AB 2020 Form 10-K

The Fund’s incentive fee may induce the Adviser to pursue speculative investments and to use leverage when it may be unwise to do so. The incentive fee payable by the Fund to the Adviser may create an incentive for the Adviser to pursue investments on the Fund’s behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The income-based incentive fee payable to the Adviser will be calculated based on a percentage of the Fund’s return on invested capital. This may encourage the Adviser to use leverage to increase the return on the Fund’s investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of the Fund’s common stock. In addition, the Adviser will receive the incentive fee based, in part, upon net capital gains realized on the Fund’s investments. As a result, in certain situations the Adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in the Fund’s investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. The Small Business Credit Availability Act allows the Fund to incur additional leverage, which may increase the risk of investing with the Fund. On March 23, 2018, the SBCAA was signed into law. The SBCAA, among other things, modifies the applicable provisions of the 1940 Act to reduce the required asset coverage ratio applicable to BDCs from 200% to 150% subject to certain approval, time and disclosure requirements (including either stockholder approval or approval of a majority of the directors who are not interested persons of the BDC and who have no financial interest in the proposal). On July 5, 2018, the Board voted to approve the adoption of the reduced asset coverage ratio and separately recommended that Investors approve the reduced asset coverage requirements at the 2018 annual meeting of stockholders. On September 26, 2018, the Fund’s stockholders voted to approve the adoption of the reduced asset coverage ratio, effective September 27, 2018. Increased leverage could increase the risks associated with investing in the Fund. For example, if the value of the Fund’s assets decreases, although the asset base and expected revenues would be larger because increased leverage would permit the Fund to acquire additional assets, leverage will cause the Fund’s net asset value to decline more sharply than it otherwise would have without leverage or with lower leverage. Similarly, any decrease in the Fund’s revenue would cause its net income to decline more sharply, on a relative basis, than it would have if the Fund had not borrowed or had borrowed less (although, as noted above, the Fund’s asset base and expected revenues would likely be larger). However, since the Fund already uses leverage in optimizing its investment portfolio, there are no material new risks associated with increased leverage other than the amount of the leverage. If the Fund’s asset coverage ratio falls below the required limit, the Fund will not be able to incur additional debt until it is able to comply with the asset coverage ratio. This could have a material adverse effect on the Fund’s operations, and the Fund may not be able to make distributions to stockholders. The actual amount of leverage that the Fund employs will depend on the Board’s and the Adviser’s assessment of market and other factors at the time of any proposed borrowing. The Fund currently anticipates being able to obtain sufficient credit on acceptable terms, although the Fund can make no assurance that this will be the case or that it will remain such in the future. The following table illustrates the effect of leverage on returns from an investment in the Shares assuming that the Fund employs leverage such that its asset coverage equals (1) its actual asset coverage as of December 31, 2020 and (2) 150%, each at various annual returns, net of expenses and as of December 31, 2020. The calculations in the tables below are hypothetical, and are provided for illustrative purposes only. Actual returns may be higher or lower than those appearing below. Assumed Return on the Fund’s Portfolio (net of expenses) (10.00)% (5.00)% 0.00% 5.00% 10.00% Corresponding net return to holders of common stock assuming actual asset coverage as of December 31, 2020 (1) (31.7)% (18.3)% (5.0)% 8.3% 21.7% Corresponding net return to holders of common stock assuming 150% asset coverage (2) (36.0)% (21.0)% (6.0)% 9.0% 24.0% (1) Assumes $593.0 million in total portfolio assets, $370.7 million in debt outstanding, $222.4 million in net assets, and an average cost of funds of 3.0%. Actual interest payments may be different. (2) Assumes $593.0 million in total portfolio assets, $395.4 million in debt outstanding, $197.7 million in net assets, and an average cost of funds of 3.0%. Actual interest payments may be different. 35