the underwriters’ over-allotment option.
(3)
The registration fee, which has been previously paid, was calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
 


 

 
EXPLANATORY NOTE

This registration statement on Form N-2 is being filed by GSC Investment LLC, a Maryland limited liability company. Prior to the effectiveness of the registration statement, GSC Investment LLC will merge with and into GSC Investment Corp., a Maryland corporation. Therefore, investors in this offering will only receive, and the prospectus only describes the offering of, shares of common stock of GSC Investment Corp.
 

 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED _______, 2007
 
P R O S P E C T U S
[LOGO]
Shares
GSC Investment Corp.
Common Stock
$       per share 
GSC Investment Corp. (the “Company”) is a newly-organized Maryland corporation that will operate as a non-diversified closed-end management investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and we will elect to be taxable as a regulated investment company (“RIC”) for U.S. federal income tax purposes. Prior to the issuance of common stock in this offering, our predecessor entity, GSC Investment LLC, a Maryland limited liability company, will merge with and into the Company in accordance with the limited liability agreement of GSC Investment LLC and Maryland law. Our investment objectives are to generate both current income and capital appreciation through debt and, to a lesser extent, equity investments, by primarily investing in private middle market companies, as described in “Prospectus Summary—Portfolio summary.” We will use the proceeds of this offering to acquire a portfolio of approximately $181 million of debt investments that consist of first lien and second lien loans, senior secured bonds and unsecured bonds. We anticipate that substantially all of the investments held in the portfolio will have either a sub-investment grade rating by Moody’s Investors Service and/or Standard & Poor’s or will not be rated by any rating agency but we believe that if such investments were rated, they would be below investment grade. Debt securities rated below investment grade are commonly referred to as “junk bonds.”
 
We are externally managed and advised by our investment adviser, GSCP (NJ), L.P., which together with certain affiliates, manages investment funds with approximately $22.2 billion of assets under management as of December 31, 2006. GSCP (NJ), L.P., together with certain affiliates, does business as GSC Group. Our investment adviser and the members of its investment committee have no experience managing a BDC.
 
Our common stock has no history of public trading. Common stock of closed-end investment companies, including BDCs, frequently trades at a discount to net asset value. If our common stock trades at a discount, it may increase the risk of loss for purchasers in this offering. We currently expect the initial public offering price to be $15.00 per share. We have applied to have our common stock included for listing on the New York Stock Exchange under the symbol “GNV”. GSC Group and/or its affiliates, prior to our election to be treated as a BDC, will receive common shares of GSC Investment LLC in exchange for contributing to us their interests in GSC Partners CDO Fund III, Limited (“CDO Fund III”), including an interest representing approximately 6.24% of the equity in CDO Fund III (the “Contributed Interests”). These common shares will be converted into shares of our common stock following our reorganization as a Maryland corporation prior to the completion of this offering. Based on the value of the interests of CDO Fund III at                     , GSC Group and/or its affiliates contribution was valued at $          . Assuming gross proceeds of $           and a public offering price of $           per share, GSC Group and/or its affiliates will hold approximately         % of our common stock outstanding upon completion of this offering (assuming the underwriters do not exercise their over-allotment option).
 
As set forth herein under “Dilution,” the estimated sales load and other expenses of the offering payable by us will result in an immediate decrease in our net asset value per share of $__ and a dilution in net asset value per share of $__ to new investors who purchase shares in this offering. Investors should note that the net asset value of the Contributed Interests is based on their estimated fair market value as of            , 2007, subject to the approval of our board of directors, and that these have not been audited by our independent auditors. As set forth in the audited financial statements contained herein, we have a negative net asset value.

 Investing in our common stock involves risks. See “Risk Factors” beginning on page 21.
 
   
Per Share
 
Total (1)
 
Public Offering Price
$
   
$
 
 
Sales Load (underwriting discount and commissions)
$
   
$
            (1)
 
Proceeds to the Company (before expenses) (2)
$
   
$
            (1)
 
(1)
We have granted the underwriters an option to purchase up to      additional shares of our common stock at the public offering price less the Sales Load, to cover over-allotments. If such option is exercised in full, the total price to the public, sales load, estimated offering expenses and proceeds to the Company will be $     , $      , $      and $      , respectively. See “Underwriting.” We will receive the full public offering price for the purchase of the Company’s common stock by the affiliates of GSC Group as no sales load will be payable with respect to these sales. See “Dilution.”
(2)
We estimate that we will incur approximately $      in expenses in connection with this offering. Purchasers of common stock in this offering will bear $      per share in expenses in connection with this offering. The net proceeds of the Company will be $      , on a per share basis and $      , on a total amount basis.
 
This prospectus contains important information about us that you should know before investing in our common stock. Please read it before making an investment decision and keep it for future reference. After completion of this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information will be available free of charge by writing to GSC Group, Investor Services, 300 Campus Drive, Suite 110, Florham Park, New Jersey 07932 or by telephone by calling collect at 973-437-1000 (Investor Services). We do not currently maintain a website. You may obtain information about us from the Securities and Exchange Commission’s website (http://www.sec.gov).
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the stock to purchasers on or about             , 2007.

Citigroup
 JPMorgan

Wachovia Securities 
 
BMO Capital Markets
Joint Lead Manager
   

Ferris, Baker, Watts
 
Stifel Nicolaus
 
        , 2007
 
 

 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. We are required by federal securities laws and the rules and regulations of the Securities and Exchange Commission to update the prospectus only in certain circumstances, such as in the event of a material change to the Company which occurs prior to the completion of this offering.
 

 
TABLE OF CONTENTS
 
 
Page
   
Forward-Looking Statements
ii
Prospectus Summary
1
The Offering
15
Fees and Expenses
18
Risk Factors
21
Contribution
39
Use of Proceeds
43
Distributions
44
Dividend Reinvestment Plan
45
Capitalization
47
Dilution
48
Discussion of Management’s Expected Operating Plans
49
Obligations and Indebtedness
51
Business
53
Management
72
Certain Relationships
87
Control Persons and Principal Stockholders
89
Determination of Net Asset Value
90
Material U.S. Federal Income Tax Considerations
92
Description of Our Common Stock
96
Regulation
103
Transfer and Dividend Paying Agent and Registrar
109
Brokerage Allocation and Other Practices
110
Shares Eligible For Future Sale
111
Underwriting
112
Legal Matters
117
Independent Registered Public Accountants
118
Available Information
119
Index to Audited Financial Statements for GSC Investment LLC
F-1
 

 
Until      , 2007 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

i

 
Forward-Looking Statements
 
Some of the statements under “Prospectus Summary,” “Risk Factors,” “Distributions,” “Discussion of Management’s Expected Operating Plans,” “Business” and elsewhere in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology. Any forward-looking statements contained in this prospectus do not have the benefit of the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act of 1933.
 
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. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.
 
The forward-looking statements contained in this prospectus involve risks and uncertainties, including the risks listed under “Risk Factors” herein as well as the statements as to:
 
 
·
our lack of operating history;
 
 
·
our ability to effectively deploy the proceeds raised in this offering;
 
 
·
changes in economic conditions generally;
 
 
·
our dependence on GSCP (NJ), L.P., our investment adviser, and ability to find a suitable replacement if our investment adviser were to terminate its investment advisory and management agreement with us;
 
 
·
the existence of conflicts of interest in our relationship with GSCP (NJ), L.P. and/or its affiliates, which could result in decisions that are not in the best interests of our stockholders;
 
 
·
limitations imposed on our business by our intended registration under the 1940 Act;
 
 
·
changes in our business strategy;
 
 
·
general volatility of the securities markets and the market price of our common stock;
 
 
·
availability of qualified personnel;
 
 
·
changes in our industry, interest rates or the general economy;
 
 
·
the degree and nature of our competition; and
 
 
·
changes in governmental regulations, tax laws and tax rates and other similar matters which may affect us and our stockholders.
 
ii


PROSPECTUS SUMMARY
 
This summary highlights some of the information in this prospectus. It is not complete and does not contain all of the information that you should consider. You should read carefully the more detailed information in this prospectus, especially information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms the “Company,” “we,” “us” and “our” refer to GSC Investment Corp., a Maryland corporation; “GSC Group” refers collectively to GSCP (NJ), L.P., GSCP LLC, GSCP (NJ) Holdings, L.P. and GSC Group Limited, which do business as GSC Group, formerly known as GSC Partners, and are substantially owned by its management and employees; and our “investment adviser” and our “administrator” refer to GSCP (NJ), L.P. The information presented in this prospectus assumes, unless the context otherwise indicates, that the over-allotment option of the underwriters is not exercised.
 
The Company
 
GSC Investment Corp. is a newly-organized Maryland corporation that will operate as a non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Our investment objectives are to generate both current income and capital appreciation through debt and, to a lesser extent, equity investments, by primarily investing in first and second lien loans and mezzanine debt of private middle market companies, as well as select high yield bonds. Our operations will be externally managed and advised by our investment adviser, GSCP (NJ), L.P., pursuant to an investment management agreement. We intend to elect to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Code.
 
Prior to the pricing of this offering, we will enter into a portfolio acquisition agreement with GSC Partners CDO Fund III, Limited, a Cayman Islands exempted company (“CDO Fund III”), pursuant to which we will agree to purchase for cash a portfolio of approximately $181 million of debt investments that consist of first lien and second lien loans, senior secured bonds and unsecured bonds held by CDO Fund III (the “Portfolio”). As of February 16, 2007, the Portfolio consisted of approximately $191 million principal amount of debt. We intend to use the net proceeds of this offering to complete this acquisition promptly following the closing of this offering. At such time, we also expect to employ leverage by borrowing under a secured revolving credit facility to make additional investments that are consistent with our investment strategy. Over time we anticipate that senior secured and unsecured bonds will decrease as a percentage of our total assets as we add mezzanine debt and new first and second lien loan assets to the portfolio. See “—Liquidity” and “Business—Prospective investments—The Portfolio.”
 
In addition, GSC Group and/or its affiliates has contributed to us all of their general partner and limited partner interests, an indirect equity interest of approximately 6.24%, in CDO Fund III in exchange for common shares of GSC Investment LLC (our predecessor entity) and our investment adviser has assigned to us its rights and obligations as collateral manager of CDO Fund III in exchange for a payment of $_____. These common shares will be converted into shares of our common stock following our reorganization to a Maryland corporation prior to the completion of this offering (the “Contribution”). See “Contribution”.
 
Portfolio summary
 
We anticipate that our portfolio will be comprised primarily of investments in first and second lien loans, mezzanine debt and high yield debt issued by private companies, which will be sourced through a network of relationships with commercial finance companies and commercial and investment banks, as well as through our relationships with financial sponsors. The capital that we provide is generally used to fund buyouts, acquisitions, growth, recapitalizations, note purchases and other types of financing. First and second lien loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Mezzanine debt and high yield bonds are generally subordinated to senior loans and are generally unsecured, though approximately 47% of the high yield bonds in the initial portfolio are secured. However, there
 
1


can be no assurance that we will make investments in secured bonds to the same extent in the future. In some cases, we may also receive warrants or options in connection with our debt investments. We also anticipate, to a lesser extent, making equity investments in private middle market companies. Investments in warrants, options or other equity investments may be made in conjunction with loans we make to these companies. In this prospectus, we generally use the term “middle market” to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization.
 
We expect that the first and second lien loans will generally have stated terms of three to ten years and that the mezzanine debt will generally have stated terms of up to ten years, but that the expected average life of such first and second lien loans and mezzanine debt will generally be between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. We anticipate that substantially all of the investments held in our portfolio will have either a sub-investment grade rating by Moody’s Investors Service and/or Standard & Poor’s or will not be rated by any rating agency but we believe that if such investments were rated, they would be below investment grade. Debt securities rated below investment grade are commonly referred to as “junk bonds.”
 
While our primary focus will be to generate both current income and capital appreciation through investments in debt and, to a lesser extent, equity securities of private middle market companies, we intend to invest up to 30% of our assets in opportunistic investments identified by our investment adviser in order to seek to enhance returns to our stockholders. Opportunistic investments may include investments in distressed debt, debt and equity securities of public companies, credit default swaps, emerging market debt, or collateralized debt obligation (“CDO”) vehicles holding debt, equity or synthetic securities. As part of this 30%, we may also invest in debt of private middle market companies located outside of the United States. Given our primary investment focus on first and second lien loans, mezzanine debt and high yield bonds in private companies, we believe our opportunistic investments will allow us to supplement our core investments with other investments that are within GSC Group’s expertise that we believe offer attractive yields and/or the potential for capital appreciation.
 
About GSC Group
 
GSCP (NJ), L.P. is an investment adviser with approximately $22.2 billion of assets under management as of December 31, 2007.  GSC Group was founded in 1999 by Alfred C. Eckert III, its Chairman and Chief Executive Officer.  Its senior officers and advisers are in many cases long-time colleagues who have worked together extensively at other institutions, including Goldman, Sachs & Co., Greenwich Street Capital Partners and The Blackstone Group.  GSC Group specializes in credit-driven investing including corporate credit, distressed investing and real estate. GSC Group is privately owned and has over 170 employees with headquarters in New Jersey, and offices in New York, London and Los Angeles.
 
GSC Group operates in three main business lines: (i) the corporate credit group which is comprised of 28 investment professionals who manage approximately $8.0 billion of assets in leveraged loans, high yield bonds, mezzanine debt and derivative products with investments in more than 450 companies; (ii) the equity and distressed investing group which is comprised of 21 investment professionals who manage approximately $1.3 billion of assets in three control distressed debt funds and a long/short credit strategies hedge fund; and (iii) the real estate group which is comprised of 16 investment professionals managing $12.9 billion of assets, including a privately-held mortgage REIT (GSC Capital Corp.), various synthetic and hybrid collateralized debt obligation funds and a structured products hedge fund.
 
Our investment adviser
 
We will be externally managed and advised by our investment adviser, GSCP (NJ), L.P. Our Chairman Richard M. Hayden and CEO Thomas V. Inglesby have management responsibility for the corporate credit group and are officers of our investment adviser.  Mr. Hayden and Mr. Inglesby have combined experience of over 56 years and individually have experience of over 36 years and 20 years, respectively. Mr. Hayden and Mr. Inglesby will be supported by the 28 investment professionals within our investment adviser’s corporate credit group. Additionally,
 
2


the Fund will have access to GSC Group's 37 investment professionals in its equity and distressed investing group and its real estate group. Under our investment advisory and management agreement, we have agreed to pay our investment adviser an annual base management fee based on our total assets, as defined under the 1940 Act (other than cash and cash equivalents but including assets purchased with borrowed funds), and an incentive fee based on our performance. See “Management—Investment advisory and management agreement.” Our investment adviser, together with certain affiliates, does business as GSC Group.
 
Our investment adviser is responsible for administering our business activities and day-to-day operations and will use the resources of GSC Group to support our operations. We believe that our investment adviser will be able to utilize GSC Group’s current investment platform, resources and existing relationships with financial institutions, financial sponsors, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, we expect that the GSC Group investment platform will assist our investment adviser in analyzing and monitoring investments. In particular, these resources provide us with a wide variety of investment opportunities and access to information that assists us in making investment decisions across our targeted asset classes, which we believe provide us with a competitive advantage. Since GSC Group’s inception in 1999, it has been investing in first and second lien loans, high-yield bonds and mezzanine debt. In addition to having access to approximately 70 investment professionals employed by GSC Group, we will also have access to over 100 GSC Group administrative professionals who will provide assistance in accounting, legal compliance and investor relations.
 
Our relationship with our investment adviser and GSC Group
 
We intend to utilize the personnel, infrastructure, relationships and experience of GSC Group and our investment adviser to enhance the growth of our business. We currently have no employees and each of our executive officers is also an officer of GSC Group. As part of the Contribution, following completion of this offering GSC Group will own      shares of our common stock, which it will have received in exchange for its contribution to us of all of its interests in CDO Fund III. See “Contribution.” Upon completion of this offering, GSC Group will no longer have any continuing economic interest or affiliation with CDO Fund III.
 
We have entered into an investment advisory and management agreement with our investment adviser. The initial term of the investment advisory and management agreement will be for two years, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom are not “interested” directors as defined in the 1940 Act, and/or our stockholders. Pursuant to the investment advisory and management agreement, our investment adviser implements our business strategy on a day-to-day basis and performs certain services for us, under the direction of our board of directors. Our investment adviser is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.
 
Pursuant to our investment advisory and management agreement, our investment adviser has formed an investment committee to advise and consult with our investment adviser’s senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee will consist of members of GSC Group’s senior investment staff, including Thomas V. Inglesby, our Chief Executive Officer, Richard M. Hayden, our Chairman, Robert F. Cummings, Jr., Thomas J. Libassi and Daniel I. Castro, Jr. All of the members of this committee are senior officers in various divisions of GSC Group. Mr. Inglesby is Senior Managing Director of GSC Group. Mr. Hayden is Vice Chairman of GSC Group, head of the corporate credit group and a member of the GSC Group management committee. Mr. Cummings is Senior Managing Director of GSC Group, Chairman of the risk and conflicts committee, Chairman of the valuation committee and a member of the GSC Group management committee. Mr. Libassi is Senior Managing Director of GSC Group’s equity and distressed debt business unit. Mr. Castro is Managing Director of GSC Group’s real estate group and Chief Investment Officer of GSC Capital Corp. The investment committee will approve all investments in excess of $5 million made by the Company by unanimous consent. Along with the corporate credit group’s investment staff, the investment committee will actively monitor
 
3


investments in our portfolio. Sale recommendations made by the corporate credit group’s investment staff must be approved by three out of five investment committee members.
 
We will pay our investment adviser a fee for investment advisory and management services consisting of two components - a base management fee and an incentive fee. The base management fee will be calculated at an annual rate of 1.75% of our total assets which shall include assets purchased with borrowed funds but exclude cash or cash equivalents. As a result, our investment adviser will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.
 
In addition to a base fee, we will pay our investment adviser an incentive fee which will have two parts. First, we will pay our investment adviser our incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
 
 
·
no incentive fee in any calendar quarter in which our pre-incentive fee income does not exceed a fixed “hurdle rate” of 1.875% per quarter (7.5% annualized); and
 
 
·
20% of the amount of our pre-incentive fee net investment revenue, if any, that exceeds the “hurdle rate” in any given quarter.
 
Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies and any fees we are paid as collateral manager of CDO Fund III) earned during the calendar quarter, minus our operating expenses for the quarter.
 
The second part of the incentive fee will be determined and payable at the end of each calendar year, commencing with the calendar year ending December 31, 2007, and will equal 20% of our realized capital gains on a cumulative basis, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis. See “Management—Management fee and incentive fee.”
 
Pursuant to a separate administration agreement, our investment adviser, who also serves as our administrator, will furnish us with office facilities, equipment and clerical, bookkeeping and record keeping services. Under the administration agreement, our administrator will also perform, or oversee the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator will assist us in determining and publishing our net asset value, oversee the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversee the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the administration agreement will be equal to an amount based upon our allocable portion of our administrator’s overhead in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion will be based on the proportion that our total assets bears to the total assets administered or managed by our administrator. Under the administration agreement, our administrator will also provide managerial assistance, on our behalf, to those portfolio companies who accept our offer of assistance.
 
Our investment adviser will utilize the same, disciplined investment philosophy as that of GSC Group’s corporate credit group. GSC Group’s approach will seek to minimize risk by focusing on:
 
 
·
issuers that have a history of generating stable earnings and strong free cash flow;
 
 
·
industry leaders with sustainable market shares in attractive sectors;

4

 
 
·
issuers with reasonable price-to-cash flow multiples;
 
 
·
capital structures that provide appropriate terms and reasonable covenants;
 
 
·
issuers that have well constructed balance sheets;
 
 
·
management teams that are experienced and that hold meaningful equity ownership in the businesses that they operate;
 
 
·
industries in which GSC Group’s investment professionals historically have had deep investment experience and success;
 
 
·
macro competitive dynamics in the industry within which each company competes; and
 
 
·
adhering to diversification with regard to position sizes, industry groups and geography.
 
Market opportunity
 
We believe the environment for investing in private middle market companies is attractive for the following reasons:
 
 
·
middle market debt securities are attractive compared to more broadly syndicated debt securities because middle market debt securities generally have more conservative capital structures, tighter financial covenants, better security packages and higher yields;
 
 
·
established relationships create a high barrier to entry in the middle market financing business. Specifically, private middle market companies and their financial sponsors prefer to access capital from and maintain close and longstanding relationships with a small group of well-known capital providers;
 
 
·
many private middle market companies prefer to execute transactions with private capital providers, rather than execute high-yield bond transactions in the public markets, which may necessitate SEC compliance and reporting obligations;
 
 
·
the middle market debt segment is a highly fragmented portion of the leveraged finance market. We believe that many of the largest capital providers in the broader leveraged finance market choose not to participate in middle market lending because of a preference for larger, more liquid transactions; and
 
 
·
we expect continued strong leverage buyout activity from private equity firms who currently hold large pools of uninvested capital earmarked for acquisitions of private middle market companies. These private equity firms will continue to seek to leverage their investments by combining their equity capital with senior secured loans and mezzanine debt from other sources.
 
Competitive advantages
 
Although we have no prior operating history and our investment adviser, GSC Group, has no experience managing a BDC, we believe that through our relationship with GSC Group, we will enjoy several competitive advantages over other capital providers to private middle market companies.
 
 
·
GSC Group’s investment platform
 
GSC Group has a long history of strong performance across a broad range of asset classes and sectors. The senior investment professionals of GSC Group have extensive experience investing in leveraged loans, high-yield bonds, mezzanine debt and private equity.
 
5

 
 
·
Rapid deployment of offering proceeds
 
Shortly after the consummation of this offering, we intend to use the net proceeds to partially fund the purchase of the Portfolio. We believe that this rapid deployment of offering proceeds into these assets will provide potential for higher initial returns than cash or cash equivalents and distinguishes us from some of our potential competitors.
 
 
·
Experience sourcing and managing middle market loans
 
GSC Group has historically focused on investments in private middle market companies and we expect to benefit from this experience. Our investment adviser will use GSC Group’s extensive network of relationships with intermediaries focused on private middle market companies to attract well-positioned prospective portfolio company investments. Since 2003, the GSC Group corporate credit group has reviewed over 970 new middle market loan opportunities, approximately 300 of which were second lien loans. Of the loans reviewed, 285 were purchased, including 51 second lien loans. In addition, our investment adviser will work closely with the equity and distressed debt and European mezzanine groups, which oversee a portfolio of investments in over 45 companies, maintain an extensive network of relationships and possess valuable insights into industry trends.
 
 
·
Experienced management and investment committee
 
Thomas V. Inglesby, our Chief Executive Officer and Senior Managing Director of GSC Group, has over 20 years of middle market investing experience having managed leveraged loan, high-yield bond, mezzanine debt, distressed debt and private equity portfolios. In addition to Mr. Inglesby, our investment committee consists of Richard M. Hayden, Robert F. Cummings, Jr., Thomas J. Libassi and Daniel I. Castro, Jr. Mr. Hayden is Vice Chairman of GSC Group, head of the corporate credit group and a member of the GSC Group management committee. Mr. Hayden was previously with Goldman, Sachs & Co. from 1969 until 1999 and was elected a Partner in 1980. Mr. Cummings is Senior Managing Director of GSC Group, Chairman of the risk and conflicts committee, Chairman of the valuation committee and a member of the GSC Group management committee. Mr. Cummings was previously with Goldman, Sachs & Co. from 1973 to 1998. Mr. Libassi is Senior Managing Director of GSC Group in the equity and distressed investing group and has 23 years of experience managing high-yield and distressed debt portfolios. Mr. Castro is Managing Director of GSC Group in the real estate group. Mr. Castro has over 24 years of experience investing in debt products and was, until 2004, on the Institutional Investor All-American Fixed Income Research Team every year since its inception in 1992.
 
 
·
Diversified credit-oriented investment strategy
 
Through the use of GSC Group’s credit-based investment approach which relies on detailed business and financial analysis, we will seek to minimize principal loss while maximizing risk-adjusted returns. We believe that our affiliation with GSC Group offers an attractive opportunity to invest in middle market first and second lien loans and mezzanine debt.
 
 
·
Utilizing our broad transaction sourcing network and relationships with middle market lenders
 
We intend to capitalize on the diverse deal-sourcing opportunities that we believe GSC Group brings to us as a result of its investment experience in our targeted asset classes, track record and extensive network of contacts in the financial community, including financial sponsors, merger & acquisition advisory firms, investment banks, capital markets desks, lenders and other financial intermediaries and sponsors. In addition, through its other activities, GSC Group is regularly in contact with portfolio company management teams that can help provide additional insights on a wide variety of companies and industries.
 
In particular, GSC Group has developed its middle market franchise via extensive relationships with middle market loan originators. These relationships have been developed over the past 15 years at multiple levels of management within GSC Group and have resulted in GSC Group’s ability to generate a significant amount of middle market opportunities, including first and second lien loans and mezzanine debt securities. We believe that these relationships will continue to provide GSC Group with access to middle market debt securities.
 
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·
Extensive industry focus
 
Since its founding in 1999, GSC Group has invested in over 950 companies and over this time has developed long-term relationships with management teams and management consultants. We expect that the experience of GSC Group’s investment professionals in investing across the aerospace, automotive, broadcasting/cable, consumer products, environmental services, technology, telecom and diversified manufacturing industries, throughout various stages of the economic cycle, will provide our investment adviser with access to ongoing market insights and favorable investment opportunities.
 
 
·
Disciplined investment process
 
In making its investment decisions, our investment adviser intends to apply GSC Group’s rigorous and consistent investment process. Upon receiving an investment opportunity, GSC Group’s corporate credit group performs an initial screening of the potential investment which includes an analysis of the company, industry, financial sponsor and deal structure. If the investment is suitable for further analysis, GSC Group’s investment staff conducts a more intensive analysis which includes in-depth research on competitive dynamics in the industry, customer and supplier research, cost and growth drivers, cash flow characteristics, management capability, balance sheet strength, covenant analysis’ and a distressed recovery analysis. Our investment approach will emphasize capital preservation and minimization of downside risk.
 
 
·
Flexible transaction structuring
 
We expect to be flexible in structuring investments, the types of securities in which we invest and the terms associated with such investments. The principals of GSC Group have extensive experience in a wide variety of securities for leveraged companies with a diverse set of terms and conditions. This approach and experience should enable our investment adviser to identify attractive investment opportunities throughout various economic cycles and across a company’s capital structure so that we can make investments consistent with our stated objectives.
 
Access to GSC Group’s infrastructure
 
We will have access to GSC Group’s finance and administration function which addresses legal, compliance, and operational matters, and promulgates and administers comprehensive policies and procedures regarding important investment adviser matters, including portfolio management, trading allocation and execution, securities valuation, risk management and information technologies in connection with the performance of our investment adviser’s duties hereunder. We believe that the finance and administrative infrastructure established by GSC Group is an important component of a complex investment vehicle such as a BDC. These systems support, and are integrated with, our portfolio management functions. GSC Group has over 170 employees, including over 70 investment professionals, who will be available to support our operations.
 
We will also have the benefit of the experience of GSC Group’s senior professionals and members of its advisory board, many of whom have served on public and private company boards and/or served in other senior management roles. We believe that this experience will also be valuable to our investment adviser and to us.
 
Initial investment
 
Prior to the pricing of this offering we will enter into a portfolio acquisition agreement that will grant us the exclusive right to purchase certain investments for approximately $181 million in cash (subject to certain adjustments), plus accrued interest on the assets in the Portfolio. The Portfolio, which had a weighted average yield of 10.9% as of February 16, 2007, contains, based on outstanding principal amount as of February 16, 2007, 34.5% first lien loans, 27.1% second lien loans, 18.0% secured bonds and 20.4% unsecured bonds. We calculated the weighted average yield of the portfolio as of a specific date by determining the interest rate and the prevailing market value of each investment. We assumed either the fixed coupon of each fixed-rate investment or the current interest rate of floating rate investments. To calculate the current interest rate of the floating rate investment, we added the applicable margin of each floating rate investment to 3-month LIBOR. Prior to the execution of the
 
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definitive portfolio acquisition agreement there may be limited changes to the Portfolio reflected in the preliminary prospectus as a result of market pricing, credit quality changes or redemptions. Any changes to the Portfolio will be reflected in our final prospectus. The Portfolio satisfies our investment objectives but we anticipate that over time senior secured and unsecured bonds will decrease as a percentage of our total assets as we add mezzanine loans and new first and second lien loan assets to the Portfolio. Below is a summary of the Portfolio as of February 16, 2007:
 
 
Estimated Fair Market Value
($000s)
 
Percent
of Total
(%)
 
Weighted
Avg. Yield(1)
(%)
 
Weighted Avg. Maturity
(Years)
First Lien Loans
62,474
 
34.5 
 
  9.5
 
4.5
Second Lien Loans
49,086
 
27.1
 
11.7
 
5.1
Senior Secured Bonds
32,701
 
18.0 
 
12.3
 
2.1
Unsecured Bonds
37,042
 
20.4
 
10.9
 
3.6
 
181,303  
 
100.0  
 
10.9
 
4.1
 

(1) 
For those securities which have a floating interest rate, we have assumed LIBOR equal to 5.36% for the calculation, which was LIBOR as of February 16, 2007.
 
This Portfolio was managed by GSC Group’s corporate credit group. Our board of directors will utilize the services of Valuation Research Corporation (“VRC”) an independent valuation firm, to aid it in determining the fair value of the investments in the Portfolio. The terms of the portfolio acquisition agreement provide for a final valuation of the investments and a corresponding price adjustment prior to the closing of the purchase of the Portfolio. The purchase price will be the sum of the valuations ascribed to each asset in the Portfolio as determined by our board of directors. Our acquisition of the Portfolio from CDO Fund III may present conflicts of interest with the other equity investors of CDO Fund III. The fair value determined by our board of directors may differ materially from the values that would have been used if a ready market for these investments existed which could result in the other equity investors realizing a lower value on their residual interest. Consents are generally not required with respect to the transfer or assignment of the investments in the Portfolio, except in the case of a limited number of the Portfolio assets, which consents, we expect to receive prior to the purchase of the Portfolio. Our board of directors will consider a number of factors when it reviews and approves this transaction including the fact that we have a material interest in acquiring suitable assets rapidly following our offering in order to generate income for our investors. We intend to use the proceeds of this offering to fund the purchase of the Portfolio as soon as practicable after the closing of this offering. See “Liquidity” and “Business—Prospective investments—The Portfolio.”
 
The portfolio acquisition agreement will be subject to the approval of our board of directors (including a majority of the non-interested directors) and a determination that the terms thereof, including the consideration to be paid, are reasonable and fair to our stockholders and in, what our board of directors reasonably believes to be, our best interests, do not involve overreaching by any party, and are consistent with our investment policies.
 
Our ability to purchase the Portfolio is conditioned upon the successful defeasance (i.e., retirement) of the secured notes of CDO Fund III, which is expected to occur simultaneously with the closing of this offering. Under the indenture governing the secured notes issued by CDO Fund III, CDO Fund III is required to place on deposit with the indenture trustee, an aggregate of $496 million, which is an amount sufficient to allow the defeasance of the secured notes issued by CDO Fund III under the indenture. CDO Fund III expects to fund the required deposit amount from its additional cash, together with the issuance of a new class of notes in the aggregate amount of $250 million (the “CDO Fund III Notes”). We expect that the CDO Fund III Notes will be issued at the closing of this offering and will be secured under the existing indenture by a general security interest in all the assets of CDO III. If sufficient funding from the issuance of the CDO Fund III Notes is not available for any reason, CDO Fund III will need to arrange alternative financing to fund the required deposit in order to retire the secured notes and thereby allow the Portfolio to be delivered to us under the portfolio acquisition agreement and CDO Fund III may not be able to arrange such alternative financing.
 
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The sale of the CDO Fund III assets (including the Portfolio to be purchased by the Company) will result in cash proceeds for the equity investors in CDO Fund III (including the Company). The Company anticipates selling the CDO Fund III assets not included the Portfolio to dealers who make a market in these asset types and that such sales will be affected at the current market value of those assets at the time of the sale. See “Contribution”. The assets that are not included in the Portfolio consist of leveraged loans and high yield bonds. There can be no assurance that the sales will result in gains. As a result of the Contribution, due to its interests in CDO Fund III contributed by GSC Group and/or its affiliates, the Company also expects to receive 77% of an incentive fee of 20% of the profits (after payment of the capital contribution and an internal rate of return of 12% per year) of such third party equity investors. In addition, we expect to receive fees in the amount of $      due to our role as collateral manager of CDO Fund III. See “Contribution.”
 
In addition to the acquisition of this Portfolio, we expect to make additional investments in first lien loans, second lien loans, mezzanine debt and high yield bonds issued by private companies. We currently expect that we will use borrowed funds to make any such additional investments. The consummation of any of these additional investments depends upon the completion of this offering and our ability to obtain financing and, among other things, satisfactory completion of our due diligence investigation of the prospective portfolio companies, our acceptance of the terms and structures of such investment, the execution and delivery of satisfactory documentation and the receipt of any necessary consents. Any such investments will be made in accordance with our investment policies and procedures. We cannot assure you that we will make any of these investments.
 
Operating and Regulatory Structure
 
Our investment activities will be managed by our investment adviser, under the direction of our board of directors, a majority of whom are independent of our Company, our investment adviser, our underwriters and their respective affiliates.
 
As a BDC, we will be required to comply with certain regulatory requirements. For example, while we are permitted to finance investments using leverage, which may include the issuance of shares of preferred stock, commercial paper or notes and other borrowings, our ability to use leverage will be limited in certain significant respects. See “Regulation.” Any decision to use leverage will depend upon our assessment of the attractiveness of available investment opportunities in relation to the costs and perceived risks of such leverage. The use of leverage to finance investments creates certain risks and conflicts of interest. See “Risk Factors—Risks related to our business—If we incur indebtedness or issue senior securities we will be exposed to additional risks, including the typical risks associated with leverage” and “Risk Factors—Risks related to our business—We will pay the investment adviser incentive compensation based on our net investment income and realized capital gains, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our investment adviser also controls the timing of when capital gains and losses will be realized on our investments, which may create an incentive to realize capital gains or losses to maximize its compensation. Our board of directors will monitor our performance and the timing of when capital gains and losses are realized.”
 
Also, as a BDC, we will be generally prohibited from acquiring assets other than “qualifying assets” unless, after giving effect to the acquisition, at least 70% of our total assets are qualifying assets. Qualifying assets generally include securities of “eligible portfolio companies,” cash, cash equivalents, U.S. government securities and high-quality debt instruments maturing in one year or less from the time of investment. The SEC has adopted a new rule under the 1940 Act which defines an “eligible portfolio company” to include all private domestic operating companies and public domestic operating companies whose securities are not listed on a national securities exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ Global Market). Public domestic operating companies whose securities are quoted on the over-the-counter bulletin board and through Pink Sheets LLC are not listed on a national securities exchange, and therefore are eligible portfolio companies under the new rule. In addition, the SEC is considering comments on alternatives for a new rule that would expand the definition of eligible portfolio companies to include one of the following ceilings: publicly-traded companies with a market capitalization of less than $250 million,
 
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publicly-traded companies with a market capitalization of less than $150 million or publicly-traded companies with a public float of less than $75 million. The SEC has published these alternatives for comment, and we cannot be certain which alternative it will choose to adopt as the new rule after the comment period has ended. However, we would not need to adjust our investment objective and policies if such proposed rule is not adopted. See “Regulation.” We may invest up to 30% of our portfolio in opportunistic investments that our investment adviser identifies in order to seek to enhance returns to stockholders.
 
We intend to elect to be treated for U.S. federal income tax purposes as a RIC. In order to be treated as a RIC, we must satisfy, among other things, certain income, asset diversification and distribution requirements. See “Material U.S. Federal Income Tax Considerations.”
 
Resolution of potential conflicts of interest; equitable allocation of investment opportunities
 
Subject to the 1940 Act restrictions on co-investments with affiliates, GSC Group will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies and other relevant factors, subject to the exception that, in accordance with GSC Group’s conflict of interest and allocation policies, we might not participate in each individual opportunity but will, on an overall basis, be entitled to equitably participate with GSC Group’s other funds or other clients.
 
We anticipate that we will be GSC Group’s principal investment vehicle for non-distressed second lien loans and mezzanine debt of U.S. middle market entities. Although existing and future investment vehicles managed or to be managed by GSC Group invest or may invest in mezzanine loans and second lien loans, none of these investment vehicles target non-distressed domestic second lien and mezzanine loans as the core of their portfolios. For example, while funds managed by GSC Group’s equity and distressed debt group may purchase second lien loans and mezzanine debt of private middle market companies, these funds will typically be interested in these assets in distressed situations, whereas we generally will seek to hold performing debt. Likewise, while funds managed by GSC Group’s real estate group may purchase second lien loans and mezzanine debt as an aspect of their investment strategies, these funds are largely focused on asset-backed and mortgage-backed loans and debt, not on corporate debt of the type we target. Finally, due to the high amounts of leverage deployed by various CDO funds managed by GSC Group, these funds tend to target first lien loans, while second lien and mezzanine loans are a secondary part of the strategy.
 
To the extent that we do compete with any of GSC Group’s other clients for a particular investment opportunity, our investment adviser will allocate the investment opportunity across the funds for which the investment is appropriate based on its internal conflict of interest and allocation policies consistent with the requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), subject further to the 1940 Act restrictions on co-investments with affiliates and also giving effect to priorities that may be enjoyed from time to time by one or more funds based on their investment mandate or guidelines or any right of first review agreed to from time to time by GSC Group. Currently, GSC European Mezzanine Fund II, L.P. has a priority on investments in mezzanine securities of issuers located primarily in Europe. In addition, GSC Acquisition Company has recently entered into a business opportunity right of first review agreement which provides that it will have a right of first review prior to any other fund managed by GSC Group with respect to business combination opportunities with an enterprise value of $175 million or more until the earlier of it consummating an initial business combination or its liquidation. Subject to the foregoing, GSC Group’s allocation policies are intended to ensure that we may generally share equitably with other GSC Group-managed investment vehicles in investment opportunities, particularly those involving a security with limited supply or involving differing classes of securities of the same issuer, that may be suitable for us and such other investment vehicles.
 
GSC Group has historically managed investment vehicles with similar or overlapping investment strategies and has a conflict-resolution policy in place that will also address the co-investment restrictions under the 1940 Act. The policy is intended to ensure that we comply with the 1940 Act restrictions on transactions with affiliates. These restrictions will significantly impact our ability to co-invest with other GSC Group’s funds. While the 1940 Act generally prohibits all “joint transactions” between entities that share a common investment adviser, the staff of the
 
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SEC has granted no-action relief to an investment adviser permitting purchases of a single class of privately-placed securities, provided that the investment adviser negotiates no term other than price and certain other conditions are satisfied. As a result, we only expect to co-invest on a concurrent basis with GSC Group’s funds when each fund will own the same securities of the issuer. If opportunities arise that would otherwise be appropriate for us and for one or more of GSC Group’s other funds to invest in different securities of the same issuer, our investment adviser will need to decide whether we or the other funds will proceed with the investment. See “Regulation—Co-investment.”
 
GSC Group’s allocation procedures are designed to allocate investment opportunities among the investment vehicles of GSC Group in a manner consistent with its obligations under the Advisers Act.  If two or more investment vehicles with similar investment strategies are still in their investment periods, an available investment opportunity will be allocated as described below, subject to any provisions governing allocations of investment opportunities in the relevant organizational documents. As an initial step, our investment adviser will determine whether a particular investment opportunity is an appropriate investment for us and its other clients and typically will determine the amount that would be appropriate for each client by considering, among other things, the following criteria: (1) the investment guidelines and/or restrictions set forth in the applicable organizational documents; (2) the risk and return profile of the client entity; (3) the suitability/priority of a particular investment for the client entity; (4) if applicable, the target position size of the investment for the client entity; and (5) the level of available cash for investment with respect to the particular client entity. If there is an insufficient amount of an opportunity to satisfy the needs of all participants, the investment opportunity will generally be allocated pro-rata based on the initial investment amounts. See “Risk Factors—There are conflicts of interest in our relationship with our investment adviser and/or GSC Group, which could result in decisions that are not in the best interests of our stockholders.
 
Liquidity
 
As a BDC, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such borrowing. The amount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market conditions and other factors at the time of any proposed borrowing.
 
As of the date of this prospectus, we have no outstanding indebtedness. However, we expect, in the future, to borrow from and issue senior debt securities to, banks and other lenders, including pursuant to a securitized revolving credit facility which we expect to enter into following the completion of this offering. We expect to raise additional funds, through public and private offerings of our securities and additional borrowings, which will be used to purchase additional assets. There can be no assurance that we will be able to obtain borrowing on terms acceptable to us or at all, or that we will be able to borrow the amounts anticipated.
 
Risk factors
 
Investing in this offering involves risks. The following is a summary of certain risks that you should carefully consider before investing in our common stock. In addition, see “Risk Factors” beginning on page 21 for a more detailed discussion of these risk factors.
 
Risks related to our business
 
 
·
We are a newly-incorporated Maryland corporation with no operating history.
 
 
·
We may not be able to replicate GSC Group’s historical performance.
 
 
·
We may compete with investment vehicles of GSC Group for access to GSC Group.

11

 
 
·
We are dependent upon our investment adviser’s key personnel for our future success and upon their access to GSC Group investment professionals.
 
 
·
Our financial condition and results of operation will depend on our ability to manage future growth effectively.
 
 
·
Our ability to grow will depend on our ability to raise capital.
 
 
·
If we incur indebtedness or issue senior securities we will be exposed to additional risks, including the typical risks associated with leverage.
 
 
·
We will pay the investment adviser a base management fee based on our total assets, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our board of directors will monitor the amount of leverage we incur.
 
 
·
We will pay the investment adviser incentive compensation based on our net investment income and realized capital gains, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our investment adviser also controls the timing of when capital gains and losses will be realized on our investments, which may create an incentive to realize capital gains or losses to maximize its compensation. Our board of directors will monitor our performance and the timing of when capital gains and losses are realized.
 
 
·
We will be exposed to risks associated with changes in interest rates.
 
 
·
Many of our portfolio investments will be recorded at fair value as determined in good faith by our board of directors. As a result, there will be uncertainty as to the value of our portfolio investments.
 
 
·
We may experience fluctuations in our quarterly results.
 
 
·
There are conflicts of interest in our relationship with our investment adviser and/or GSC Group, which could result in decisions that are not in the best interests of our stockholders.
 
 
·
Our investment adviser’s liability will be limited under the investment advisory and management agreement, and we will indemnify our investment adviser against certain liabilities, which may lead our investment adviser to act in a riskier manner on our behalf than it would when acting for its own account.
 
 
·
We may be obligated to pay our investment adviser incentive compensation even if we incur a net loss, regardless of the market value of our common stock.
 
 
·
Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
 
 
·
We operate in a highly competitive market for investment opportunities.
 
 
·
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.
 
Risks related to our operation as a BDC
 
 
·
Our investment adviser and the members of its investment committee have no experience managing a BDC.
 
 
·
A failure on our part to maintain our qualification as a BDC would significantly reduce our operating flexibility.
 

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·
We will be subject to corporate-level income tax if we fail to qualify as a RIC.
 
 
·
There is a risk that you may not receive distributions or that our distributions may not grow over time.
 
 
·
As a BDC, we may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.
 
 
·
Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.
 
 
·
If our primary investments are deemed not to be qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business plan.
 
 
·
Our ability to enter into transactions with our affiliates will be restricted.
 
 
·
Our common stock may trade at a discount to our net asset value per share.
 
 
·
The floating interest rate features of any indebtedness we incur could adversely affect us if interest rates rise.
 
Risks related to our investments
 
 
·
Our investments may be risky, and you could lose all or part of your investment.
 
 
·
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
 
 
·
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
 
 
·
An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies and a greater vulnerability to economic downturns.
 
 
·
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
 
 
·
Investments in equity securities involve a substantial degree of risk.
 
 
·
Our incentive fee may induce our investment adviser to make certain investments, including speculative investments.
 
 
·
Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.
 
 
·
We may expose ourselves to risks if we engage in hedging transactions.
 
 
·
The lack of liquidity in our investments may adversely affect our business.
 
 
·
Other than the agreement relating to the purchase of the Portfolio, we have not entered into any binding agreements with respect to any portfolio company investments.
 
 
·
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

 
·
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
 
13

 
Risks related to this offering
 
 
·
An active trading market for our common stock may not develop.
 
 
·
Investing in our common stock may involve an above average degree of risk.
 
 
·
Investing in non-traded companies may be riskier than investing in publicly traded companies due to a lack of available public information.
 
 
·
The debt securities in which we invest are subject to credit risk and prepayment risk.
 
 
·
We may allocate the net proceeds from this offering in ways with which you may not agree.
 
 
·
Investors in this offering will suffer immediate dilution upon the closing of this offering.
 
 
·
We may sell additional shares of common stock in the future, which may dilute existing stockholders’ interests in us or cause the market price of our common stock to decline.
 
 
·
The market price of our common stock may fluctuate significantly.
 
 
·
Provisions of our governing documents and the Maryland General Corporation Law could deter takeover attempts and have an adverse impact on the price of our common stock.
 
Our corporate information
 
Our corporate offices are located at 12 East 49th Street, Suite 3200, New York, New York 10017. Our telephone number is (212) 884-6200.
 
14


THE OFFERING
 
Common stock offered by us
          shares of our common stock, $0.0001 par value per share (excluding           shares issuable pursuant to the option to purchase additional shares granted to the underwriters at $        per share through a group of underwriters led by Citigroup Global Markets Inc. and J.P. Morgan Securities Inc.).
   
Common stock outstanding after this offering
          shares (excluding           shares of our common stock issuable pursuant to the option to purchase additional shares granted to the underwriters).
   
Use of Proceeds
We expect to use all of the net proceeds from this offering to fund the initial investments described under “Business—Prospective investments—The Portfolio”. See “Use of Proceeds.”
   
Listing
Our common stock has no history of public trading. We have applied for listing of our common stock on the New York Stock Exchange under the symbol “GNV”, subject to official notice of issuance.
   
Trading at a Discount
Common stock of closed-end investment companies, including BDCs, frequently trade at discounts to net asset value and our common stock may also be discounted in the market. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade above, at or below our net asset value.
   
Taxation
We intend to elect to qualify as a RIC for U.S. federal income tax purposes. As a RIC, we generally will not be subject to U.S. federal income tax on our net taxable income that is distributed to stockholders. To qualify as a RIC we must derive at least 90% of our annual gross income from certain sources, meet certain asset diversification requirements and distribute to stockholders at least 90% of our net taxable income (which includes, among other items, interest, dividends, the excess of any net short-term capital gains over net long-term capital losses and other taxable income other than net capital gains). See “Material U.S. Federal Income Tax Considerations.”
   
Distributions
We intend to make quarterly distributions to our stockholders out of assets legally available for distribution. Our quarterly distributions, if any, will be determined by our board of directors, but in order to maintain our qualification as a RIC, we must distribute at least 90% of our net taxable income each year.
 
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Anti-takeover provisions
Our board of directors will be divided into three classes of directors serving staggered three-year terms. This structure is intended to provide us with a greater likelihood of continuity of management, which may be necessary for us to realize the full value of our investments. A staggered board of directors also may serve to deter hostile takeovers or proxy contests, as may certain provisions of Maryland law and our governing documents. See “Description of Our Common Stock—Provisions of our governing documents and the Maryland General Corporation Law.”
   
Leverage
We intend to borrow funds to make additional investments. We expect to use this practice, which is known as “leverage,” to attempt to increase returns to our stockholders, but it involves significant risks. See “Risk Factors,” “Obligations and Indebtedness” and “Regulation—Indebtedness and senior securities.” As a BDC, under the 1940 Act, with certain limited exceptions, we will only be allowed to borrow amounts such that our asset coverage (calculated on a consolidated basis), as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market conditions and other factors at the time of any proposed borrowing.
   
Management arrangements
GSCP (NJ), L.P. will serve as our investment adviser and our administrator. For a description of GSCP (NJ), L.P., GSC Group and our contractual arrangements with these companies, see “Management—Investment advisory and management agreement,” and “Management—Administration agreement.”
   
Custodian
U.S. Bank National Association, 401 S. Tryson Street, 12th Floor, Charlotte, NC 28288
   
Transfer Agent
American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 10038
   
Dividend Reinvestment Plan
We have adopted a dividend reinvestment plan through which cash dividends are automatically reinvested in additional shares of our common stock, unless a stockholder opts out of the plan and elects to receive cash. Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election. See “Dividend Reinvestment Plan.”
   
Risk Factors
Investing in our common stock involves certain risks relating to our structure and our investment objective that you should consider before deciding whether to invest in our common stock. See “Risk Factors” for a discussion of
 
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factors you should carefully consider before deciding whether to invest in shares of our common stock.
   
Additional Information
After completion of this offering, our common stock will be registered under the Exchange Act, and we will be required to file reports, proxy statements and other information with the SEC. This information will be will be available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, at http://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, that file documents electronically with the SEC.

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FEES AND EXPENSES
 
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly and estimated what our annual expenses would be, stated as percentages of net assets attributable to common stock. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us” or “GSC Investment Corp.,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in GSC Investment Corp.
 
Stockholder transaction expenses (as a percentage of offering price):
 
Sales load paid
7.00%
 (1)
Offering expenses
0.80%
 (2)
Dividend reinvestment plan expenses
None
 (3)
Total stockholder transaction expenses paid
7.80%
 
   
Annual expenses (as a percentage of net assets attributable to common stock):
 
Management fees
2.81%
 (4)
Incentive fees payable under the investment advisory and management agreement (20% of adjusted net investment income, in excess of hurdle rate and 20% of realized capital gains)
0%
 (5)
Interest payments on borrowed funds
3.87%
 (4)
Other expenses
1.51%
 (6)
 
 
Total annual expenses
8.20%
 (7)

Example
 
The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed a 7% sales load, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above.
 
   
1 year
 
3 years
 
5 years
 
10 years
 
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(8)
 
$
140
 
$
261
 
$
382
 
$
688
 
 

(1)
The underwriters’ discounts and commissions with respect to common stock sold in this offering, which are one-time fees paid by us to the underwriter in connection with this offering, are the only sales load paid in connection with this offering.
   
(2)
Amount reflects estimated unreimbursed offering expenses of approximately $1,615,000.
   
(3)
The expenses associated with the administration of our dividend reinvestment plan are included in “Other expenses.” The participants in the dividend reinvestment plan will pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see “Dividend Reinvestment Plan.”
   
(4)
“Total annual expenses” is presented as a percentage of net assets attributable to common stock. This percentage is higher than it would be if we had not incurred leverage. Money that we borrow, if any, is used to leverage our net assets and increase our total assets. Because holders of common shares bear all these expenses, the SEC requires that the “total annual expenses” percentage be calculated as a percentage of net assets attributable to our common stock, rather than the total assets which include assets that have been funded with borrowed money.

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We do not expect to incur significant leverage or to pay significant interest in respect thereof until we have outstanding borrowings under a securitized revolving credit facility which we expect to enter into following the completion of this offering. “Interest payments on borrowed funds” represents an estimate of our annual interest expense based on payments assumed to be made under this credit facility.
   
 
Our management fee is 1.75% of our total assets other than cash and cash equivalents. For the purposes of this table, we have assumed that (i) we maintain no cash or cash equivalents; (ii) we incurred indebtedness for investment purposes in an amount equal to 36.0% of our total assets; and (iii) the anticipated interest rate on the amount borrowed is 6.37%. See “Management—Investment advisory and management agreement.”
   
(5)
We expect to fully invest the net proceeds from this offering upon the closing of this offering and may have capital gains and interest income that could result in the payment of an incentive fee to our investment adviser in the first year after completion of this offering. However, the incentive fee payable to our investment adviser is based on our performance and will not be paid unless we achieve certain goals. As we cannot predict whether we will meet the necessary performance targets, we have assumed an incentive fee of 0% in this chart.
   
 
The incentive fee consists of two parts:
   
 
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income, expressed as a rate of return on the value of the net assets at the end of the immediately preceding quarter (including interest that is accrued but not yet received in cash), that exceeds a 1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our investment adviser receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Amounts received as a return of capital will not be included in calculating this portion of the incentive fee. Since the hurdle rate is based on net assets, a return of less than the hurdle rate on total assets may still result in an incentive fee.
   
 
The second, payable at the end of each calendar year ending on or after December 31, 2007, equals 20% of our net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in each case on a cumulative basis, less the aggregate amount of capital gains incentive fees paid to the investment adviser through such date. See “Management—Management incentive fee.”
   
 
The calculation of the incentive fee will commence as of the date on which we elect to become a BDC and will be based on the acquisition cost to the Company of assets acquired through the Contribution and the purchase of the Portfolio.
   
 
We will defer actual cash payment of any incentive fee earned by our investment adviser if, during the most recent four full calendar quarter period ending on or prior to the date such payment is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) is less than 7.5% of our net assets at the beginning of such period. Such payments will only be made at such time as the foregoing conditions are satisfied. These calculations will be appropriately pro rated during the first three calendar quarters following the closing of this offering and will be adjusted for any share issuances or repurchases.
   
 
See “Management—Investment advisory and management agreement.”
   
(6)
Includes estimated organizational expenses of $300,000 (which are non-recurring) and our operating expenses. In addition, “other expenses” includes our estimated overhead expenses, including payments under the administration agreement based on our projected allocable portion of overhead and other expenses incurred by our administrator in performing its obligations under the administration agreement. See “Management—Administration agreement.”
   
(7)
While the Company does not have any current plans to issue preferred stock or other senior securities, if the Company does so in the future, such issuance will be consistent with the 1940 Act.
 
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(8)
The above illustration assumes that we will not realize any capital gains which equals all realized capital gains less the sum of (i) all realized capital losses and (ii) unrealized capital depreciation.
 
 
This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
 
The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC for registered investment companies, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher.
 
While the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.
 
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RISK FACTORS
 
Before you invest in our common stock, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other in formation included in this prospectus, before you decide whether to make an investment in our common stock. The known material risks of an investment in the Company are set out below. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the value of our common stock could decline, and you may lose all or part of your investment.
 
Risks related to our business
 
We are a newly-incorporated Maryland corporation with no operating history.
 
We were incorporated in      2007 and have not yet commenced our operations. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially.
 
We may not be able to replicate GSC Group’s historical performance.
 
Our primary focus in making investments will differ from those of other private funds that are or have been managed by GSC Group’s investment professionals. Further, our investors are not acquiring an interest in other GSC Group funds. Any investment opportunity will be subject to, among other things, regulatory and independent board member approvals, the receipt of which, if sought, cannot be assured. Accordingly, we cannot assure you that we will replicate GSC Group’s historical performance, and we caution you that our investment returns could be substantially lower than the returns achieved by other GSC Group funds.
 
We may compete with investment vehicles of GSC Group for access to GSC Group.
 
Our investment adviser and its affiliates have sponsored and currently manage other investment vehicles with an investment focus that overlaps with our focus, and may in the future sponsor or manage additional investment vehicles with an overlapping focus to ours, which, in each case, could result in us competing for access to the benefits that we expect our relationship with our investment adviser to provide to us.
 
We are dependent upon our investment adviser’s key personnel for our future success and upon their access to GSC Group investment professionals.
 
We will depend on the diligence, skill and network of business contacts of the members of our investment adviser’s investment committee. We will also depend, to a significant extent, on our investment adviser’s access to the investment professionals of GSC Group and the information and deal flow generated by GSC Group’s investment professionals in the course of their investment and portfolio management activities. Our future success will depend on the continued service of our investment adviser’s investment committee. The departure of any of the members of our investment adviser’s investment committee, or of a significant number of the investment professionals or partners of GSC Group, could have a material adverse effect on our ability to achieve our investment objectives. In addition, we cannot assure you that our investment adviser will remain our investment adviser or that we will continue to have access to GSC Group’s investment professionals or its information and deal flow.
 
Our financial condition and results of operation will depend on our ability to manage future growth effectively.
 
Our ability to achieve our investment objectives will depend on our ability to acquire suitable investments and monitor and administer those investments, which will depend, in turn, on our investment adviser’s ability to identify, invest in and monitor companies that meet our investment criteria.
 
Accomplishing this result on a cost-effective basis will be largely a function of our investment adviser’s structuring of the investment process and its ability to provide competent, attentive and efficient services to us. Our
 
21


executive officers and the members of our investment adviser will have substantial responsibilities in connection with their roles at GSC Group and with the other GSC Group funds as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide managerial assistance to our portfolio companies on behalf of our administrator. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, we and our investment adviser will need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will contribute to the work of the investment adviser. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.
 
Our ability to grow will depend on our ability to raise capital.
 
We will need to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.
 
If we incur indebtedness or issue senior securities we will be exposed to additional risks, including the typical risks associated with leverage.
 
As of the date of this prospectus, we have no outstanding indebtedness. However, we expect, in the future, to borrow from and issue senior debt securities to, banks and other lenders, including pursuant to a securitized revolving credit facility which we expect to enter into following completion of this offering. See “Obligations and Indebtedness.”
 
With certain limited exceptions, once we become a BDC we will only be allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. The amount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market conditions and other factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations of stockholders, including:
 
 
·
There is a likelihood of greater volatility of net asset value and market price of our common stock than a comparable portfolio without leverage.
 
 
·
We will be exposed to increased risk of loss if we incur debt or issue senior securities to finance investments because a decrease in the value of our investments would have a greater negative impact on our returns and therefore the value of our common stock than if we did not use leverage.
 
 
·
It is likely that such debt or senior securities will be governed by an instrument containing covenants restricting our operating flexibility. These covenants may impose asset coverage or investment portfolio composition requirements that are more stringent than those imposed by the 1940 Act and could require us to liquidate investments at an inopportune time.
 
 
·
We, and indirectly our stockholders, will bear the cost of leverage, including issuance and servicing costs.
 
 
·
Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock (although the common stock issuable upon conversion or exchange of such securities will have the same rights, preferences and privileges as our outstanding common stock). As a BDC, we are required to receive, among other things, shareholder approval prior to an issuance of securities convertible into voting securities.
 
 
·
Lenders will have fixed dollar claims on our assets that are superior to the claims of our shareholders, as a result of which lenders will be able to receive proceeds available in the case of our liquidation before any proceeds are distributed to our shareholders.

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Any requirement that we sell assets at a loss to redeem or pay interest or dividends on any leverage or for other reasons would reduce our net asset value and also make it difficult for the net asset value to recover. Our investment adviser and our board of directors in their best judgment nevertheless may determine to use leverage if they expect that the benefits to our stockholders of maintaining the leveraged position will outweigh the risks.
 
We will pay the investment adviser a base management fee based on our total assets, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our board of directors will monitor the amount of leverage we incur.
 
We will pay the investment adviser a quarterly base management fee based on the value of our total assets (including any assets acquired with leverage). Accordingly, the investment adviser will have an economic incentive to increase our leverage. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we will incur. If our leverage is increased, we will be exposed to increased risk of loss, bear the increase cost of issuing and servicing such senior indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender. See “Risk Factors—Risks related to our business—We will pay the investment adviser incentive compensation based on our net investment income and realized capital gains, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our investment adviser also controls the timing of when capital gains and losses will be realized on our investments, which may create an incentive to realize capital gains or losses to maximize its compensation. Our board of directors will monitor our performance and the timing of when capital gains and losses are realized.”
 
We will pay the investment adviser incentive compensation based on our net investment income and realized capital gains, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation. Our investment adviser also controls the timing of when capital gains and losses will be realized on our investments, which may create an incentive to realize capital gains or losses to maximize its compensation.
 
The incentive fee payable to the investment adviser may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to the investment adviser is determined, which is calculated as a percentage of the return on net assets, may encourage the investment adviser to use leverage to increase the return to the Company’s investments. If the investment adviser acquires poorly-performing assets with such leverage, the loss to holders of the Shares, including investors in this offering, could be substantial. Moreover, if our leverage is increased, we will be exposed to increased risk of loss, bear the increased cost of issuing and servicing such senior indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur. See “Risk Factors—Risks related to our business—We will pay the investment adviser a base management fee based on our total assets, which may create an incentive for the investment adviser to cause us to incur more leverage than is prudent in order to maximize its compensation.”
 
We will be exposed to risks associated with changes in interest rates.
 
General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on investment objectives and our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed-rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to three to ten years. This means that we will be subject to greater risk (other things being equal) than a fund
 
23


investment solely in shorter-term securities. A decline in the prices of the debt we own could adversely affect the trading price of our common stock.
 
Many of our portfolio investments will be recorded at fair value as determined in good faith by our board of directors. As a result, there will be uncertainty as to the value of our portfolio investments.
 
A large percentage of our portfolio investments will be investments that are not publicly traded. The fair value of investments that are not publicly traded may not be readily determinable. We will value these investments quarterly at fair value as determined in good faith by our board of directors. However, we may be required to value our investments more frequently as determined in good faith by our board of directors to the extent necessary to reflect significant events affecting their value. Where appropriate, our board of directors may utilize the services of an independent valuation firm to aid it in determining fair value. The types of factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments are materially higher than the values that we ultimately realize upon the sale of our investments.
 
We may experience fluctuations in our quarterly results.
 
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
 
There are conflicts of interest in our relationship with our investment adviser and/or GSC Group, which could result in decisions that are not in the best interests of our stockholders.
 
Subject to the restrictions of the 1940 Act, we may co-invest in securities of portfolio companies on a concurrent basis with other funds managed by GSC Group. Similarly a GSC Group fund may, in certain circumstances, invest in securities issued by a company in which we have made, or are making, an investment. Although certain such investments may present conflicts of interest, we nonetheless may pursue and consummate such transactions. These conflicts may include:
 
Co-Investment. We will be prohibited from co-investing with other funds managed now or in the future by GSC Group in certain securities of portfolio companies in instances where GSC Group negotiates terms other than price. In instances where we co-invest with a GSC Group fund, while we will invest on the same terms and neither we nor the GSC Group fund may negotiate terms of the transaction other than price, conflicts of interest may arise. For example, if an investee company in which both we and a GSC Group fund have invested becomes distressed, and if the size of our relative investments vary significantly, the decisions relating to actions to be taken could raise conflicts of interest.
 
Conflicts in Different Parts of Capital Structure. If a portfolio company in which we and another GSC Group fund hold different classes of securities encounters financial problems, decisions over the terms of any workout will raise conflicts of interests. For example, a debt holder may be better served by a liquidation of the issuer in which it will be paid in full, whereas an equity holder might prefer a reorganization that could create value for the equity holder.
 
Potential Conflicting Positions. Given our investment objectives and the investment objectives of other GSC Group funds, it is possible that we may hold a position that is contrary to a position held by another GSC Group
 
24


fund. For example, we could hold a longer term investment in a certain portfolio company and at the same time another GSC Group fund could hold a short term position in the same company. The GSC Group will make each investment decision separately based upon the investment objective of each of its clients.
 
Shared Legal Counsel. We and a GSC Group fund will generally engage common legal counsel in transactions in which both are participating. Although separate counsel may be engaged, the time and cost savings and other efficiencies and advantages of using common counsel will generally outweigh the disadvantages. In the event of a significant dispute or divergence of interests, typically in a work-out or other distressed situation, separate representation may become desirable, and in litigation and other circumstances, separate representation may be necessary.
 
Allocation of Opportunities. In particular, our investment adviser provides investment management, investment advice or other services in relation to a number of investment vehicles of GSC Group, which focus on corporate credit, distressed debt, mezzanine investments and structured finance products and have investment objectives that are similar to or overlap with ours. Investment opportunities that may be of interest to us may also be of interest to GSC Group’s other investment vehicles, and GSC Group may buy or sell securities for us which differ from securities which they may cause to be bought or sold for GSC Group’s other investment vehicles. GSC Group may have conflicting interests, including a larger capital commitment to, or larger fees from, another investment vehicle of GSC Group, in determining which investment vehicle should pursue the investment opportunity.
 
Material Nonpublic Information. GSC Group or its employees, officers, principals or affiliates may come into possession of material nonpublic information in connection with business activities unrelated to our operations. The possession of such information may limit our ability to buy or sell securities or otherwise participate in an investment opportunity or to take other action it might consider in our best interest.
 
Cross-Trading. Subject to applicable law, we may engage in transactions directly with GSC Group or our investment adviser, including the purchase or sale of all or a portion of a portfolio investment. Cross-trades can save us brokerage commissions and, in certain cases, related transaction costs. Cross-trades between affiliates may create conflicts of interest with respect to certain terms, including price, of the transaction. The 1940 Act imposes substantial restrictions on cross-trades between us and GSC Group or our investment adviser. As a result, our board of directors has adopted cross-trading procedures designed to ensue compliance with the requirements of the 1940 Act and will regularly review the terms of any cross-trades.
 
Our investment adviser’s liability will be limited under the investment advisory and management agreement, and we will indemnify our investment adviser against certain liabilities, which may lead our investment adviser to act in a riskier manner on our behalf than it would when acting for its own account.
 
Our investment adviser has not assumed any responsibility to us other than to render the services described in the investment advisory and management agreement. Pursuant to the investment advisory and management agreement, our investment adviser and its general partner, officers and employees will not be liable to us for their acts, under the investment advisory and management agreement, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect our investment adviser and its general partner, officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of our investment adviser not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the investment advisory and management agreement. These protections may lead our investment adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
 
We may be obligated to pay our investment adviser incentive compensation even if we incur a net loss, regardless of the market value of our common stock.
 
Our investment adviser will be entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, net operating losses and certain other items) above a threshold return for that quarter. Our pre-incentive fee, net
 
25


investment income, for incentive compensation purposes, excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our investment adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our Portfolio or we incur a net loss for that quarter.
 
Under the investment advisory and management agreement, we will defer cash payment of any incentive fee otherwise earned by our investment adviser if, during the most recent four full calendar quarter periods ending on or prior to the date such payment is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) is less than 7.5% of our net assets at the beginning of such period. These calculations will be appropriately pro rated during the first three calendar quarters following the closing of this offering and will be adjusted for any share issuances or repurchases. Furthermore, the incentive fee that we pay is not tied to the market value of our common stock.
 
If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. The investment adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income.
 
Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
 
We and our portfolio companies will be subject to regulation at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us to comply with these laws or regulations may adversely affect our business.
 
As discussed below, there is a risk that certain investments that we intend to treat as qualifying assets will be determined to not be eligible for such treatment. Any such determination would have a material adverse effect on our business.
 
We operate in a highly competitive market for investment opportunities.
 
A number of entities will compete with us to make the types of investments that we plan to make in private middle market companies. We will compete with other BDCs, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, high-yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several other BDCs have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act will impose on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objectives.
 
We will not seek to compete primarily based on the interest rates we will offer and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer.
 
We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased
 
26


risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than what we may have originally anticipated, which may impact our return on these investments.
 
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.
 
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.
 
Risks related to our operation as a BDC
 
Our investment adviser and the members of its investment committee have no experience managing a BDC.
 
The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of private operating companies or U.S. public companies whose securities are not listed on a national securities exchange registered under the Exchange Act (i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ Global Market), cash, cash equivalents, U.S. government securities and high quality debt investments that mature in one year or less. Our investment adviser does not have any experience managing a BDC. The lack of experience of our investment adviser and the members of its investment committee in managing a portfolio of assets under such constraints may hinder their ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.
 
A failure on our part to maintain our qualification as a BDC would significantly reduce our operating flexibility.
 
If we fail to qualify as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility.
 
We will be subject to corporate-level income tax if we fail to qualify as a RIC.
 
Upon our election to become a BDC, we will seek to qualify as a RIC under the Code, which requires us to qualify continuously as a BDC and meet certain source of income, distribution and asset diversification requirements.
 
The source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.
 
The annual distribution requirement is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. Because we may use debt financing in the future, we may be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. In such case, if we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.
 
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To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of our RIC qualification. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. While we intend to enter into a credit facility within 60 days following the closing of this offering, which would provide us with access to additional capital, we cannot assure you that we will be able to obtain a credit facility on terms acceptable to us or at all. In addition, if we raise additional capital to satisfy the asset diversification requirements, it could take us time to invest such capital. During this period, we will invest the additional capital in temporary investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in first and second lien loans and mezzanine debt.
 
If we fail to qualify as a RIC for any reason, all of our taxable income will be subject to U.S. federal income tax at regular corporate rates. The resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders. See “Material U.S. Federal Income Tax Considerations—Tax consequences as a RIC.”
 
There is a risk that you may not receive distributions or that our distributions may not grow over time.
 
As a BDC for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we intend to make distributions on a quarterly basis to our stockholders when and if authorized by our board of directors and declared by us out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test that is applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution. See “Distributions.”
 
As a BDC, we may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.
 
For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash, including, for example, non-cash income from pay-in-kind securities and deferred payment securities.
 
Since in certain cases we may recognize income before or without receiving cash in respect of such income, we may have difficulty meeting the requirement that we distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, to qualify as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investments to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax. See “Material U.S. Federal Income Tax Considerations—Tax consequences as a RIC.”
 
Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
 
We may issue debt securities or preferred stock, which we refer to collectively as “senior securities,” and borrow money from banks or other financial institutions up to the maximum amount permitted by the 1940 Act.
 
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Under the provisions of the 1940 Act, we will be permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equal at least 200% after such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which would prohibit us from paying dividends and could prevent us from qualifying as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
 
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital.
 
In addition, we may in the future seek to securitize our loans to generate cash for funding new investments. To securitize loans, we may create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. This could include the sale of interests in the subsidiary on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in loan pools, and we would retain a portion of the equity in the securitized pool of loans. An inability to successfully securitize our loan portfolio could limit our ability to grow our business, fully execute our business strategy and decrease our earnings, if any. The securitization market is subject to changing market conditions and we may not be able to access this market when we would otherwise deem appropriate. Moreover, the successful securitization of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests will tend to be those that are riskier and more apt to generate losses. The 1940 Act may also impose restrictions on the structure of any securitization.
 
If our primary investments are deemed not to be qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business plan.
 
If we are to maintain our qualification as a BDC, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. We believe that the senior loans and mezzanine investments that we propose to acquire constitute qualifying assets because the privately held issuers will not, at the time of our investment, have securities listed on a national securities exchange.
 
The Securities and Exchange Commission (the “SEC”) has adopted a rule that defines an “eligible portfolio company” as any private domestic operating company and public domestic operating company that does not have securities listed on a national securities exchange. In addition, the SEC has proposed a new rule that would expand the definition of eligible portfolio companies to include publicly-traded companies with a market capitalization of less than $250 million. If adopted or enacted, the effect of this rule would be to further reduce or eliminate confusion surrounding whether a company qualifies as an eligible portfolio company. We cannot assure you that this rule will be approved by the SEC. Until the SEC or its staff has issued a final rule, we will continue to monitor this issue closely. See “—Risks related to our business—Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business” above.
 
Our ability to enter into transactions with our affiliates will be restricted.
 
Following our election to be treated as a BDC, we will be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent directors, or in some cases, the prior approval of the SEC. For example, any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we will generally be prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent

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directors. The 1940 Act also prohibits “joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person, or entering into joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result, we will be limited in our ability to negotiating the term of any investment (except with respect to price) in instances where we are participating in such investments with other funds managed by GSC Group. Generally, we will be prohibited from knowingly making an investment in securities of a portfolio company that is already held by GSC Group or any other fund managed by GSC Group. However, if a portfolio company offers additional securities and existing securities are held by us and GSC Group or other funds managed by GSC Group, then we may participate in a follow-on investment in such securities on a pro-rata basis. Prior to our election to be treated as a BDC, the restrictions and protections of the 1940 Act will not be applicable, therefore we will not be prohibited from entering into transactions with our affiliates.
 
Our common stock may trade at a discount to our net asset value per share.
 
Common stock of BDCs, as closed-end investment companies, frequently trades at a discount to net asset value. It is possible that after our initial public offering our common stock will also trade at a discount. The possibility that our common stock may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. Our net asset value immediately following this offering will reflect reductions resulting from the underwriters’ discount and the amount of the organizational and offering expenses paid by us. This risk may have a greater effect on investors expecting to sell their common stock soon after completion of the initial public offering and our common stock may be more appropriate for long-term investors than for investors with shorter investment horizons. We cannot predict whether our common stock following our initial public offering will trade above, at or below our net asset value per share.
 
The floating interest rate features of any indebtedness incurred by us could adversely affect us if interest rates rise.
 
Any indebtedness incurred by us will likely bear interest at a floating rate based on LIBOR. As a result, if LIBOR increases, our costs under any indebtedness incurred would become more expensive, which could have a material adverse effect on our earnings.
 
Risks related to our investments
 
Our investments may be risky, and you could lose all or part of your investment.
 
We anticipate that substantially all of the investments held in the portfolio will hold a sub-investment grade rating by Moody’s Investors Service and/or Standard & Poor’s or, where not rated by any rating agency, would be below investment grade, if rated. Debt securities rated below investment grade are commonly referred to as “junk bonds.” Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Our mezzanine investments may result in an above average amount of risk and volatility or loss of principal. We will invest in assets other than mezzanine investments including first and second lien loans, high-yield securities, U.S. government securities, credit derivatives and other structured securities and certain direct equity investments. These investments will entail additional risks that could adversely affect our investment returns. In addition, to the extent interest payments associated with such debt are deferred such debt will be subject to greater fluctuations in value based on changes in interest rates, such debt could produce taxable income without a corresponding cash payment to us, and since we will generally not receive any cash prior to maturity of the debt, the investment will be of greater risk.
 
In addition, private middle market companies in which we expect to invest involve a number of significant risks, including:
 
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·
limited financial resources and being unable to meet their obligations, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
     
 
·
shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;
 
 
·
depending 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 portfolio company and, in turn, on us;
 
 
·
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. In addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and
 
 
·
difficulty accessing the capital markets to meet future capital needs.
 
When we invest in first and second lien senior loans or mezzanine debt, we may acquire warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
 
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
 
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
 
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.
 
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
 
If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we actually render significant managerial assistance.
 
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An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies and a greater vulnerability to economic downturns.
 
We will invest primarily in privately-held companies. Generally, little public information exists about these companies, and we will be required to rely on the ability of our investment adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information will not be subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Also, privately-held companies frequently have less diverse product lines and smaller market presence than larger competitors, subjecting them to greater vulnerability to economic downturns. These factors could affect our investment returns.
 
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
 
Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities, that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
 
Investments in equity securities involve a substantial degree of risk.
 
We may purchase common stock and other equity securities. Although equity securities have historically generated higher average total returns than fixed-income securities over the long term, equity securities also have experienced significantly more volatility in those returns and in recent years have significantly under performed relative to fixed-income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:
 
 
·
any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process;
 
 
·
to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment in equity securities; and
 
 
·
in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of our portfolio companies. Even if the portfolio companies are successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can sell our equity investments. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell.
 

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There are special risks associated with investing in preferred securities, including:
 
 
·
preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes even though we have not received any cash payments in respect of such income;
 
 
·
preferred securities are subordinated debt in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater risk than debt;
 
 
·
preferred securities may be substantially less liquid than many other securities, such as common securities or U.S. government securities; and
 
 
·
preferred security holders generally have no voting rights with respect to the issuing company, subject to limited exceptions.
 
Our incentive fee may induce our investment adviser to make certain investments, including speculative investments.
 
The incentive fee payable by us to our investment adviser may create an incentive for our investment adviser to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to our investment adviser is determined, which is calculated as a percentage of the return on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in this offering. In addition, the investment adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income will be computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. The investment adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never receive as a result of a default by an entity on the obligation that resulted in the accrual of such income.
 
Because of the structure of the incentive fee, it is possible that we may have to pay an incentive fee in a quarter where we incur a net loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate for a quarter, we will pay the applicable incentive fee even if we have incurred a net loss in that quarter due to realized capital losses. In addition, if market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income.
 
Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.
 
Our investment strategy contemplates potential investments in debt of foreign companies, including the debt of emerging market issuers. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers
 

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and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Investments in the debt of emerging market issuers may subject us to additional risks such as inflation, wage and price controls, and the imposition of trade barriers. Furthermore, economic conditions in emerging market countries are, to some extent, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the debt of issuers in other countries.
 
Although most of our investments will be U.S. dollar-denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure you that we will fully hedge against these risks or that such strategies will be effective.
 
We may expose ourselves to risks if we engage in hedging transactions.
 
If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may include counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at unacceptable price.
 
The success of our hedging transactions will depend on our ability to correctly predict movements, currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.
 
The lack of liquidity in our investments may adversely affect our business.
 
We expect to make investments in private companies. A portion of these securities may be subject to legal and other restrictions on resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our investment adviser has or could be attributed with material non-public information regarding such business entity.
 
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Other than the agreement relating to the purchase of the Portfolio, we have not entered into any binding agreements with respect to any portfolio company investments.
 
Other than the agreement relating to the purchase of the Portfolio (as described under “Business—Prospective investments”), we have not entered into any binding agreements with respect to any portfolio company investments that we have identified. Other than the Portfolio, you will not be able to evaluate any specific portfolio company investments prior to purchasing our common stock. Additionally, our investments will be selected by our investment adviser and our stockholders will not have input into such investment decisions. Both of these factors will increase the uncertainty, and thus the risk, of investing in our common stock.
 
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.
 
We anticipate making both debt and minority equity investments; therefore, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
 
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
 
Our board of directors has the authority to modify or waive our current operating policies and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.
 
Risks related to this offering
 
An active trading market for our common stock may not develop.
 
Prior to this offering, there has been no public trading market for our common stock, and an active trading market might never develop. To the extent that an active trading market does not develop, the liquidity and trading prices for our common stock may be harmed. If shares of our common stock are traded after their initial issuance, they may trade at a discount from their initial offering price, depending on the market for similar securities, the performance of our investments and other factors.
 
Even if a trading market for our common stock develops, it may not be liquid. The liquidity of any market for our common stock will depend upon the number of holders of our common stock, our results of operations and financial condition, the market for similar securities, the interest of securities dealers in making a market in our common stock and other factors.
 
Investing in our common stock may involve an above average degree of risk.
 
The investments we make in accordance with our investment objectives may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.
 
Investing in non-traded companies may be riskier than investing in publicly traded companies due to a lack of available public information.
 
We will invest in primarily non-traded companies, which may be subject to higher risk than investments in publicly traded companies. Little public information exists about many of these companies, and we will rely on the ability of GSC Group to obtain adequate information to evaluate the potential risks and returns involved in investing
 
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in these companies. If GSC Group is unable to obtain all material information about these companies, GSC Group may not make a fully informed investment decision, and we may lose some or all our investment in these companies. These factors could subject us to greater risk than investment in publicly traded companies and negatively affect our investment returns, which could negatively impact the dividends paid to you and the value of your investment.
 
The debt securities in which we invest are subject to credit risk and prepayment risk.
 
An issuer of debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade of a security by rating agencies may further decrease its value.
 
Certain debt instruments may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument’s stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher yielding debt instruments with lower yielding debt instruments. An issuer may also elect to refinance their debt instruments with lower yielding debt instruments if the credit standing of the issuer improves. To the extent debt securities in our portfolio are called or redeemed, we may receive less than we paid for such security and we may be forced to reinvest in lower yielding securities or debt securities of issuers of lower credit quality.
 
We will value investments for which market quotations are not readily available quarterly at a fair value as determined in good faith by our board of directors based on input from our investment adviser, a third party independent valuation firm and our audit committee. We may also be required to value any publicly traded securities at fair value as determined in good faith by our board of directors to the extent necessary to reflect significant events affecting the value of those securities. The types of factors that may be considered in a fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value by our board of directors may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
 
We may allocate the net proceeds from this offering in ways with which you may not agree.
 
We will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from this offering in ways with which you may not agree or for purposes other than those contemplated at the time of the offering.
 
Investors in this offering will suffer immediate dilution upon the closing of this offering.
 
The net cash proceeds that we receive from this offering will be net of the underwriting discount of $         per share as well as other offering and organizational expenses of $         per share. As a result, our net asset value per share immediately after completion of this offering is estimated be to $         per share, compared to an offering price of $         per share. Accordingly, investors purchasing shares in this offering will pay a price per share of common stock that exceeds the net asset value per shares of common stock after this offering by $              and will indirectly bear the costs of the underwriting discount and other offering expenses.
 
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We may sell additional shares of common stock in the future, which may dilute existing stockholders’ interest in us or cause the market price of our common stock to decline.
 
We may issue additional shares of common stock in subsequent offerings in order to make new investments or for other purposes. We are not required to offer any such stock to existing stockholders on a pre-emptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issues, which may dilute the existing stockholders’ interests in us. Additional shares of common stock may be issued pursuant to the terms of the underwriters’ over-allotment option, which, if issued, would dilute stockholders’ percentage ownership in us. The issuance of additional shares of common stock by us, or the possibility of such issue, may cause the market price of our common stock to decline.
 
The market price of our common stock may fluctuate significantly.
 
Prior to this offering, there has been no public trading market for our common stock. The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
 
 
·
significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies;
 
 
·
changes in regulatory policies or tax rules, particularly with respect to RICs or BDCs;
 
 
·
loss of RIC qualification;
 
 
·
changes in earnings or variations in operating results;
 
 
·
changes in the value of our portfolio of investments;
 
 
·
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
 
 
·
departure of our investment adviser’s key personnel;
 
 
·
operating performance of companies comparable to us;
 
 
·
general economic trends and other external factors; and
 
 
·
loss of a major funding source.
 
Provisions of our governing documents and the Maryland General Corporation Law could deter takeover attempts and have an adverse impact on the price of our common stock.
 
We are governed by our charter and bylaws, which we refer to as our “governing documents.”
 
Our governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a transaction or a change in control of us that might involve a premium price for our stockholders or otherwise be in their best interest.
 
Our charter provides for the classification of our board of directors into three classes of directors, serving staggered three-year terms, which may render a change of control of us or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our board of directors will be filled generally only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a successor is elected and qualifies.
 
37


Our board of directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of stock that we have authority to issue, which could have the effect of diluting a stockholder’s ownership interest. Prior to the issuance of shares of stock of each class or series, including any reclassified series, our board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock.
 
Our governing documents also provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:
 
 
·
The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the common stock or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special minimum price provisions and special stockholder voting requirements on these combinations; and
 
 
·
The Maryland Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation (defined as shares of common stock which, when aggregated with other shares of common stock controlled by the stockholder, entitles the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interest shares of common stock.
 
The provisions of the Maryland Business Combination Act will not apply, however, if our board of directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Although our board of directors has adopted such a resolution, there can be no assurance that this resolution will be not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to acquire control of us.
 
As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our board of directors at any time in the future.
 
38

 
CONTRIBUTION
 
Contributions
 
We were organized in May 2006 as GSC Investment LLC, a Maryland limited liability company. Prior to our merger into a corporation and our election to be treated as a RIC for U.S. federal income tax purposes, GSC Investment LLC, GSC Group and certain affiliates of GSC Group engaged in a series of transactions. These transactions are referred to in this prospectus as the “Contribution.” Following the Contribution, there will be no affiliation between CDO Fund III and our promoters, underwriters, investment manager, officers, directors, control persons or principal owners. Unless otherwise noted or the context otherwise requires, the information included in this prospectus assumes that the Contribution will have been completed as described below.
 
Pursuant to the agreement entered into on October 17, 2006 among GSC CDO III, L.L.C., GSCP (NJ), L.P., GSC Investment LLC and the other investors party thereto, as amended (the “Contribution and Exchange Agreement”), we completed the following acquisitions:
 
 
·
Acquisition of interests in CDO Fund III
 
 
·
GSC Investment LLC issued             common shares to affiliates of GSC Group to acquire (i) a general partner interest in the general partner of the limited partnership that owns the equity in CDO Fund III pursuant to which we will manage the activities of the limited partnership and (ii) a limited partner interest in that same general partner. See Figure 1 below for a diagram representing these contributions. The combined interests indirectly represent a 6.24% equity interest in CDO Fund III, an entity excluded from the definition of “investment company” in reliance upon Section 3(c)(7) of the 1940 Act, and a contractual right to receive approximately 77% of all carried interest distributions with respect to CDO Fund III. Carried interest distributions with respect to CDO Fund III generally equal 20% of all distributions made to the equity investors in CDO Fund III in excess of capital contributions, once such distributions are in excess of a 12% per year internal rate of return. Furthermore, the value of these interests may be positively or negatively affected by any appreciation or depreciation in the value of CDO Fund III’s assets between the time the interests contributed to us and the completion of the liquidation of CDO Fund III. While there can be no assurances that any carried interest distributions will be received by us in connection with the liquidation of CDO Fund III, our investment in CDO Fund III aligns our interests with the other beneficial owners of CDO Fund III and furthers our investment objective as an asset that may generate current income and provide the potential for capital appreciation. These common shares (which were initially issued at the mid-point of the range of the initial public offering price as set forth on the cover of this prospectus and will be subsequently adjusted to reflect the actual initial public offering price) will convert into shares of our common stock upon our merger into a GSC Investment Corp. as described below. The interests in CDO Fund III that will be acquired by GSC Investment LLC were issued in private placements not requiring registration under the Securities Act.
     
  ·
Based on the value of CDO Fund III of $                               at                , 2007, GSC Group’s contribution of general and limited partner interests would be valued at $            , and $            respectively, and which in the aggregate is less than   % of the expected value of our assets upon completion of this offering. We valued these interests in CDO Fund III at their fair market value by reference to its net liquidation value, as determined by a majority of our independent directors in good faith and the amounts that would be available for distribution in respect of these interests. Three business days prior to the date of the acquisition of interests, we calculated the net liquidation value of the collateral held in CDO Fund III by determining the aggregate fair market value of its assets, less the debt issued by CDO Fund III and expenses associated with CDO Fund III’s liquidation. This methodology may or may not reflect the value that could be obtained for these interests in CDO Fund III in a transaction with a third party. As of the date of this prospectus, the total assets in CDO Fund III are valued at $          . The expected profits to be generated by the liquidation of CDO Fund III as of

39

 
 
 
, 2007 are $            , after estimated costs of $             associated with such liquidation are taken into consideration.
 
 
·
Acquisition of role as Collateral Manager of CDO Fund III 
 
 
·
GSC Investment LLC entered into an agreement with GSCP (NJ), L.P., the current collateral manager of CDO Fund III, subject to payment by the Company of $______ to GSCP (NJ), L.P., to acquire the right to act as collateral manager to CDO Fund III, and in doing so will assume all of the rights and obligations of the collateral manager, including the right to receive all fees that are expected to be received by the collateral manager following the Contribution. See Figure 1 below for a diagram representing this contribution. Under the terms of the Collateral Management Agreement, we will assume responsibility for directing the investment and reinvestment of the CDO Fund III collateral, selecting new collateral, monitoring existing collateral and directing the trustee, custodian or collateral administrator in the acquisition or disposition of collateral. Following the acquisition of the right to act as collateral manager, our senior officers, with oversight from our board of directors, will actively manage the liquidation of CDO Fund III. CDO Fund III will be defeased and its assets will be liquidated at the direction of the owners of CDO Fund III. We will purchase the assets of CDO Fund III comprising the Portfolio as we have determined these assets are appropriate investments given our investment strategy.
 
 
·
In light of the planned liquidation of CDO Fund III, we expect our activities as collateral manager will be primarily related to the orderly liquidation of the remaining portfolio assets in CDO Fund III and any activities incidental thereto, e.g., liasing with the trustee. The management fee we receive will be related to these activities.
 
 
·
We valued this role as collateral manager to CDO Fund III at its fair market value of $____, as determined by a majority of our independent directors in good faith. We estimated the management fee, that would accrue and be payable under the existing collateral management agreement between CDO Fund III and the collateral manager after February __, 2007 through the maturity of the CDO Fund III Notes. This methodology may or may not reflect the value that could be obtained for the right to act as collateral manager in CDO Fund III in a transaction with a third party. The management fee is expected to be $_______.
 
 
·
Pursuant to the collateral management agreement, we (including our directors and officers) will not be liable for any acts or omissions or any decrease in value of the CDO Fund III, except by reason of acts or omissions constituting criminal conduct, fraud, bad faith, willful misconduct or gross negligence, or reckless disregard of our duties as collateral manager. CDO Fund III has agreed to indemnify and hold us harmless from and against any and all liabilities, charges and claims of any nature whatsoever arising from acts or omissions made in good faith and transactions not constituting criminal conduct, fraud, bad faith, willful misconduct or gross negligence, or reckless disregard of our duties as collateral manager. Upon completion of the liquidation, CDO Fund III will have no assets to meet any of its obligations under our indemnity. We may be exposed to liability to other parties as a result of serving as the collateral manager to CDO Fund III.

40

 
Figure 1: Contributions of general partner and limited partner interests in CDO Fund III and role as collateral manager.
 

41

 
CDO Fund III was organized on 2001 to purchase high yield bonds and leveraged loans and to earn investors in CDO Fund III an above-market return on their investment. Following the contribution described above, we will serve as the sole collateral manager of CDO Fund III. We expect our role as collateral manager of CDO Fund III will be limited to activities incidental to the orderly liquidation of the remaining assets in CDO Fund III, which we expect will be completed in approximately 45 days. We believe that the fair market value of the remaining assets in CDO Fund III will be approximately $____ million as of January __, 2007. The divested bonds and loans will be sold in the liquidation to various broker dealers that trade high yield bonds and leveraged loans. There are no arrangements that would cause the Company to sell any of the remaining assets of CDO Fund III to any affiliates of the Company or any of the principal underwriters. If any of the principal underwriters submit a bid to acquire any bond or loan, such sale will be subject to compliance by the Company with the restrictions on cross trades set forth in the 1940 Act. We do not consider CDO Fund III to be an eligible portfolio company, so our investment in CDO Fund III will not be a qualifying asset. See “Regulation―Qualifying assets.” In addition, our investment in CDO Fund III will be an illiquid investment.
 
Conversion to a Maryland Corporation.
 
Prior to the issuance of common stock in this offering, GSC Investment LLC will merge with and into GSC Investment Corp., a Maryland corporation, in accordance with the procedure for such merger in GSC Investment LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding common share of GSC Investment LLC will be, without any further action or consent required by the holders thereof, converted into an equivalent number of shares of common stock of GSC Investment Corp.
 
Tax Election
 
We intend to file an election to be treated as a RIC under Subchapter M of the Code commencing with our first taxable year as a corporation.

42


USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from the sale of          shares of our common stock in this offering will be approximately $            , assuming an initial offering price of $                  per share, after deducting the underwriters’ discount of $           payable by us and estimated organizational and offering expenses of approximately $              payable by us.
 
We expect to use substantially all of the net proceeds of this offering to purchase all of the assets in the Portfolio and make investments as described under “Business—Prospective investments” and elsewhere in this prospectus and to pay our operating expenses. We plan to invest the remainder of the net proceeds of this offering, if any, in portfolio companies in accordance with our investment objectives and strategies.
 
We intend to invest primarily in first and second lien loans, mezzanine debt and high yield bonds issued by private companies, each of which may include an equity component, and, to a lesser extent, in equity securities in such companies. In addition to such investments, we may invest up to 30% of the portfolio in opportunistic investments, including distressed debt, debt and equity securities of public companies, credit default swaps, emerging market debt and equity and synthetic securities in collateralized debt obligation (“CDO”) vehicles. Pending such investments, we will invest the net proceeds primarily in cash in the aggregate, cash equivalents, U.S. government securities and other high quality short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objectives. As a result, we may not be able to achieve our investment objectives and/or pay any dividends during this period or, if we are able to do so, such dividends may be substantially lower than the dividends that we expect to pay when our portfolio is fully invested. If we do not realize yields in excess of our expenses, we may incur operating losses and the market price of our common stock may decline. See “Regulation—Temporary investments” for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objectives.
 
43


DISTRIBUTIONS
 
We intend to make quarterly distributions to our stockholders out of assets legally available for distribution. Our quarterly distributions, if any, will be determined by our board of directors. Any such distributions will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to a dividend reinvestment plan. See “Dividend Reinvestment Plan.” In order to maintain our qualification as a RIC, we must distribute an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. To avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. The consequences of our retention of net capital gains are as described under “Material U.S. Federal Income Tax Considerations.” We cannot assure you that we will achieve results that will permit the payment of any cash distributions and, if we incur indebtedness or issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
44

 
DIVIDEND REINVESTMENT PLAN
 
We will adopt a Dividend Reinvestment Plan (the “Plan”) that provides that, unless you elect to receive your dividends or other distributions in cash, they will be automatically reinvested by the Plan Administrator, American Stock Transfer & Trust Company, in additional shares of our common stock. If you elect to receive your dividends or other distributions in cash, you will receive them in cash paid by check mailed directly to you by the Plan Administrator. The reinvestment of our distributions does not relieve stockholders of any tax that may be payable on such distributions. For U.S. federal income tax purposes, stockholders will be treated as receiving the amount of the distributions made by us, which amount generally will be either equal to the amount of the cash distribution the stockholder would have received if the stockholder had elected to receive cash or, for shares issued by us, the fair market value of the shares issued to the stockholder.
 
No action is required on the part of a registered stockholder to have their cash dividend reinvested in shares of our common stock. Unless you or your brokerage firm decides to opt out of the Plan, the number of shares of common stock you will receive will be determined as follows:
 
(1) If our common stock is trading at or above net asset value at the time of valuation, we will issue new shares at a price equal to the greater of (i) our common stock’s net asset value on that date or (ii) 95% of the market price of our common stock on that date.
 
(2) If our common stock is trading below net asset value at the time of valuation, the Plan Administrator will receive the dividend or distribution in cash and will purchase common stock in the open market, on the New York Stock Exchange or elsewhere, for the participants’ accounts, except that the Plan Administrator will endeavor to terminate purchases in the open market and cause us to issue the remaining shares if, following the commencement of the purchases, the market value of the shares, including brokerage commissions, exceeds the net asset value at the time of valuation. Provided the Plan Administrator can terminate purchases on the open market, the remaining shares will be issued by us at a price equal to the greater of (i) the net asset value at the time of valuation or (ii) 95% of the then current market price. It is possible that the average purchase price per share paid by the Plan Administrator may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid entirely in common stock issued by us.
 
Your may withdraw from the Plan at any time by giving written notice to the Plan Administrator, or by telephone in accordance with such reasonable requirements as we and the Plan Administrator may agree upon. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Administrator will sell your shares and send you the proceeds, minus brokerage commissions. The Plan Administrator is authorized to deduct a $                transaction fee plus a $                 per share brokerage commission from the proceeds.
 
The Plan Administrator maintains all common stockholders’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common stock in your account will be held by the Plan Administrator in non-certificated form. The Plan Administrator will forward to each participant any proxy solicitation material and will vote any shares so held only in accordance with proxies returned to us. Any proxy you receive will include all common stock you have received under the Plan.
 
There is no brokerage charge for reinvestment of your dividends or distributions in common stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Administrator when it makes open market purchases.
 
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. See “Material U.S. Federal Income Tax Considerations”.
 
45


If you hold your common stock with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. Consult your financial advisory for more information.
 
The Plan Administrator’s fees under the Plan will be borne by us. There is no direct service charge to participants in the Plan; however, we reserve the right to amend or terminate the Plan, including amending the Plan to include a service charge payable by the participants, if in the judgment of the board of directors the change is warranted. Any amendment to the Plan, except amendments necessary or appropriate to comply with applicable law or the rules and policies of the SEC or any other regulatory authority, require us to provide at least 30 days written notice to each participant. Additional information about the Plan may be obtained from                                                .
 
46


CAPITALIZATION
 
The following table sets forth our capitalization (1) on an as adjusted basis to give effect to the Contribution and (2) on a pro forma as adjusted basis to reflect the effects of the sale of our common stock in this offering at an assumed public offering price of $                   per share, after deducting the underwriters’ discount and estimated organizational and offering expenses payable by us. You should read this table together with “Use of Proceeds.”
 
   
As of                   , 2007
 
   
As Adjusted (1)
 
Pro forma as Adjusted (1) (2)
 
Assets:
         
Cash
 
$
   
$
 
 
Total assets
 
$
   
$
$
 
               
Liabilities:
             
Total liabilities
 
$
0
 
$
0
 
               
Stockholders’ equity:
             
                 shares of common stock, $0.0001 par value per share, authorized;               shares of common stock outstanding, actual; common stock outstanding, as adjusted
 
$
   
$
 
 
Total stockholders’ equity
 
$
   
$
 
 
Total liabilities and stockholders’ equity
 
$
   
$
 
 
 

(1)
Amount of capitalization based upon the fair value of the Contributions as of         , 2007 and assumes an initial public offering price of $15.00 per share.
(2)
Excludes the underwriter’s over-allotment option to purchase          shares of common stock. The amounts shown in the “As Adjusted” column above will change depending on the total amount of proceeds received by us in this offering.

47


DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as-adjusted net asset value per share of our common stock immediately after the completion of this offering.
 
Based on the estimated value of the assets of CDO Fund III as of January __, 2007, the as-adjusted net asset value of our common stock after giving effect to the Contributions, would have been approximately $__ million, or approximately $__ per share. We determined net asset value per share before this offering by dividing the net asset value (total assets less total liabilities) by the number of shares of common stock to be outstanding after giving effect to the Contributions. After our election to be treated as a BDC and before the completion of this offering, our board of directors will determine our net asset value in accordance with the requirements of the 1940 Act.
 
After giving effect to the sale of our common stock in this offering assuming an initial public offering price of $__ per share (which represents the mid-point of the initial public offering range set forth on the cover page of this prospectus) and after deducting estimated sales load and estimated expenses of the offering payable by us, our as-adjusted net asset value as of January __, 2007 would have been approximately $__ million, or $__ per share. This represents an immediate decrease in our net asset value per share of $__ to GSC Group and/or its affiliates and dilution in net asset value per share of $__ to new investors who purchase shares in this offering.
 
The following table illustrates this per share dilution:
 
Assumed initial public offering price per share
       
$
____
 
As adjusted net asset value per share as of January __, 2007 after giving effect to the Contributions
 
$
____
       
Decrease in net asset value per share attributable to new investors in this offering
 
$
____
       
As adjusted net asset value per share after this offering
       
$
____
 
Dilution per share to new investors
       
$
____
 
 
The following table summarizes, as of January __, 2007, and after giving effect to the Contributions, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by GSC Group and/or its affiliates and to be paid by new investors purchasing shares of common stock in this offering, at the initial public offering price of $__ per share (which represents the mid-point of the range set forth on the cover page of this prospectus) and before deducting the sales load and estimated offering expenses payable by us.
 
   
Shares Purchased
 
Total Consideration
 
Average Price
 
   
Number
 
Percent
 
Amount
 
Percent
 
Per Share
 
GSC Group and/or its affiliates
        %
$
(1)
 
    %
$
 
New investors (2)
            %           %
$
   
Total
         
100.0
%
       
100.0
%
     
 

(1)
Represents the value of the interests relating to CDO Fund III contributed by GSC Group and/or its affiliates interests in CDO Fund III, representing an indirect equity interest of approximately 6.24% in CDO Fund III.
(2)
To the extent the underwriters exercise their option to purchase additional shares, there will be further dilution to new investors. Should the underwriters exercise their full option, the above table would be as follows:
 
 
 
Shares Purchased
 
Total Consideration
 
Average Price
 
   
Number
 
Percent
 
Amount
 
Percent
 
Per Share
 
GSC Group and/or its affiliates
        %
$
(1)
 
    %
$
 
New investors
            %           %
$
   
Total
         
100.0
%
       
100.0
%
     

48


DISCUSSION OF MANAGEMENT’S EXPECTED OPERATING PLANS
 
Overview
 
GSC Investment Corp. was incorporated under the Maryland General Corporation Law in                   2007. We have elected to be treated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we will generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. operating companies or public U.S. companies whose securities are not listed on a national securities exchange registered under the Exchange Act (i.e., New York Stock Exchange, American Stock Exchange and The NASDAQ Global Market), cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are subject to a leverage restriction. We will only be allowed to borrow amounts, with certain limited exceptions, such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. This offering will significantly increase our capital resources because it will increase our borrowing capacity.
 
Revenues
 
We plan to generate revenue in the form of interest income on the debt that we hold and capital gains, if any, on warrants or other equity interests that we may acquire in portfolio companies. We expect our debt investments, whether in the form of first and second lien senior loans or mezzanine debt, to have terms of up to ten years, (but an expected average life of between three and seven years) and typically to bear interest at a fixed or floating rate. Interest on debt will be payable generally quarterly or semi-annually, with the amortization of principal generally being deferred for several years from the date of the initial investment. In some cases, we will also defer collection of payments of interest earned for the first few years after our investment. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest, to a lesser extent, in equity securities, which may, in some cases, include preferred securities that pay dividends on a current basis.
 
Expenses
 
Our primary operating expenses will include the payment of investment advisory and management fees and overhead expenses, including our allocable portion of our administrator’s overhead under the administration agreement. Our allocable portion will be based on the proportion that our total assets bears to the total assets administered by our administrator. Our investment advisory and management fees will compensate our investment adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. See “Management—Investment advisory and management agreement” and “Management—Administration agreement.” We will bear all other costs and expenses of our operations and transactions, including those relating to: organization; calculating our net asset value (including the cost and expenses of any independent valuation firm); expenses incurred by our investment adviser payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on debt, if any, incurred to finance our investments; offerings of our common stock and other securities; investment advisory and management fees; administration fees; fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments; transfer agent and custodial fees; registration fees; listing fees; taxes; independent directors’ fees and expenses; costs of preparing and filing reports or other documents of the SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; to the extent we are covered by any joint insurance policies, our allocable portion of the insurance premiums for such policies; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred by us or our administrator in connection with administering our business, such as our allocable portion of our administrator’s overhead under the
 
49


administration agreement, including rent and our allocable portion of the cost of our other officers and their respective staffs relating to the performance of services under this agreement (including travel expenses).
 
To the extent that any of our loans are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of futures, options and forward contracts. Costs incurred in entering into such contracts or in settling them will be borne by us.
 
Financial condition, liquidity and capital resources
 
We will generate cash primarily from the net proceeds of this offering, as well as any future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. In the future, we may also securitize a portion of our investments in first and second lien senior loans or mezzanine debt or other assets. Our primary use of funds will be investments in our targeted asset classes and cash distributions to holders of our common stock.
 
Distribution policy
 
We intend to qualify as a RIC under the Code, which allows us to avoid corporate-level tax on our income. To qualify as a RIC, we must distribute to our stockholders an amount equal to at least 90% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, on an annual basis. We intend to pay dividends on a quarterly basis. In addition, we also intend to distribute any realized net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) at least annually out of the assets legally available for such distributions.
 
Contractual obligations
 
We will enter into three contracts under which we have material future commitments, the investment advisory and management agreement, pursuant to which GSCP (NJ), L.P. will agree to serve as our investment adviser; the administration agreement, pursuant to which our administrator will agree to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance and a license agreement with GSC Group, pursuant to which GSC Group has agreed to grant us a non-exclusive, royalty-free license to use the name “GSC.” Payments under the investment advisory and management agreement in future periods will be equal to (1) a percentage of the value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) and (2) an incentive fee based on our performance. Payments under the administration agreement will be equal to an amount based upon our allocable portion of our administrator’s overhead in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our officers and their respective staffs. See “Management—Investment advisory and management agreement” and “Management—Administration agreement.” Each of these contracts may be terminated by either party without penalty upon 60 days written notice to the other. Further, although our Chief Financial Officer, Chief Compliance Officer, and Vice President and Secretary will have certain duties to us, they will also perform duties for other GSC Group related entities.
 
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OBLIGATIONS AND INDEBTEDNESS
 
Under the 1940 Act, we are not permitted to incur indebtedness or issue shares of preferred stock unless immediately after such borrowing or issuance our asset coverage, as defined in the 1940 Act, equals at least 200%. In addition, we are not permitted to declare any cash dividend or other distribution on our common stock unless, at the time of such declaration, the net asset value of our portfolio is at least 200% of the liquidation value of our outstanding preferred stock. The amount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. Any additional sale of shares of our common stock will increase our capacity to borrow under these facilities in compliance with the leverage restrictions of the 1940 Act. See “Regulation—Indebtedness and senior securities.”
 
In order to borrow under any borrowing arrangements, we will likely be required to meet various financial and operating covenants. These covenants will likely require us to maintain certain financial ratios, including debt to equity and interest coverage, a minimum net worth and will also limit our ability to declare dividends if we default under certain provisions.
 
Assuming the use of leverage in the amount of 33% of our total assets and an annual dividend/interest rate of        % payable on such leverage based on estimated market dividend/interest rates as of the date of this prospectus, the additional income that we must earn (net of estimated expenses related to leverage) in order to cover such dividend/interest payments is         %. Our actual cost of leverage will be based on market dividend/interest rates at the time we undertake a leveraging strategy, and such cost of leverage may be higher or lower than that assumed in the previous example.
 
The following table is furnished pursuant to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on total return on our common stock, assuming investment portfolio total returns (comprised of income, net expenses and changes in the value of investments held in the portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of what the investment portfolio’s returns will be. The table further reflects the use of leverage representing approximately 33% of the our total assets after such issuance and the Company’s currently projected dividend rate, borrowing interest rate or payment rate set by an interest rate transaction of          %. See “Risk Factors”. The table does not reflect any offering costs of our common stock or leverage.
 
Assumed Portfolio Return
(10.00)%
(5.00)%
0.00%
5.00%
10.00%
Common Stock Total Return
(20.2)%
(12.4)%
(4.6)%
3.2%
11.1%

Total return is composed of two elements - the common stock dividends paid by the Company (the amount of which is largely determined by the Company’s net investment income after paying the cost of leverage) and realized and unrealized gains or losses on the value of the securities the Company owns. As required by Securities and Exchange Commission rules, the table assumes that the Company is more likely to suffer capital loss than to enjoy capital appreciation.
 
During the time in which the Company is using leverage, the amount of the fees paid to the investment adviser for investment management services will be higher than if the Company did not use leverage because the fees paid will be calculated based on our total assets including assets resulting from indebtedness. Because the leverage costs will be borne by the Company at a specified rate, only the common stock will bear the cost of these fees and expenses.
 
Unless and until the Company uses leverage, the common stock will not be leveraged and this section will not apply. Any determination to use leverage by the Company, including the aggregate amount of leverage, if any, from time to time and the type and terms of such leverage, will be made by the investment adviser, subject to approval of the board of directors.
 

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The Company Credit Facility
 
After the closing of this offering, we expect to enter into a securitized revolving credit facility (the “Company Credit Facility”) of up to approximately $250 million. Advances under the Company Credit Facility will be used by us to make additional investments. We expect that the Company Credit Facility will be primarily secured by a perfected first priority lien in all of the additional investments acquired by us with the advances under the Company Credit Facility, as well as the Portfolio, if necessary. We expect that availability under the Company Credit Facility will be subject to a borrowing base and that the Company Credit Facility will bear interest at the commercial paper rate plus 20%. We expect that the pool of additional investments securing part or all of the Company Credit Facility would need to meet certain eligibility criteria defined in the documents governing the Company Credit Facility. One or more of the underwriters in this offering, or an affiliate of an underwriter in this offering, may be a lender under the Company Credit Facility. There can be no assurance that we will be able to obtain this Company Credit Facility on terms acceptable to us or at all, or that we will be able to borrow the amounts anticipated even if we are able to obtain such a Company Credit Facility.
 
The portfolio that we expect to hold immediately following the completion of this offering must experience an annual rate of return of approximately [       ]% to cover annual interest payments on obligations incurred under the Company Credit Facility.
 
The CDO Fund III Notes
 
In order for us to successfully complete the purchase of the Portfolio, CDO Fund III is required under its governing indenture to place an aggregate of $497 million on deposit with the indenture trustee, which is an amount sufficient to allow the defeasance of all of the outstanding secured notes issued by CDO Fund III. Defeasance of all of the outstanding secured notes of CDO Fund III is required in order to release the underlying collateral subject to the CDO Fund III indenture to permit CDO Fund III’s sale of the Portfolio to us and to permit the sale of CDO Fund III’s remaining assets and the securitization, if any, of such assets under the issuance of the CDO Fund III Notes to finance such assets pending such sale. CDO Fund III expects to fund the required deposit amount from the proceeds it receives from the sale of the Portfolio, together with the issuance of the CDO Fund III Notes, which we expect will be issued in the amount of approximately $250 million. We expect that the CDO Fund III Notes will be issued at the closing of this offering and will be secured under the existing indenture by a general security interest in all the assets of CDO Fund III. The underwriters of this offering may or may not be purchasers of, or involved in the issuance of, the CDO Fund III Notes. If sufficient funding from the issuance of the CDO Fund III Notes is not available for any reason, CDO Fund III will need to arrange alternative financing to fund the required deposit in order to retire the secured notes and thereby allow the Portfolio to be delivered to us under the portfolio acquisition agreement.
 
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BUSINESS
 
General
 
GSC Investment Corp. is a newly-incorporated Maryland corporation that has elected to be treated as a BDC under the 1940 Act. Our investment objectives are to generate both current income and capital appreciation through debt and, to a lesser extent, equity investments by primarily investing in private middle market companies, as well as select high yield bonds. We intend to file an election to be treated as a RIC under subchapter M of the Code commencing with our first taxable year as a corporation.
 
Prior to the pricing of this offering, we will enter into a portfolio acquisition agreement with CDO Fund III, an exempted company with limited liability under the Companies Law (2004 Revision) of the Cayman Islands (the “Cayman Islands Companies Law”). A Cayman Islands exempted company is a company that conducts its business outside the Cayman Islands, is exempt from certain regulatory requirements of the Cayman Islands Companies Law and which may take advantage of certain favorable tax provisions under the tax laws of the Cayman Islands. Pursuant to the portfolio acquisition agreement, we have agreed to purchase for cash a portfolio of approximately $181 million of debt investments that consist of first lien and second lien loans, senior secured bonds and unsecured bonds held by CDO Fund III (the “Portfolio”). We intend to use the net proceeds of this offering to complete this acquisition promptly following the closing of this offering. We also intend to make additional investments that are consistent with our investment strategy. Over time we anticipate that the amount of senior secured and unsecured bonds will decrease as a percentage of our total assets as we add mezzanine debt and new first and second lien loan assets to the portfolio. See “—Prospective investments—The Portfolio.”
 
We anticipate that our portfolio will be comprised primarily of investments in first and second lien loans, mezzanine debt and high yield debt issued by private companies, which will be sourced through a network of relationships with commercial finance companies and commercial and investment banks as well as through our relationships with financial sponsors. The capital that we provide is generally used to fund buyouts, acquisitions, growth, recapitalizations, note purchases and other types of financing. First and second lien loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Mezzanine debt and high yield bonds in private companies subordinated to senior loans and are generally unsecured, though approximately 47% of the high yield bonds in the initial portfolio are secured. However, there can be no assurance that we will make investments in secured bonds to the same extent in the future. In some cases, we may also receive warrants or options in connection with our debt investments. We also anticipate, to a lesser extent, making equity investments in private middle market companies. Investments in warrants, options or other equity investments will generally be made in conjunction with loans we make to these companies.
 
While our primary focus will be to generate both current income and capital appreciation through investments in debt and, to a lesser extent, equity securities of private middle market companies, we intend to invest up to 30% of our assets in opportunistic investments. Opportunistic investments may include investments in distressed debt, debt and equity securities of public companies, credit default swaps, emerging market debt, or collateralized debt obligation (“CDO”) vehicles holding debt, equity or synthetic securities. As part of this 30%, we may also invest in debt of private middle market companies located outside of the United States. Given our primary investment focus on first and second lien loans, mezzanine debt and high yield bonds in private companies, we believe our opportunistic investments will allow us to supplement our core investments with other investments that are within GSC Group’s expertise that we believe offer attractive yields and/or the potential for capital appreciation.
 
We expect that the first and second lien loans will generally have stated terms of three to ten years and that the mezzanine debt will generally have stated terms of up to ten years, but that the expected average life of such first and second lien loans and mezzanine debt will generally be between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. We anticipate that substantially all of the investments held in our portfolio will hold a sub-investment grade rating by Moody’s Investors Service and/or Standard & Poor’s or, if not rated, would be below investment grade if rated. Debt securities rated below investment grade are commonly referred to as “junk bonds.”
 
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About GSC Group
 
GSCP (NJ), L.P. is an investment adviser with approximately $22.2 billion of assets under management as of December 31, 2006. GSC Group was founded in 1999 by Alfred C. Eckert III, its Chairman and Chief Executive Officer.  Its senior officers and advisers are in many cases long-time colleagues who have worked together extensively at other institutions, including Goldman, Sachs & Co., Greenwich Street Capital Partners and The Blackstone Group.  GSC Group specializes in credit-based alternative investment strategies including corporate credit, distressed investing and real estate. GSC Group is privately owned and has over 170 employees with headquarters in New Jersey, and offices in New York, London and Los Angeles. 
 
GSC Group operates in three main business lines: (i) the corporate credit group which is comprised of 28 investment professionals who manage approximately $8.0 billion of assets in leveraged loans, high yield bonds, mezzanine debt and derivative products with investments in more than 450 companies; (ii) the equity and distressed investing group which is comprised of 21 investment professionals who manage approximately $1.3 billion of assets in three control distressed debt funds and a long/short credit strategies hedge fund; and (iii) the real estate group which is comprised of 16 investment professionals managing $12.9 billion of assets, including a privately-held mortgage REIT (GSC Capital Corp.), various synthetic and hybrid collateralized debt obligation funds and a structured products hedge fund.
 
Our investment adviser
 
We will be externally managed and advised by our investment adviser, GSCP (NJ), L.P.  Our Chairman Richard M. Hayden and CEO Thomas V. Inglesby have management responsibility for the corporate credit group and are officers of our investment advisor.  Mr. Hayden and Mr. Inglesby have combined experience of over 56 years and individually have experience of over 36 years and 20 years, respectively. Mr. Hayden and Mr. Inglesby will be supported by the 28 investment professionals within the corporate credit group.  Additionally, the Fund will have access to GSC Group's 37 investment professionals in its equity and distressed investing group and its real estate group.  Under our investment advisory and management agreement, we have agreed to pay our investment adviser an annual base management fee based on our total assets, as defined under the 1940 Act (other than cash and cash equivalents but including assets purchased with borrowed funds), and an incentive fee based on our performance. See “Management—Investment advisory and management agreement.” Our investment adviser, together with certain affiliates, does business as GSC Group.
 
Our investment adviser is responsible for administering our business activities and day-to-day operations and will use the resources of GSC Group to support our operations. We believe that our investment adviser will be able to leverage GSC Group’s current investment platform, resources and existing relationships with financial institutions, financial sponsors, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, we expect that the GSC Group investment platform will assist our investment adviser in analyzing and monitoring investments. In particular, these resources provide us with a wide variety of investment opportunities and access to information that assists us in making investment decisions across our targeted asset classes, which we believe provide us with a competitive advantage. Since GSC Group’s inception in 1999, it has been investing in first and second lien loans, high-yield bonds and mezzanine debt. In addition to having access to approximately 70 investment professionals employed by GSC Group, we will also have access to over 100 GSC Group administrative professionals who will provide assistance in accounting, legal compliance and investor relations.

Our relationship with our investment adviser and GSC Group
 
We intend to utilize the personnel, infrastructure, relationships and experience of GSC Group and our investment adviser to enhance the growth of our business. We currently have no employees, and each of our executive officers is also an officer of GSC Group. Following completion of this offering GSC Group will own shares of common stock, which it will have received in exchange for the contribution of its interests in CDO Fund III in connection with the Contribution. See “Contribution.” Upon completion of this offering, GSC Group will no longer have any continuing economic interest or affiliation with CDO Fund III.
 
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We recently entered into an investment advisory and management agreement with our investment adviser. The initial term of the investment advisory and management agreement shall be for two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. Pursuant to the investment advisory and management agreement, our investment adviser implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our investment adviser is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investments, asset sales, financings and performing asset management duties.
 
Pursuant to our investment advisory and management agreement, our investment adviser has formed an investment committee to advise and consult with our investment adviser’s senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the cumulative experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee will consist of members of GSC Group’s senior investment staff, including Thomas Inglesby, our Chief Executive Officer, Richard Hayden, our Chairman, Robert Cummings, Jr., Thomas Libassi and Daniel Castro, Jr. All of the members of this committee are senior officers in various divisions of GSC Group. Mr. Inglesby is Senior Managing Director of GSC Group. Mr. Hayden is Vice Chairman of GSC Group, head of the corporate credit group and a member of the GSC Group management committee. Mr. Cummings is Senior Managing Director of GSC Group, Chairman of the risk and conflicts committee, Chairman of the valuation committee and a member of the GSC Group management committee. Mr. Libassi is Senior Managing Director of GSC Group’s equity and distressed debt business unit. Mr. Castro is Managing Director of GSC Group’s real estate group and Chief Investment Officer of the real estate investment trust. The investment committee will approve all investments in excess of $5 million made by the Company by unanimous consent. Along with the corporate credit group’s investment staff, the investment committee will actively monitor investments in our portfolio. Sale recommendations made by the corporate credit group’s investment staff must be approved by three out of five investment committee members.
 
Market opportunity
 
We believe the environment for investing in private middle market companies is attractive for the following reasons:
 
 
·
middle market debt securities are attractive compared to more broadly syndicated debt securities because middle market debt securities generally have more conservative capital structures, tighter financial covenants, better security packages and higher yields.
 
 
·
established relationships create a high barrier to entry in the middle market financing business. Specifically, private middle market companies and their financial sponsors prefer to access capital from and maintain close and longstanding relationships with a small group of well-known capital providers.
 
 
·
many private middle market companies prefer to execute transactions with private capital providers, rather than execute high-yield bond transactions in the public markets, which may necessitate SEC compliance and reporting obligations.
 
 
·
the middle market debt segment is a highly fragmented portion of the leveraged finance market. We believe that many of the largest capital providers in the broader leveraged finance market choose not to participate in middle market lending because of a preference for larger, more liquid transactions.
 
 
·
we expect continued strong leverage buyout activity from private equity firms who currently hold large pools of uninvested capital earmarked for acquisitions of private middle market companies. These private equity firms will continue to seek to leverage their investments by combining their equity capital with senior secured loans and mezzanine debt from other sources.

55

 
Competitive advantages
 
Although we have no prior operating history and our investment advisor, GSC Group, has no experience managing a BDC, we believe that through our relationship with GSC Group, we will enjoy several competitive advantages of GSC Group over other capital providers to private middle market companies.
 
GSC Group’s investment platform
 
GSC Group has a long history of strong performance across a broad range of asset classes and sectors. The senior investment professionals of GSC Group have extensive experience investing in syndicated loans, high-yield bonds, mezzanine debt and private equity.
 
Rapid deployment of offering proceeds
 
Shortly after the consummation of this offering, we intend to use the net proceeds to fund the purchase of the Portfolio, which consists of approximately $181 million of debt investments that consist of first lien and second lien loans, senior secured bonds and unsecured bonds. We believe that this rapid deployment of offering proceeds into these assets will provide potential for higher initial returns than cash or cash equivalents and distinguishes us from some of our potential competitors.
 
Experience sourcing and managing middle market loans
 
GSC Group has historically focused on investments in private middle market companies and we expect to benefit from this experience. Our investment adviser will use GSC Group’s extensive network of relationships with intermediaries focused on private middle market companies to attract well-positioned prospective portfolio company investments. Since 2003, the GSC Group corporate credit group has reviewed over 970 new middle market loan opportunities, approximately 300 of which were second lien loans. Of the loans reviewed, 285 were purchased, including 51 second lien loans. In addition, our investment adviser will work closely with the equity and distressed debt and European mezzanine groups, which oversee a portfolio of investments in over 45 companies, maintain an extensive network of relationships and possess valuable insights into industry trends.
 
Experienced management and investment committee
 
Thomas V. Inglesby, our Chief Executive Officer and Senior Managing Director of GSC Group, has over 20 years of middle market investing experience having managed leveraged loan, high-yield bond, mezzanine debt, distressed debt and private equity portfolios. In addition to Mr. Inglesby, our investment committee consists of Richard M. Hayden, Mr. Robert F. Cummings, Jr., Thomas J. Libassi and Daniel I. Castro, Jr. Mr. Hayden is Vice Chairman of GSC Group, head of the corporate credit group and a member of the GSC Group management committee. Mr. Hayden was previously with Goldman, Sachs & Co. from 1969 until 1999 and was elected a Partner in 1980. Mr. Cummings is a Senior Managing Director of GSC Group, Chairman of the risk and conflicts committee, Chairman of the valuation committee and a member of the GSC Group management committee. Mr. Cummings was previously with Goldman, Sachs & Co. from 1973 to 1998. Mr. Libassi is Senior Managing Director of GSC Group in the equity and distressed debt group and has 23 years of experience managing high-yield and distressed debt portfolios. Mr. Castro is Managing Director of GSC Group in the real estate group. Mr. Castro has over 24 years of experience investing in debt products and was, until 2004, on the Institutional Investor All-American Fixed Income Research Team every year since its inception in 1992.
 
Diversified credit-oriented investment strategy
 
Through the use of GSC Group’s credit-based investment approach which relies on detailed business and financial analysis and portfolio diversification, we will seek to minimize principal loss while maximizing risk-adjusted returns. We believe that our affiliation with GSC Group offers an attractive opportunity to invest in middle market first and second lien loans and mezzanine debt.
 
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Utilizing our broad transaction sourcing network and relationships with middle market lenders
 
We intend to capitalize on the diverse deal-sourcing opportunities that we believe GSC Group brings to us as a result of its investment experience in our targeted asset classes, track record and extensive network of contacts in the financial community, including financial sponsors, merger & acquisition advisory firms, investment banks, capital markets desks, lenders and other financial intermediaries and sponsors. In addition, through its other activities, GSC Group is regularly in contact with portfolio company management teams that can help provide additional insights on a wide variety of companies and industries.
 
In particular, GSC Group has developed its middle market franchise via extensive relationships with middle market loan originators. These relationships have been developed over the past 15 years at multiple levels of management within GSC Group and have resulted in GSC Group’s ability to generate a significant amount of middle market opportunities, including first and second lien loans and mezzanine debt securities. We believe that these relationships will continue to provide GSC Group with access to middle market debt securities.
 
Extensive industry focus
 
Since its founding in 1999, GSC Group has invested in over 950 companies and over this time has developed long-term relationships with management teams and management consultants. We expect that the experience of GSC Group’s investment professionals in investing across the aerospace, automotive, broadcasting/cable, consumer products, environmental services, technology, telecom and diversified manufacturing industries, throughout various stages of the economic cycle, will provide our investment adviser with access to ongoing market insights and favorable investment opportunities.
 
Disciplined investment process
 
In making its investment decisions, our investment adviser intends to apply GSC Group’s rigorous and consistent investment process. Upon receiving an investment opportunity, GSC Group’s corporate credit group performs an initial screening of the potential investment which includes an analysis of the company, industry, financial sponsor and deal structure. If the investment is suitable for further analysis, GSC Group’s investment staff conducts a more intensive analysis which includes in-depth research on competitive dynamics in the industry, customer and supplier research, cost and growth drivers, cash flow characteristics, management capability, balance sheet strength, covenant analysis and a distressed recovery analysis. Our investment approach will emphasize capital preservation and minimization of downside risk.
 
Flexible transaction structuring
 
We expect to be flexible in structuring investments, the types of securities in which we invest and the terms associated with such investments. The principals of GSC Group have extensive experience in a wide variety of securities for leveraged companies with a diverse set of terms and conditions. This approach and experience should enable our investment adviser to identify attractive investment opportunities throughout various economic cycles and across a company’s capital structure so that we can make investments consistent with our stated objectives.
 
Access to GSC Group’s infrastructure
 
We will have access to GSC Group’s finance and administration function which addresses legal, compliance, and operational matters, and promulgates and administers comprehensive policies and procedures regarding important investment adviser matters, including portfolio management, trading allocation and execution, securities valuation, risk management and information technologies in connection with the performance of our investment adviser’s duties hereunder. We believe that the finance and administrative infrastructure established by GSC Group is an important component of a complex investment vehicle such as a BDC. These systems support, and are integrated with, our portfolio management functions. GSC Group has over 170 employees, including over 70 investment professionals, who will be available to support our operations.
 
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We will also have the benefit of the experience of GSC Group’s senior professionals and members of its advisory board, many of whom have served on public and private company boards and/or served in other senior management roles. We believe that this experience will also be valuable to our investment adviser and to us.
 
Prospective investments
 
The Portfolio
 
Prior to the pricing of this offering, we will enter into a portfolio acquisition agreement that grants us the exclusive right to purchase the Portfolio for approximately $181 million in cash (subject to certain adjustments) plus accrued interest on the assets in the Portfolio. See Figure 2 below for a diagram representing the Portfolio sale. Our board of directors has engaged Valuation Research Corporation (“VRC”), an independent valuation firm, to assist them in determining the fair value of each illiquid investment in the Portfolio for which there are no readily available market quotations. We have agreed to pay VRC a total fee of approximately $140,000. Our investment manager has provided VRC with detailed information on each investment, including prices for each investment in the Portfolio that it believes represent fair value. VRC has conducted a preliminary valuation analysis on each asset in the Portfolio and is of the opinion that the prices proposed by our investment manager for such assets seem reasonable. VRC is still in the process of conducting its analysis on these investments and will provide an opinion as to the fair value of each of these investments based upon the most current information available on or about the date of the closing of this offering and will update its opinion on or about the date of the closing of the sale of such investments to us based upon the then most current information available. Our board of directors will utilize the services of VRC to review the fair value of any securities considered by our investment adviser. VRC is still conducting its review, and has not formed a final opinion, but based on its preliminary analysis, VRC is of the opinion that the final fair value of the Portfolio should be consistent with the prices that our investment manager has proposed.
 
The purchase price will be the sum of the valuations ascribed to each asset in the Portfolio as determined by our board of directors. The term of the portfolio acquisition agreement provides for a final valuation of the investments and a corresponding price adjustment prior to the closing of the purchase of the Portfolio. Consents are generally not required with respect to the transfer or assignment of many of the investments in the Portfolio, except in the case of a limited number of the Portfolio assets, which consents we expect to receive prior to the purchase of the Portfolio. If a consent is required and not obtained from any portfolio company in the Portfolio as of the closing of the purchase, the purchase price will be reduced by the amount ascribed to such asset and we will purchase only the portion of the Portfolio for which we have received the necessary consents and acknowledgements. If the consent is received within 60 days following the closing, we will purchase the assets at the final valuation amount plus accrued interest. In compliance with our future obligations as a BDC, we will offer to provide each of the companies in the Portfolio our significant managerial assistance. The portfolio acquisition agreement contains customary representations and warranties, including those relating to good title to the investments to be purchased. In addition, CDO Fund III will agree to indemnify us for one year following the closing of the portfolio acquisition agreement for any losses resulting from the breach by CDO Fund III of its obligations under the portfolio acquisition agreement.
 
Our ability to purchase the Portfolio is conditioned upon the successful covenant defeasance (i.e., retirement) of the secured notes of CDO Fund III, which is expected to occur immediately following the consummation of this offering. Under the indenture governing the secured notes issued by CDO Fund III, CDO Fund III is required to place on deposit with the indenture trustee, an aggregate of $497 million, which is an amount sufficient to allow the defeasance of the secured notes issued by CDO Fund III under the indenture. CDO Fund III expects to fund the required deposit amount from its additional cash, together with the issuance of the CDO Fund III Notes, which we expect will be issued in the aggregate amount of $250 million. We expect that the CDO Fund III Notes will be issued at the closing of this offering and will be secured under the existing indenture by a general security interest in all the assets of CDO Fund III. The underwriters of this offering may or may not be purchasers of, or involved in the issuance of, the CDO Fund III Notes. If sufficient funding from the issuance of the CDO Fund III Notes is not available for any reason,
 

58


CDO Fund III will need to arrange alternative financing to fund the required deposit in order to retire the secured notes and thereby allow the Portfolio to be delivered to us under the portfolio acquisition agreement.
 
Because of our interests in CDO Fund III as a result of the Contribution, the sale of the CDO Fund III assets (including the Portfolio to be purchased by the Company) will result in cash proceeds for the equity investors in CDO Fund III, including the Company, and we also expect to receive part of any incentive fee payable (which is equal to 20% of the profits of such third party equity investors, above a hurdle rate). Moreover, prior to liquidation, we will also earn a fee as collateral manager for CDO Fund III. See “Contribution.” The liquidation, which will consist of the sale of all the remaining assets in CDO Fund III, will commence on the closing of this offering.
 
The Portfolio is primarily comprised of first and second lien loans, senior secured bonds and unsecured bonds. The Portfolio and the companies described below under “—Prospective investments” currently constitute all of our prospective investments which have been purchased directly from agent banks or in the open market. These assets have been selected for inclusion in the Portfolio as a result of their yield, operating performance, and position in the capital structure.
 
Based on due diligence conducted to date, we believe that a majority of the prospective portfolio investments in the Portfolio are BDC qualifying assets that satisfy our general investment objectives. After purchasing the Portfolio, our investment adviser will be responsible for monitoring and servicing the investments.
 
Our board of directors (including a majority of the non-interested directors) has approved the portfolio acquisition agreement and determined that:
 
 
·
the terms thereof, including the consideration to be paid, are reasonable and fair to our stockholders and do not involve overreaching of any party; and
 
 
·
the proposed transaction is consistent with the interests of our stockholders and our investment policies.

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Figure 2: Portfolio sale following the Contribution
 
 
The following table provides certain information about the investments included in the Portfolio and reflects data as of February 16, 2007. Prior to the execution of the definitive acquisition agreement, there may be limited changes to the Portfolio reflected in the preliminary prospectus as a result of market pricing, credit quality changes or redemptions. Any changes to the Portfolio will be reflected in the final prospectus. GSC Group purchased all of the Portfolio assets from time to time from agent banks or in the open market, with the first purchase occurring on June 19, 2000. At February 16, 2007, the aggregate market value of the investments was $181 million. Assuming we purchase all of the securities in the Portfolio, we will not control any of the businesses included in the Portfolio.
 
 
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Portfolio Assets Contracted to be Purchased
 
Name of Portfolio Company
 
Nature of Business
 
Coupon*
 
Maturity
 
Par Value
(in millions)
 
Estimated Fair Market Value
(in millions)
                     
First Lien Term Loan
                   
Aero Products International, Inc.
 
Personal and Nondurable Consumer Products
 
L + 5.00%
 
12/19/08
 
4.2
 
4.1
American Driveline Systems, Inc.
 
Automobile
 
L + 3.50%
 
08/09/12
 
0.4
 
0.4
Atlantis Plastics Films, Inc.
 
Containers, Packaging and Glass
 
L + 4.00%
 
09/22/11
 
1.6
 
1.6
CFF Acquisition LLC
 
Leisure, Amusement and
Entertainment
 
L + 3.75%
 
08/31/13
 
5.0
 
5.0
Contec, LLC
 
Electronics
 
L + 3.25%
 
06/15/12
 
0
 
Convergeone Holdings Corp.
 
Telecommunications
 
L + 3.75%
 
05/31/12
 
3.9
 
3.9
Cortz, Inc.
 
Personal, Food and
Miscellaneous Services
 
L + 3.50%
 
11/30/09
 
1.1
 
1.1
Cortz, Inc.
 
Personal, Food and Miscellaneous Services
 
L + 4.00%
 
11/30/10
 
1.7
 
1.6
Cygnus Business Media, Inc.
 
Printing, Publishing, and
Broadcasting
 
L + 4.50%
 
07/13/09
 
6.4
 
6.3
Flakeboard Company Limited
 
Diversified/Conglomerate Manufacturing
 
L + 3.75%
 
07/28/12
 
7.8
 
7.7
Flavor and Fragrance Group Holdings, Inc.
 
Personal and Nondurable Consumer Products
 
L + 4.00%
 
06/30/10
 
0.8
 
0.8
Flavor and Fragrance Group Holdings, Inc.
 
Personal and Nondurable Consumer Products
 
L + 4.50%
 
06/30/11
 
2.1
 
2.1
Flavor and Fragrance Group Holdings, Inc.
 
Personal and Nondurable Consumer Products
 
L + 7.00%
 
12/31/11
 
1.2
 
1.2
Infor Enterprise Solutions Holdings, Inc.
 
Diversified/Conglomerate
Service
 
L + 3.75%
 
07/28/12
 
0.6
 
0.6
Infor Enterprise Solutions Holdings, Inc.
 
Diversified/Conglomerate
Service
 
L + 3.75%
 
07/28/12
 
1.1
 
1.2
Insight Pharmaceuticals LLC
 
Personal, Food and Miscellaneous Services
 
L + 4.00%
 
03/31/11
 
1.1
 
1.1
Insight Pharmaceuticals LLC
 
Personal, Food and Miscellaneous Services
 
L + 4.38%
 
03/31/12
 
1.1
 
1.1
Legacy Cabinets, Inc.
 
Home and Office
Furnishings
 
L + 3.75%
 
08/31/12
 
1.9
 
1.9
Lincoln Industrial Corporation
 
Machinery (Non Agriculture, Non Construction, Non Electronic)
 
L + 3.25%
 
04/01/10
 
1.7
 
1.7
Lincoln Industrial Corporation
 
Machinery (Non Agriculture, Non Construction, Non Electronic)
 
L + 3.75%
 
04/01/11
 
3.1
 
3.1
Miller Heiman Acquisition Corp.
 
Diversified/Conglomerate
Service
 
L + 3.50%
 
06/01/10
 
1.4
 
1.4
Miller Heiman Acquisition Corp.
 
Diversified/Conglomerate
Service
 
L + 3.75%
 
06/01/12
 
1.8
 
1.8
Questex Media Group, Inc.
 
Printing, Publishing, and
Broadcasting
 
L + 4.25%
 
05/23/12
 
5.8
 
5.8
Redwood Toxicology Laboratory, Inc.
 
Healthcare
 
L + 3.50%
 
02/27/11
 
0.9
 
0.9
Redwood Toxicology Laboratory, Inc.
 
Healthcare
 
L + 4.00%
 
02/27/12
 
1.0
 
1.0
Soil Safe, Inc.
 
Ecological
 
L + 3.50%
 
09/15/12
 
2.3
 
2.3
Switch & Data Holdings, Inc.
 
Telecommunications
 
L + 4.25%
 
10/13/11
 
4.5
 
4.5
Total First Lien Term Loans
                 
62.5
 
Second Lien Term Loan
   
ABP Corporation
 
Restaurant
 
L + 4.50%
 
07/15/10
 
5.9
 
5.9
Bankruptcy Management Solutions, Inc.
 
Finance
 
L + 6.25%
 
07/31/13
 
2.0
 
2.0
Convergeone Holdings Corp.
 
Telecommunications
 
L + 5.75%
 
05/31/13
 
1.0
 
1.0
Energy Alloys, LLC
 
Metals
 
L + 6.50%
 
09/13/11
 
6.2
 
6.2
 
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Name of Portfolio Company
 
Nature of Business
 
Coupon*
 
Maturity
 
Par Value
(in millions)
 
Estimated Fair Market Value
(in millions)
Group Dekko
 
Electronics
 
L + 6.25%
 
01/20/12
 
4.0
 
4.0
Hopkins Manufacturing Corporation
 
Personal and Nondurable Consumer Products
 
L + 7.00%
 
01/26/12
 
3.3
 
3.2
Legacy Cabinets, Inc.
 
Home and Office Furnishings
 
L + 7.50%
 
08/18/13
 
2.4
 
2.4
New World Restaurant Group, Inc.
 
Personal, Food and Miscellaneous Services
 
L + 6.75%
 
01/26/12
 
5.5
 
5.6
Sportcraft, LTD
 
Personal and Nondurable Consumer Products
 
L + 7.75%
 
03/31/12
 
5.0
 
3.7
Stronghaven, Inc.
 
Containers, Packaging and Glass
 
11.00%
 
10/31/10
 
3.3
 
3.3
Transportation Aftermarket Enterprises, Inc.
 
Automobile
 
L + 7.25%
 
06/30/12
 
1.0
 
1.0
USS Mergerco, Inc.
 
Ecological
 
L + 4.25%
 
06/29/13
 
6.0
 
6.0
Wyle Laboratories, Inc.
 
Aerospace and Defense
 
L + 6.50%
 
07/28/11
 
1.0
 
1.0
X-Rite, Incorporated
 
Electronics
 
L + 5.00%
 
06/30/11
 
4.0
 
4.0
Total Second Lien Term Loans
                 
49.1
                     
Senior Secured Bond
   
GFSI Inc
 
Apparel
 
11.00%
 
06/01/11
 
8.9
 
8.8
MSX International, Inc.
 
Diversified/Conglomerate Service
 
11.00%
 
10/15/07
 
6.0
 
6.0
Strategic Industries
 
Diversified/Conglomerate Manufacturing
 
12.50%
 
10/01/07
 
12.0
 
10.8
Terphane Holdings Corp.
 
Containers, Packaging and Glass
 
12.50%
 
06/15/09
 
2.8
 
2.8
Terphane Holdings Corp.
 
Containers, Packaging and Glass
 
12.50%
 
06/15/09
 
2.6
 
2.6
Terphane Holdings Corp.
 
Containers, Packaging and Glass
 
L + 9.70%
 
06/15/09
 
0.5
 
0.5
Vitamin Shoppe Industries, Inc.
 
Retail Store
 
L + 7.50%
 
11/15/12
 
1.1
 
1.1
Total Senior Secured Bonds
                 
32.7
                     
Unsecured Bond
   
Advanced Lighting Technologies, Inc.
 
Electronics
 
11.00%
 
03/31/09
 
7.0
 
6.9
Ainsworth Lumber
 
Diversified Natural Resources, Precious Metals
 
7.25%
 
10/01/12
 
6.0
 
4.8
EuroFresh Inc.
 
Farming and Agriculture
 
11.50%
 
01/15/13
 
5.0
 
4.9
IDI Acquisition Corp.
 
Healthcare
 
10.75%
 
12/15/11
 
2.1
 
1.9
Jason Incorporated
 
Automobile
 
13.00%
 
11/01/08
 
3.4
 
3.4
NE Restaurant Co.
 
Restaurant
 
10.75%
 
07/15/08
 
9.9
 
9.9
Network Communications, Inc.
 
Printing, Publishing, and Broadcasting
 
10.75%
 
12/01/13
 
5.0
 
5.2
Total Unsecured Bonds
                 
37.0
                     
Total
                 
181.3
 

*
 L means the London Interbank Offered Rate (LIBOR), which generally at the option of the respective borrowers may be based on LIBOR rates of various terms, depending on the term of the borrowing.
 
Our investment adviser employs a proprietary credit rating system (“CRM”) to categorize our investments. See “—Ongoing relationships with and monitoring of portfolio companies.”
 
 
62


In addition to various risk management and monitoring tools, GSC Group normally grades all investments using a proprietary scoring system. GSC Group utilizes CRM to rate its portfolio companies. The CRM rating consists of two components: (i) a numerical debt score and (ii) a corporate letter rating. The numerical debt score is based on the objective evaluation of six risk categories: (i) leverage, (ii) seniority in the capital structure, (iii) fixed charge coverage ratio, (iv) debt service coverage/liquidity, (v) operating performance, and (vi) business/industry risk. The numerical debt score ranges from 1.00 to 5.00, which can generally be characterized as follows: 1.00-2.00 represents assets that hold senior positions in the capital structure typically have low financial leverage and/or strong historical operating performance; 2.00-3.00 represents assets that hold relatively senior positions in the capital structure, either senior secured, senior unsecured, or senior subordinate, and have moderate financial leverage and/or are performing at or above expectations; 3.00-4.00 represents assets which are junior in the capital structure, have moderate financial leverage and/or are performing at or below expectations; and 4.00-5.00 represents assets that are highly leveraged and have poor operating performance. Our numerical debt score is designed to produce higher scores for debt positions that are more subordinate in the capital structure. Therefore, generally second lien loans, high-yield bonds and mezzanine debt will be assigned scores of 2.25 or higher.
 
The CRM also consists of a corporate letter rating, whereby each credit is assigned a letter rating based on several subjective criteria, including perceived financial and operating strength and covenant compliance. The corporate letter ratings range from A through F and are characterized as follows: (A) = strong credit, (B) = satisfactory credit, (C) = special attention credit, (D) = payment default risk, (E) = payment default, (F) = restructured equity security. Our investment adviser believes that as of February 16, 2007, the weighted average rating of the investments included in the Portfolio is approximately 2.5B and the weighted average yield of such investments is approximately 10.9%. A weighted average score of 2.5B reflects our investment adviser’s belief that the Portfolio is performing well. No asset in the portfolio is currently in payment default or delinquent on any payment obligations.
 
Investments
 
We will seek to create a diversified portfolio that will include first and second lien loans and long-term mezzanine debt by investing up to 5% of capital in each investment, although the investment sizes may be more or less then the targeted range. We also anticipate, to a lesser extent, making equity investments in private middle market companies. In this prospectus, we generally use the term “middle market” to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization. Each of these investments will generally be less than 5% of capital and made in conjunction with loans we make to these companies. We expect that our target portfolio over time will include both first and second lien loans and long-term mezzanine debt, and, to a lesser extent, private equity securities. In addition to originating investments, we may acquire investments in the secondary market. In the interests of diversifying our sources of debt funding, we may in the future consider securitizing certain of the portfolio investments out of a wholly-owned subsidiary, subject to our ability to satisfy the 1940 Act restrictions on BDCs, including the qualifying asset and leverage tests.
 
First lien loans
 
First lien loans are secured by a first priority perfected security interest on all assets of the borrower and may include a first priority pledge of the capital stock of the borrower. First lien loans hold first priority with regard to right of payment. Generally, first lien loans offer floating rate interest payments, have a stated maturity of five to seven years, and typically have a fixed amortization schedule. First lien loans generally have restrictive financial covenants that govern such items as the maintenance of certain financial ratios, restricted payments, asset sales and additional debt incurrence.
 
Second lien loans
 
Second lien loans are secured by a second perfected priority security interest on all assets of the borrower and may include a second priority pledge of the capital stock of the borrower as well. Second lien loans hold second priority with regard to right of payment. Second lien loans offer either floating rate or fixed rate interest payments that generally have a stated maturity of five to eight years, and may or may not have a fixed amortization schedule. Second liens that do not have fixed amortization schedules require payment of the principal amount of the loan upon the maturity date of the loan. Second lien loans typically pay cash interest. In instances where there is a paid-in-kind (PIK) interest component to the coupon payments, the principal amounts of the loan increases with the payment
 
63


of PIK interest. Second lien loans generally have less restrictive financial covenants than those that govern first lien loans.
 
Senior Secured Bonds
 
A secured bond is a type of bond that is secured by the issuer's pledge of a specific asset. In the event of a default, the bond issuer passes title of the asset or right to a specific revenue stream on to the bondholders. Such senior secured bonds will take priority over other debt securities sold by the same issuer and secured by the same collateral.
 
Unsecured Bonds
 
An unsecured bond is not secured by an underlying asset or collateral of the issuer. In the event of the issuer’s liquidation, dissolution, reorganization, bankruptcy or other similar proceeding, the bondholders only have the right to share pari passu in the issuer’s unsecured assets with other equally-ranking creditors of the issuer.
 
Mezzanine debt
 
Structurally, mezzanine debt usually ranks subordinate in priority of payment to senior loans and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers’ capital structure. Typically, mezzanine debt has elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with senior loans, while providing lenders an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest. This equity interest typically takes the form of warrants. Due to its higher risk profile and often less restrictive covenants as compared to senior loans, mezzanine debt generally earns a higher return than senior secured debt. The warrants associated with mezzanine debt are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity interest in the borrower. Mezzanine debt also may include a “put” feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed formula.
 
We also intend, to a lesser extent, to make equity investments in private middle market companies. In making an investment, in addition to considering the factors discussed below under “—Investment selection,” we also consider the anticipated timing of a liquidity event, such as a public offering, sale of the company or redemption of our equity securities.
 
We will generally seek to target companies that generate positive cash flows. GSC Group has a staff of 70 investment professionals who specialize in specific industries. We will generally seek to invest in companies from the industries in which GSC Group’s investment professionals have direct expertise. The following is a representative list of the industries in which GSC Group has invested: aerospace and defense, automotive, broadcasting/cable, chemicals, consumer products, energy, environmental services, food and beverage, gaming, health care, homebuilding, lodging and leisure, metals/mining, paper and forest products, retail, diversified manufacturer, supermarket and drug, technology, wireless telecom and wireline telecom.
 
However, we may invest in other industries if we are presented with attractive opportunities.
 
As a result of regulatory restrictions, we are generally not permitted to invest in any portfolio company in which GSC Group or any affiliate currently has an investment. In addition to such investments, we may invest up to 30% of our assets in opportunistic investments in high-yield bonds, debt and equity securities in CDO vehicles, distressed debt and equity securities of public companies. We also may invest in debt of private middle market companies located outside of the United States.
 
64

Unassociated Document
Prospective Portfolio Company Characteristics
 
Our investment adviser will utilize the same disciplined investment philosophy as that of GSC Group’s corporate credit group in identifying and selecting portfolio company investments. Our portfolio companies generally will have one of more of the following characteristics:
 
 
·
issuers that have a history of generating stable earnings and strong free cash flow;
 
 
·
issuers that have well constructed balance sheets, including an established tangible liquidation value;
 
 
·
industry leaders with significant competitive advantages and sustainable market shares in attractive sectors;
 
 
·
capital structures that provide appropriate terms and reasonable covenants;
 
 
·
management teams that are experienced and that hold meaningful equity ownership in the businesses that they operate;
 
 
·
issuers with reasonable price-to-cash flow multiples;
 
 
·
industries in which GSC Group’s investment professionals historically have had deep investment experience and success;
 
 
·
macro competitive dynamics in the industry within which each company competes; and
 
 
·
adhering to diversification with regard to position sizes, industry groups and geography.
 
Investment selection
 
Our investment adviser will employ a rigorous and consistent investment selection process which will be based on extensive quantitative and qualitative analysis. Through this process, we will seek to identify those issuers exhibiting superior fundamental risk-reward profiles and strong defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. In managing us, our investment adviser will employ the same investment philosophy and portfolio management methodologies used by the investment professionals of GSC Group in GSC Group’s private investment funds. Our investment adviser’s investment philosophy and portfolio construction will involve the following:
 
 
·
bottoms-up, company-specific research and analysis;
 
 
·
with respect to each individual company, an emphasis on capital preservation, low volatility and minimization of downside risk; and
 
 
·
investing with management teams that are experienced and that hold meaningful equity ownership in the businesses t