FS Energy & Power Fund updates

Summary

The Board of Trustees of FS Energy & Power Fund approved a change in the Fund’s name, investment objectives and investment strategy as part of a plan to transition the Fund’s investment strategy from investing primarily in private U.S. energy and power companies to a diversified credit strategy investing across private and public credit in a broader set of industries, sectors and subsectors.

The transition to a diversified credit strategy is designed to help:

Enhance the return to shareholders
Maximize the Fund’s long-term liquidity options
Accelerate the timeline to a liquidity event and
Reduce the volatility associated with a single sector-focused strategy.

The Fund will be renamed FS Specialty Lending Fund to align with the transition to a diversified credit strategy. FS/EIG Advisor, LLC (the “Advisor”) will continue to manage the Fund under the new investment strategy. We expect investment professionals from FS Investments, including Andrew Beckman, Head of Liquid Credit and Special Situations at FS Investments, will supplement the Advisor’s investment management resources to assist in the transition and management of the diversified credit portfolio.

We currently expect to target a liquidity event within three years of the effective date of the investment strategy change, subject to the pace of the portfolio rotation, Fund performance, market conditions and the best interest of shareholders. A liquidity event could include a merger, sale of the portfolio, a listing of the Fund’s common shares on a national securities exchange or other transaction as approved by the Board.

The effective date of the new name and investment strategy will be 60 days after we send our shareholders a regulatory notice regarding the change. We expect the effective date to occur in the third quarter of 2023.

FSEP Q1 2023 update webinar replay now available.

Watch here

Key resources

Account maintenance form

Strategic rationale

The transition to a diversified credit strategy is designed to help:

Maximize the Fund’s near-medium and long-term liquidity options. The primary goal of transitioning to a diversified credit strategy is to maximize the Fund’s near-, medium- and long-term liquidity options. To demonstrate a meaningful and tangible step towards providing shareholders with liquidity in the near- to medium-term, we expect the Fund to provide enhanced distributions to shareholders.

The enhanced distribution schedule is designed to meaningfully increase the return to shareholders during the transition process. Furthermore, since we expect a portion of the enhanced distributions will be funded through a return of capital, which would reduce the Fund’s total assets under management, the graduating schedule further aligns the interests of shareholders and the Advisor to seek to achieve a long-term liquidity event that maximizes shareholder value within the targeted three-year timeframe.

Maximize the Fund’s long-term liquidity options by:

Increasing the Fund’s distribution yield: The transition plan has been structured to enhance the Fund’s portfolio yield and ultimately seek to reach our targeted annualized distribution rate of approximately 9.0% based on the Fund’s NAV. We expect the combination of rotating the portfolio, optimizing the Fund’s borrowings and reducing the Fund’s exposure to energy and non-income-producing assets may help grow the income generated by the portfolio at an accelerated pace compared to the current investment strategy.
Diversifying the portfolio to appeal to a broader audience: Investor demand for energy-focused strategies has generally declined since FSEP’s launch in 2011 driven by the volatility associated with commodity cycles, a changing regulatory environment, climate change concerns and general competition for capital from other sectors. The result is a more limited investor base for energy-specific investments. We believe the flexibility to invest in private and public credit markets across the capital structure, industries, sectors and subsectors is critical to enhancing shareholder returns, reducing exposure to commodity price volatility and building a portfolio that may appeal to a broader set of investors.
Optimizing borrowings: FSEP has historically used leverage (borrowings) to enhance the return of FSEP’s investment portfolio. Many traditional lenders, such as banks and insurance companies, have eliminated or curtailed their lending to the energy sector or significantly increased the cost of borrowing due to many of the reasons noted above. We believe the transition to a diversified credit strategy may broaden the amount and type of financing options available to the Fund, reduce the cost of borrowing, accelerate the turnover of FSEP’s portfolio by growing the size of the portfolio and reducing the portfolio’s concentration of equity holdings and sustain a higher annualized distribution rate for shareholders.

Long-term liquidity outlook

Enhanced distributions

We expect the Fund to provide enhanced quarterly distributions to shareholders commencing in the third quarter of 2023 until the achievement of a long-term liquidity event.

Targeted schedule of enhanced distributions¹

	Q3 2023	Q4 2023	2024	2025	2026
Annualized distribution rate²	7.5%	7.5%	10.0%	12.5%	15.0%³

Hypothetical account with a current value of $100,000⁴

	Q3 2023	Q4 2023	2024	2025	2026
Cash distributions for the period	$1,875	$1,860	$9,810	$11,890	$13,750³
Cumulative cash distributions	$1,875	$3,735	$13,545	$25,435	$39,185³

Additional resources

Fact sheet

Commentary

Quarterly update

FS Liquid Credit & Special Situations team page

RISK FACTORS

An investment in the common shares of FSEP involves a high degree of risk and may be considered speculative. The following are some of the risks an investment in our common shares involves; however, you should carefully consider all of the information found in Item 1A of our annual report on Form 10-K and other reports filed with the U.S. Securities and Exchange Commission.

your common shares. If you are able to sell your common shares before we complete a liquidity event, it is likely that you will receive less than what you paid for them. Our share repurchase program contains numerous restrictions. In addition, we have currently suspended our share repurchase program. If we conduct quarterly tender offers for our common shares in the future, only a limited number of our common shares will be eligible for repurchase. We may suspend or terminate the share repurchase program at any time.
Our distributions may be funded from unlimited amounts of offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to us for investment. Any capital returned to shareholders through distributions will be distributed after payment of fees and expenses.
We invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.
Our current investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of energy and power companies. The revenues, income (or losses) and valuations of energy and power companies can fluctuate suddenly and dramatically due to a number of environmental, regulatory, political and general market risks, which have historically impacted our financial performance, including our net asset value per share, and may continue to in the future.
An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.
Investing in middle market companies involves a number of significant risks, any one of which could have a material adverse effect on our operating results.
A lack of liquidity in certain of our investments may adversely affect our business. We may be unable to sell our investments at favorable prices or at all.
We are subject to financial market risks, including changes in interest rates, which may have a substantial negative impact on our investments.
We may borrow funds to make investments, which increases the volatility of our investments and may increase the risks of investing in our securities.
FSEP is a long-term investment for persons of adequate financial means who have no need for liquidity in their investment. To invest in FSEP, an investor must have either
- 1) a net worth of at least $70,000 and an annual gross income of at least $70,000, or
- 2) a net worth of at least $250,000. Some states, such as Kansas, impose higher suitability standards.
Portions of our distributions to shareholders were funded from the reimbursement of certain expenses, including through the offset of certain investment advisory fees, that are subject to repayment to our affiliate, FS Investments, and our future distributions may be funded from such offsets and reimbursements. Significant portions of these distributions may not be based on our investment performance, and such offsets and reimbursements by FS Investments may not continue in the future. If FS Investments had not agreed to reimburse certain of our expenses, including through the offset of certain advisory fees, significant portions of these distributions would have come from offering proceeds or borrowings. The repayment of amounts owed to FS Investments will reduce the future distributions to which you would otherwise be entitled.
The global outbreak of COVID-19 (commonly known as the coronavirus) has caused volatility, severe market dislocations and liquidity constraints in many markets, including securities we hold, and has adversely affected our investments and operations. Such impacts may continue to adversely affect us, the performance of our investments and an investment in us.
We expect that the recent market conditions may have a lasting and, in some instances, permanent impact 8 on some of our portfolio companies as they struggle to meet covenant obligations and face insolvency in future periods. Poor performance or insolvency of our portfolio companies could have a material adverse impact on our financial condition and results of operations.

CAUTIONARY STATEMENT FORWARD-LOOKING STATEMENTS
Statements included herein may constitute “forward-looking” statements as that term is defined in Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, including statements with regard to future events or the future performance or operations of the Fund, the transition in investment policy, anticipated distribution rates, portfolio rotation, borrowings and liquidity events. Words such as “intends,” “will,” “expects,” and “may” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ materially include changes in the economy, geo-political risks, risks associated with possible disruption to the Fund’s operations or the economy generally due to hostilities, terrorism, natural disasters or pandemics such as COVID-19, future changes in laws or regulations and conditions in the Fund’s operating area, unexpected costs, the ability of the Fund to (i) transition to a diversified credit strategy within anticipated timeframes or at all, (ii) pay the targeted distributions, (iii) obtain the applied-for exemptive relief, (iv) obtain leverage on terms satisfactory to the Fund and (v) achieve a liquidity event, and such other factors that are disclosed in the Fund’s filings with the Securities and Exchange Commission (the “SEC”). The inclusion of forward-looking statements should not be regarded as a representation that any plans, estimates or expectations will be achieved. Any forward-looking statements speak only as of the date of this communication. Except as required by federal securities laws, the Fund undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on any of these forward-looking statements.

FS Energy & Power Fund update