Alcentra Capital Corp - FORM 10-Q

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EX-32.2 - CERTIFICATION - Alcentra Capital Corp	v451429_ex32-2.htm
EX-32.1 - CERTIFICATION - Alcentra Capital Corp	v451429_ex32-1.htm
EX-31.2 - CERTIFICATION - Alcentra Capital Corp	v451429_ex31-2.htm
EX-31.1 - CERTIFICATION - Alcentra Capital Corp	v451429_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

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

COMMISSION FILE NUMBER: 1-36447

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-2961489

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

200 Park Avenue, 7 ^th Floor

New York, NY 10166

(Address of Principal Executive Offices) (Zip Code)

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨ (do not check if a smaller reporting company)	Smaller reporting company	¨

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

There were 13,490,636 shares of the Registrant’s common stock outstanding as of November 3, 2016.

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

		Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Financial Statements of Alcentra Capital Corporation:

Consolidated Statements of Assets and Liabilities as of September 30, 2016 (unaudited) and December 31, 2015		3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 (unaudited) and 2015 (unaudited)		4

Consolidated Statements of Changes in Net Assets for the Nine Months Ended September 30, 2016 (unaudited) and 2015 (unaudited)		5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 (unaudited) and 2015 (unaudited)		6

Consolidated Schedule of Investments as of September 30, 2016 (unaudited) and December 31, 2015		7

Notes to Unaudited Consolidated Financial Statements		15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		40

Item 4. Controls and Procedures		40

PART II. OTHER INFORMATION		41

Item 1. Legal Proceedings		41

Item 1A. Risk Factors		41

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3. Defaults Upon Senior Securities		41

Item 4. Mine Safety Disclosures		41

Item 5. Other Information		41

Item 6. Exhibits		42

SIGNATURES		43

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Assets and Liabilities

	As of September 30, 2016 (Unaudited)			As of December 31, 2015
Assets
Portfolio investments, at fair value
Non-controlled, non-affiliated investments, at fair value (cost of $285,609,124 and $219,715,263, respectively)	$	269,067,466		$	221,349,073
Non-controlled, affiliated investments, at fair value (cost of $29,583,292 and $56,426,475, respectively)		23,066,462			59,243,999
Controlled, affiliated investments, at fair value (cost $14,954,174 and $27,289,995, respectively)		13,814,627			15,748,539
Total of portfolio investments, at fair value (cost $330,146,590 and $303,431,733, respectively)		305,948,555			296,341,611
Cash		6,708,245			4,866,972
Dividends and interest receivable		1,572,352			2,607,205
Receivable for investments sold		1,364,550			—
Deferred financing costs		1,501,745			2,183,881
Deferred tax asset		5,994,993			1,382,408
Prepaid expenses and other assets		174,886			113,730
Total Assets	$	323,265,326		$	307,495,807

Liabilities
Credit facility payable	$	70,872,238		$	63,504,738
Notes payable (net of deferred note offering costs of $1,548,824 and $1,156,622, respectively)		53,451,176			38,843,378
Other accrued expenses and liabilities		743,521			271,801
Directors’ fees payable		117,000			37,025
Professional fees payable		365,894			481,333
Interest and credit facility expense payable		1,471,876			813,222
Management fee payable		1,335,294			1,302,213
Income-based incentive fees payable		1,914,909			1,081,797
Distributions payable		4,586,816			4,595,700
Unearned structuring fee revenue		1,373,992			689,577
Income tax liability		2,374,417			842,812
Total Liabilities		138,607,133			112,463,596

Commitments and Contingencies (Note 12)

Net Assets
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,490,636 and 13,516,766 shares issued and outstanding, respectively)		13,491			13,517
Additional paid-in capital		197,181,027			197,652,086
Accumulated net realized gain		4,423,425			2,791,590
Undistributed net investment income		3,651,025			1,130,327
Net unrealized appreciation (depreciation) on investments, net of benefit/(provision) for taxes of $3,587,260 and $534,813 as of September 30, 2016 and December 31, 2015, respectively		(20,610,775	)		(6,555,309	)
Total Net Assets		184,658,193			195,032,211
Total Liabilities and Net Assets	$	323,265,326		$	307,495,807

Net Asset Value Per Share	$	13.69		$	14.43

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Operations

	For the three months ended September 30, 2016 (Unaudited)			For the three months ended September 30, 2015 (Unaudited)			For the nine months ended September 30, 2016 (Unaudited)			For the nine months ended September 30, 2015 (Unaudited)
Investment Income:
From non-controlled, non-affiliated investments:
Interest income from portfolio investments	$	6,306,358		$	5,133,259		$	16,743,520		$	13,577,787
Paid-in-kind interest income from portfolio investments		409,638			439,608			2,769,251			2,341,772
Other income from portfolio investments		158,048			452,038			1,729,498			1,407,320
Dividend income from portfolio investments		52,021			—			52,021			302,874
From non-controlled, affiliated investments:
Interest income from portfolio investments		827,500			1,001,296			2,522,867			3,209,301
Paid in-kind income from portfolio investments		462,161			655,205			1,947,325			1,897,750
Other income from portfolio investments		336,679			23,435			2,287,616			72,320
From controlled, affiliated investments:
Interest income from portfolio investments		398,185			588,627			1,162,820			1,746,836
Paid in-kind income from portfolio investments		165,878			213,674			487,910			618,532
Other income from portfolio investments		—			—			—			64,843
Total investment income		9,116,468			8,507,142			29,702,828			25,239,335

Expenses:
Management fees		1,335,294			1,273,705			3,908,093			3,641,673
Income-based incentive fees		607,739			546,027			2,324,624			1,749,155
Capital gains incentive fees		—			(434,217	)		—			1,001,467
Professional fees		273,965			167,356			1,000,502			527,291
Valuation services		57,722			89,822			199,769			312,737
Interest and credit facility expense		1,476,911			1,197,553			4,120,365			2,870,559
Amortization of deferred financing costs		299,932			229,716			848,367			608,973
Directors’ fees		83,313			57,635			232,608			171,826
Insurance expense		65,915			67,449			198,296			204,990
Amortization of deferred note offering costs		91,852			—			91,852			—
Other expenses		37,032			170,052			488,321			383,564
Total expenses		4,329,675			3,365,098			13,412,297			11,472,235
Waiver of capital gains incentive fees		—			—			—			(1,001,467	)
Net expenses		4,329,675			3,365,098			13,412,297			10,470,768
Net investment income		4,786,793			5,142,044			16,290,031			14,768,567

Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments
Net realized gain (loss) on:
Non-controlled, non-affiliated investments		(361,060	)		244,000			1,539,380			97,551
Non-controlled, affiliated investments		9,334,765			—			11,356,462			—
Controlled, affiliated investments		(109,512	)		—			(11,264,007	)		—
Net realized gain (loss) from portfolio investments		8,864,193			244,000			1,631,835			97,551
Net change in unrealized appreciation (depreciation) on:
Non-controlled, non-affiliated investments		(8,615,042	)		(744,397	)		(18,175,468	)		(1,280,386	)
Non-controlled, affiliated investments		(9,685,943	)		390,429			(9,334,354	)		3,803,027
Controlled, affiliated investments		(742,006	)		(2,874,502	)		10,401,909			(3,256,533	)
Net change in unrealized appreciation (depreciation) from portfolio investments		(19,042,991	)		(3,228,470	)		(17,107,913	)		(733,892	)
Benefit/(Provision) for taxes on unrealized gain on investments		3,549,478			1,096,875			3,052,447			527,770
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments		(6,629,320	)		(1,887,595	)		(12,423,631	)		(108,571	)
Net Increase (Decrease) in Net Assets Resulting from Operations	$	(1,842,527	)	$	3,254,449		$	3,866,400		$	14,659,996

Basic and diluted:
Net investment income per share	$	0.35		$	0.38		$	1.21		$	1.09
Earnings (loss) per share	$	(0.14	)	$	0.24		$	0.29		$	1.08
Weighted Average Shares of Common Stock Outstanding		13,490,636			13,516,766			13,502,152			13,516,766
Dividends declared per common share	$	0.340		$	0.340		$	1.020		$	1.020

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

	For the nine months ended September 30, 2016 (Unaudited)			For the nine months ended September 30, 2015 (Unaudited)
Increase (decrease) in net assets resulting from operations
Net investment income	$	16,290,031		$	14,768,567
Net realized gain on investments		1,631,835			97,551
Net change in unrealized appreciation (depreciation) on investments		(17,107,913	)		(733,892	)
Benefits/(Provision) for taxes on unrealized gain on investments		3,052,447			527,770
Net increase (decrease) in net assets resulting from operations		3,866,400			14,659,996

Capital transactions
Offering costs		(165,635	)		(128,531	)
Repurchase of common stock (26,130 and 0 shares, respectively)		(305,450	)		—
Net increase (decrease) in net assets resulting from capital transactions		(471,085	)		(128,531	)

Distributions to shareholders from:
Net investment income		(13,769,333	)		(13,787,101	)
Realized gains		—			—
Total distributions to shareholders		(13,769,333	)		(13,787,101	)

Total increase (decrease) in net assets		(10,374,018	)		744,364

Net assets at beginning of period		195,032,211			200,989,308
Net assets at end of period [including Accumulated net investment income of $3,651,025 and $1,193,312, respectively]	$	184,658,193		$	201,733,672

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Cash Flows

	For the nine months ended September 30, 2016 (Unaudited)			For the nine months ended September 30, 2015 (Unaudited)
Cash Flows from Operating Activities
Net increase in net assets resulting from operations	$	3,866,400		$	14,659,996

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized gain from portfolio investments		(1,631,835	)		(97,551	)
Net change in unrealized (appreciation) depreciation of portfolio investments		17,107,913			733,892
Deferred tax asset		(4,612,585	)		—
Deferred tax liability		—			(719,821	)
Paid in-kind interest income from portfolio investments		(5,204,486	)		(4,858,054	)
Accretion of discount on debt securities		(681,160	)		(350,577	)
Purchases of portfolio investments		(121,059,033	)		(73,781,836	)
Net proceeds from sales/return of capital of portfolio investments		101,861,657			48,051,430
Amortization of deferred financing costs		848,367			608,973
Amortization of deferred note offering costs		91,852			—
(Increase) decrease in operating assets:
Dividends and interest receivable		1,034,853			(767,110	)
Receivable for investments sold		(1,364,550	)		4,753
Prepaid expenses and other assets		(61,156	)		(60,886	)
Increase (decrease) in operating liabilities:
Payable for investments purchased		—			(8,717	)
Other accrued expenses and liabilities		471,720			(176,955	)
Directors' fees payable		79,975			(49,192	)
Professional fees payable		(115,439	)		(78,701	)
Interest and credit facility expense payable		658,654			1,027,953
Management fee payable		33,081			658,037
Income-based incentive fees payable		833,112			1,749,155
Unearned structuring fee revenue		684,415			339,273
Income tax		1,531,605			141,997
Net cash used in operating activities		(5,626,640	)		(12,973,941	)

Cash Flows from Financing Activities
Financing costs paid		(166,231	)		(809,863	)
Offering costs paid		(649,689	)		(1,134,694	)
Proceeds from credit facility payable		102,175,000			147,652,027
Repayments of credit facility payable		(94,807,500	)		(157,496,443	)
Proceeds from notes payable		15,000,000			40,000,000
Distributions paid to shareholders		(13,778,217	)		(13,787,101	)
Repurchase of common stock		(305,450	)		—
Net cash provided by financing activities		7,467,913			14,423,926
Increase in cash and cash equivalents		1,841,273			1,449,985
Cash at beginning of period		4,866,972			10,022,617
Cash and Cash Equivalents at End of Period	$	6,708,245		$	11,472,602

Supplemental and non-cash financing activities:
Cash paid during the period for interest	$	3,461,711		$	3,289,539
Accrued offering costs	$	2,485		$	2,485
Accrued distributions payable	$	4,586,816		$	4,595,700

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of September 30, 2016

(Unaudited)

Company(+) ***	Industry	Interest Rate	Base Rate Floor			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 145.71%

Senior Secured - First Lien — 42.80%

A2Z Wireless Holdings, Inc. ⁽²⁾	Telecommunications	LIBOR + 9.0% Cash		1.00	%	1/15/2021		14,625,000	$	14,478,750	$	14,625,000		7.92	%
Aphena Pharma Solutions ⁽³⁾	Packaging	8.50% Cash, 2.0% PIK				3/3/2019		1,062,821		1,062,821		1,062,821		0.58	%
Black Diamond Rentals	Oil & Gas Services	12% Cash, 5.0% PIK				7/9/2018		5,815,283		5,815,284		5,078,000		2.75	%
IGT ^(2),(4)	Industrial Services	LIBOR + 8.75% Cash, 1.5% PIK		1.00	%	12/10/2019		8,056,199		7,992,998		8,056,199		4.36	%
LRI Holding, Inc. ⁽²⁾	Industrial Services	LIBOR + 10.25% Cash				9/28/2021		18,000,000		17,820,000		18,000,000		9.75	%
NTI Holdings, LLC ⁽²⁾	Telecommunications	LIBOR + 8.0% Cash		1.00	%	3/30/2021		11,876,288		11,672,327		11,685,000		6.33	%
NWN Corporation ⁽²⁾	Technology & IT	LIBOR + 9.0% Cash		1.00	%	10/16/2020		4,226,622		4,142,089		4,226,622		2.29	%
Stancor, Inc. ⁽²⁾	Wholesale/Distribution	LIBOR + 8.0%		0.75	%	8/19/2019		5,090,909		5,090,909		5,090,909		2.76	%
Superior Controls, Inc. ^(2),(4)	High Tech Industries	LIBOR + 8.75%		1.00	%	3/22/2021		10,000,000		10,000,000		10,000,000		5.41	%
Triton Technologies ⁽³⁾	Call Center Services	8.50% Cash, 2.0% PIK				10/23/2018		1,200,000		1,190,785		1,200,000		0.65	%
Total Senior Secured - First Lien										79,265,963		79,024,551		42.80	%
Senior Secured - Second Lien — 46.63%

Alpine Waste ⁽²⁾	Waste Services	LIBOR + 9.0% Cash, 0.5% PIK		1.00	%	12/30/2020		11,131,777	$	11,131,777	$	11,131,777		6.03	%
Bioventus ⁽²⁾	Healthcare Services	LIBOR + 10.0% Cash		1.00	%	4/10/2020		12,000,000		11,842,149		12,000,000		6.50	%
Conisus LLC ⁽²⁾	Media: Advertising, Printing & Publishing	LIBOR + 8.75% Cash		1.00	%	6/23/2021		11,750,000		11,750,000		10,870,000		5.88	%
Duke Finance, LLC ⁽²⁾	Industrial Manufacturing	LIBOR + 9.75% Cash		1.00	%	10/28/2022		7,500,000		6,701,862		6,720,000		3.64	%
Graco Supply Company	Aerospace	12% Cash				3/17/2021		4,000,000		4,000,000		3,877,000		2.10	%
Healthcare Associates of Texas, LLC ⁽⁴⁾	Healthcare Services	12.25% Cash				4/30/2022		8,500,000		8,500,000		8,500,000		4.60	%
Medsurant Holdings, LLC	Healthcare Services	12.25% Cash				6/18/2021		6,200,000		6,138,000		6,200,000		3.36	%
My Alarm Center, LLC ⁽²⁾	Security	LIBOR + 11.0% Cash		1.00	%	7/9/2019		12,625,000		12,625,000		12,625,000		6.84	%
Nation Safe Drivers (NSD) ⁽²⁾	Automotive Business Services	LIBOR + 8.0% Cash		2.00	%	9/29/2020		11,721,154		11,721,154		11,838,330		6.41	%
Xpress Global Systems, LLC ⁽²⁾	Transportation Logistics	LIBOR + 10.5%, 2% PIK		1.00	%	4/10/2020		5,922,417		5,539,277		2,352,000		1.27	%
Total Senior Secured - Second Lien										89,949,219		86,114,107		46.63	%

Senior Subordinated — 43.42%
Black Diamond Rentals	Oil & Gas Services	4.0% Cash				7/9/2018		7,968,642	$	7,968,642	$	3,984,000		2.16	%

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2016

(Unaudited)

Company(+) ***	Industry	Interest Rate	Base Rate Floor			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
GST Autoleather	Automotive Business Services	11% Cash, 2.0% PIK				1/11/2021		8,368,939	$	8,368,939	$	8,368,939		4.53	%
Limbach Facility Services, LLC	Capital Equipment	13% Cash, 3.0% PIK				7/20/2022		13,078,000		12,824,415		13,078,000		7.08	%
Media Storm, LLC	Media & Entertainment	10% Cash				8/28/2019		2,454,545		2,454,545		2,454,545		1.33	%
Metal Powder Products LLC ⁽²⁾	Industrial Manufacturing	LIBOR + 12.25% Cash		0.75	%	11/5/2021		8,250,000		8,250,000		8,250,000		4.47	%
NextCare Holdings, Inc.	Healthcare Services	10% Cash, 4% PIK				12/31/2018		15,050,000		14,825,000		15,050,000		8.15	%
Pharmalogic Holdings Corp.	Healthcare Services	12% Cash				9/1/2021		19,000,000		19,000,000		19,000,000		10.29	%
QRC Holdings, LLC	High Tech Industries	12.25% Cash				11/19/2021		10,000,000		10,000,000		10,000,000		5.41	%
Total Senior Subordinated										83,691,541		80,185,484		43.42	%
Equity/Other — 12.86%

Dentistry For Children, Inc., Class A-1 Units⁽⁵⁾	Healthcare Services							2,000,000	$	2,203,000	$	3,533,000		1.91	%
IGT, Preferred Shares	Industrial Services	11% PIK						1,110,922		1,110,922		—		—
Common Shares⁽⁵⁾								44,000		44,000		—		—
Preferred AA Shares⁽⁵⁾								270,733		270,733		270,733		0.15	%
										1,425,655		270,733		0.15	%
LRI Holding, Inc., Preferred Shares⁽⁵⁾	Industrial Services							1,000,000		1,000,000		1,000,000		0.54	%
Media Storm, LLC, Preferred Shares⁽⁵⁾	Media & Entertainment							1,216,204		2,346,964		250,000		0.14	%
Metal Powder Products, LLC, Common Shares⁽⁵⁾	Industrial Manufacturing							500,000		500,000		626,000		0.34	%
My Alarm Center, LLC, Class A Preferred⁽⁵⁾	Security							284,589		—		284,589		0.15	%
NTI Holdings, LLC, Common Shares⁽⁵⁾	Telecommunications							376,515		403,030		780,000		0.42	%
Warrants⁽⁵⁾								417,823		224,689		444,998		0.24	%
										627,719		1,224,998		0.66	%
Response Team Holdings LLC, Preferred Shares	Restoration Services	12% PIK				3/28/2019		3,204,126		3,204,126		3		—
Warrants⁽⁵⁾								5		—		—		—
										3,204,126		3		—
Superior Controls, Inc., Preferred Shares⁽⁵⁾	High Tech Industries							400,000		400,000		507,000		0.28	%
Tunnel Hill ^(5),(6)	Waste Services							588,570		15,505,937		12,063,001		6.53	%
Wholesome Sweeteners, Inc., Common Shares⁽⁵⁾	Food & Beverage							5,000		5,000,000		3,984,000		2.16	%
Xpress Global Systems, LLC, Warrants⁽⁵⁾	Transportation Logistics							489,000		489,000		—		—
Total Equity/Other										32,702,401		23,743,324		12.86	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies										285,609,124		269,067,466		145.71	%

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2016

(Unaudited)

Company(+) ***	Industry	Interest Rate	Base Rate Floor			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value			% of Net Assets
Investments in Non-Controlled, Affiliated Portfolio Companies — 12.49%^*

Senior Secured - First Lien — 1.78%

Show Media, Inc.	Media & Entertainment	5.5% Cash, 5.5% PIK				8/10/2017		4,153,393	$	4,027,114	$	3,296,963			1.78	%
Total Senior Secured - First Lien										4,027,114		3,296,963			1.78	%
Senior Secured - Second Lien — 4.42%

Southern Technical Institute, Inc. ⁽²⁾	Education	LIBOR + 8.0% Cash, 4% PIK		1.00	%	12/2/2020		8,156,261	$	8,156,261	$	8,156,261			4.42	%
Total Senior Secured - Second Lien										8,156,261		8,156,261			4.42	%
Senior Subordinated — 1.18%

Battery Solutions, Inc.	Environmental/Recycling Services	6% Cash, 8% PIK				11/6/2021		2,173,133	$	2,173,133	$	2,173,133			1.18	%
Total Senior Subordinated										2,173,133		2,173,133			1.18	%

Equity/Other — 5.11%
Battery Solutions, Inc., Class A Units⁽⁵⁾	Environmental/Recycling Services							5,000,000	$	1,058,000	$	246,000			0.13	%
Class E Units		8% PIK				11/6/2021		3,740,193		3,740,193		3,740,193			2.03	%
										4,798,193		3,986,193			2.16	%
Show Media, Inc., Units⁽⁵⁾	Media & Entertainment							4,092,210		3,747,428		—			—
Southern Technical Institute, Inc., Class A Units⁽⁵⁾	Education							3,164,063		2,167,000		915,015			0.50	%
Preferred Shares		15.75% PIK						4,403,897		4,292,897		4,403,897			2.38	%
Warrants⁽⁵⁾						3/30/2026		221,267		221,266		135,000			0.07	%
										6,681,163		5,453,912			2.95	%
Total Equity/Other										15,226,784		9,440,105			5.11	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies										29,583,292		23,066,462			12.49	%
Investments in Controlled, Affiliated Portfolio Companies — 7.48%^**

Senior Secured - First Lien — 7.12%

FST Technical Services, LLC	Technology & Telecom	12% Cash, 5% PIK				11/18/2018		13,147,632	$	13,147,632	$	13,147,632			7.12	%
Total Senior Secured - First Lien										13,147,632		13,147,632			7.12	%

Equity/Other — 0.36%
FST Technical Services, LLC, Common Shares	Technology & Telecom	9% PIK						1,750,000	$	1,806,542	$	666,995			0.36	%
Total Equity/Other										1,806,542		666,995			0.36	%
Total Investments in Controlled, Affiliated Portfolio Companies										14,954,174		13,814,627			7.48	%
Total Investments										330,146,590		305,948,555			165.68	%
Liabilities In Excess Of Other Assets												(121,290,362	)		(65.68	%)
Net Assets											$	184,658,193			100.00	%

⁽⁺⁾

All portfolio companies listed are qualifying assets.

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2016

(Unaudited)

Denotes investments in which the Partnership is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2016 in these affiliated investments are as follows:

	Fair Value at						Interest/		Fair Value at
	December 31,		Gross		Gross		Dividend/		September 30,
Name of Issuers	2015		Addition		Reductions		Other Income		2016
ACT Lighting	$	12,753,733	$	-	$	12,053,793	$	2,097,103	$	-
Battery Solutions, Inc.		6,095,154		-		-		443,419		6,159,326
DBI Holding, LLC		22,894,780		-		27,831,221		2,244,921		-
Net Access Corporation		-		-		394,733		170,491		-
Show Media, Inc.		3,610,000		-		-		420,023		3,296,963
Southern Technical Institute, Inc.		13,890,332		4,235,280		4,235,280		1,381,850		13,610,173
	$	59,243,999	$	4,235,280	$	44,515,027	$	6,757,808	$	23,066,462

^**

Denotes investments in which the Partnership is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2016 in these affiliated and controlled investments are as follows:

	Fair value at						Interest/			Fair Value at
	December 31,		Gross		Gross		Dividend/			September 30,
Name of Issuers	2015		Addition		Reductions		Other income			2016
The DRC Group	$	1,804,817	$	133,333	$	832,752	$	(4,526	)	$	-
FST Technical Services, LLC		13,943,722		-		-		1,655,256			13,814,627
	$	15,750,554	$	133,333	$	832,752	$	1,650,730		$	13,814,627

^***

Pledged as collateral under the Credit Facility with ING Capital LLC.

⁽¹⁾

The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

⁽²⁾

The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

⁽³⁾

The investments are portfolio companies of Enhanced Equity Fund, L.P. ("EEF"). EEF has guaranteed the portfolio company's obligations to the company pursuant to this investment.

⁽⁴⁾

The investment has an unfunded commitment as of September 30, 2016 which is excluded from the presentation (see Note 12).

⁽⁵⁾

Non-income producing security.

⁽⁶⁾

The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

Abbreviation Legend

PIK - Payment-In-Kind

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments
As of December 31, 2015

Company***	Industry		Interest Rate			Base Rate Floor			Maturity Date		No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 113.49%
Senior Secured – First Lien — 36.58%
A2Z Wireless Holdings, Inc.^(2),(3)		Telecommunications		LIBOR + 11.75	%					3/31/2018		9,885,542	$	9,722,622	$	10,379,594		5.32	%
Aphena Pharma Solutions⁽⁴⁾		Packaging		8.50% Cash, 2.0% PIK						3/3/2019		3,792,657		3,792,657		3,792,657		1.94	%
Black Diamond Rentals		Oil & Gas Services		12% Cash, 5.0% PIK						7/8/2018		13,127,489		13,127,489		13,127,489		6.73	%
HealthFusion, Inc.		High Tech Industries		13% Cash						10/7/2018		4,750,000		4,750,000		4,892,913		2.51	%
IGT⁽³⁾		Industrial Services		LIBOR + 9.25% Cash			1.00	%		12/10/2019		9,168,757		9,080,156		9,168,757		4.70	%
NTI Holding, LLC⁽³⁾		Telecommunications		LIBOR + 8.0% Cash			1.00	%		3/30/2021		7,835,625		7,757,269		7,835,625		4.02	%
NWN Corporation⁽³⁾		Technology & IT		LIBOR + 9.0% Cash			1.00	%		10/16/2020		4,968,750		4,869,375		4,968,750		2.55	%
Response Team Holdings LLC⁽³⁾		Restoration Services		LIBOR + 8.50% Cash, 1.00% PIK			2.00	%		3/28/2019		9,902,334		9,902,334		10,001,000		5.13	%
Stancor, Inc.⁽³⁾		Wholesale/Distribution		LIBOR + 8.0	%		0.75	%		8/19/2019		5,981,818		5,981,818		5,981,818		3.07	%
Triton Technologies⁽⁴⁾		Call Center Services		8.50% Cash, 2.0% PIK						10/23/2018		1,200,000		1,188,731		1,200,000		0.61	%
Total Senior Secured – First Lien														70,172,451		71,348,603		36.58	%
Senior Secured – Second Lien — 36.51%
Alpine Waste⁽³⁾		Waste Services		LIBOR + 9.0% Cash, 0.5% PIK			1.00	%		12/30/2020		11,047,685	$	11,047,685	$	11,047,685		5.66	%
Bioventus⁽³⁾		Healthcare: Orthopedic Products		LIBOR + 10.0% Cash			1.00	%		4/10/2020		12,000,000		11,810,851		12,000,000		6.15	%
Conisus LLC⁽³⁾		Media: Advertising, Printing & Publishing		LIBOR + 10.25% Cash			1.00	%		6/23/2021		11,750,000		11,750,000		11,750,000		6.03	%
Graco Supply Company		Aerospace		12% Cash						3/17/2021		4,000,000		4,000,000		4,000,000		2.05	%
Medsurant Holdings, LLC		Healthcare Services		12.25% Cash						6/18/2021		6,200,000		6,138,000		6,200,000		3.18	%
My Alarm Center, LLC⁽³⁾		Security		LIBOR + 11.0% Cash			1.00	%		7/9/2019		9,500,000		9,500,000		9,500,000		4.87	%
Nation Safe Drivers (NSD)⁽³⁾		Automotive Business Services		LIBOR + 8.0	%		2.00	%		9/29/2020		11,721,154		11,721,154		11,721,154		6.01	%
Xpress Global Systems, LLC⁽³⁾		Transportation Logistics		LIBOR + 10.5%, 2% PIK			1.00	%		4/10/2020		5,454,778		4,986,386		4,986,386		2.56	%
Total Senior Secured – Second Lien														70,954,076		71,205,225		36.51	%
Senior Subordinated — 26.17%
Dentistry For Children, Inc.		Healthcare Services		11% Cash, 2.25% PIK						9/1/2017		14,836,488	$	14,836,488	$	14,836,488		7.61	%
GST Autoleather		Automotive Business Services		11% Cash, 2.0% PIK						1/11/2021		8,242,827		8,242,827		8,242,827		4.22	%
Media Storm, LLC		Media & Entertainment		10% Cash						8/28/2019		2,454,545		2,454,545		2,454,545		1.26	%
Pharmalogic Holdings Corp.		Healthcare Services		12% Cash						9/1/2021		15,500,000		15,500,000		15,500,000		7.95	%
Radiant Logistics⁽³⁾		Transportation Logistics		LIBOR + 11% Cash			1.00	%		4/2/2021		10,000,000	$	10,000,000	$	10,000,000		5.13	%
Total Senior Subordinated														51,033,860		51,033,860		26.17	%
Equity/Other — 14.23%
City Carting Holding Company, Inc., Series A Preferred Shares⁽⁵⁾		Waste Services		22% PIK						4/30/2016		8,542,950	$	8,542,950	$	8,542,950		4.38	%
Series B Preferred Shares⁽⁵⁾				18% PIK						4/30/2016		4,152,842		4,152,841		3,152,999		1.62	%
														12,695,791		11,695,949		6.00	%
Dentistry For Children, Inc., Class A-1 Units⁽⁶⁾		Healthcare Services										2,000,000		2,203,000		4,136,000		2.12	%
HealthFusion, Inc., Warrants⁽⁶⁾		High Tech Industries										418,000		418,000		2,115,000		1.08	%
IGT, Preferred Shares⁽⁶⁾		Industrial Services										1,079,684		1,079,684		900,000		0.46	%
Common Shares⁽⁶⁾												44,000		44,000		—		—
														1,123,684		900,000		0.46	%

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

Company***	Industry		Interest Rate		Base Rate Floor			Maturity Date		No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Media Storm, LLC, Preferred Shares⁽⁶⁾		Media & Entertainment									1,216,204		2,346,964		795,999		0.41	%
NTI Holding, LLC Common Shares⁽⁶⁾		Telecommunications									350,000		350,000		610,000		0.31	%
Response Team Holdings LLC, Preferred Shares		Restoration Services		12% PIK					3/28/2019		2,928,437		2,928,437		2,928,437		1.50	%
Warrants⁽⁶⁾											5		—		303,000		0.16	%
													2,928,437		3,231,437		1.66	%
Wholesome Sweeteners, Inc., Common Shares⁽⁶⁾		Food & Beverage									5,000		5,000,000		3,788,000		1.94	%
Xpress Global Systems, LLC, Warrants⁽⁶⁾		Transportation Logistics									489,000		489,000		489,000		0.25	%
Total Equity/Other													27,554,876		27,761,385		14.23	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies													219,715,263		221,349,073		113.49	%
Investments in Non-Controlled, Affiliated Portfolio Companies — 30.38%*
Senior Secured – First Lien — 1.85%
Show Media, Inc.		Media & Entertainment		5.5% Cash, 5.5% PIK					8/10/2017		3,984,269	$	3,775,048	$	3,610,000		1.85	%
Total Senior Secured – First Lien													3,775,048		3,610,000		1.85	%
Senior Secured – Second Lien — 6.19%
Southern Technical Institute, Inc.⁽³⁾		Education		LIBOR + 9.75%		1.00	%		12/2/2020		12,061,333	$	12,061,333	$	12,061,333		6.19	%
Total Senior Secured – Second Lien				Cash, 2% PIK									12,061,333		12,061,333		6.19	%
Senior Subordinated — 15.09%
ACT Lighting		Wholesale		12% Cash, 2% PIK					7/24/2019		8,506,733	$	8,372,671	$	8,506,733		4.36	%
				8% PIK					7/24/2020		1,964,331		1,815,097		1,860,000		0.96	%
													10,187,768		10,366,733		5.32	%
Battery Solutions, Inc.		Environmental/ Recycling Services		6% Cash, 8% PIK					12/20/2018		2,045,181	$	2,045,181	$	2,045,181		1.05	%
DBI Holding, LLC		Infrastructure Maintenance		12% Cash, 4% PIK					9/6/2019		9,032,780		9,032,780		9,032,780		4.63	%
				16% PIK					9/6/2019		8,444,350		8,059,285		7,980,000		4.09	%
													17,092,065		17,012,780		8.72	%
Total Senior Subordinated													29,325,014		29,424,694		15.09	%
Equity/Other — 7.25%
ACT Lighting, Warrants⁽⁶⁾		Wholesale							7/24/2019		143,000	$	143,000	$	2,387,000		1.22	%
Battery Solutions, Inc., Class A Units⁽⁶⁾		Environmental/ Recycling Services									5,000,000		1,058,000		530,000		0.27	%
Class E Units				8% PIK					12/20/2018		3,519,973		3,519,973		3,519,973		1.80	%
													4,577,973		4,049,973		2.07	%
DBI Holding, LLC, Warrants⁽⁶⁾		Infrastructure Maintenance							3/6/2024		519,412		519,412		5,882,000		3.02	%
Show Media, Inc., Units⁽⁶⁾		Media & Entertainment									4,092,210		3,747,428		—		—
Warrants⁽⁶⁾											—		—		—		—
													3,747,428		—		—
Southern Technical Institute, Inc., Class A Units⁽⁶⁾		Education									3,164,063		2,167,000		1,828,999		0.94	%
Warrants⁽⁶⁾											110,267		110,267		—		—
													2,277,267		1,828,999		0.94	%
Total Equity/Other													11,265,080		14,147,972		7.25	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies													56,426,475		59,243,999		30.38%

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

Company***	Industry		Interest Rate		Base Rate Floor	Maturity Date		No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value			% of Net Assets
Investments in Controlled, Affiliated Portfolio Companies — 8.07%**
Senior Secured – First Lien — 6.92%
DRC Emergency Services		Disaster Recovery Services		10% Cash			1/11/2020		5,000,000	$	5,000,000	$	—			—
				8% Cash			6/30/2016		1,199,893		1,199,893		835,000			0.43	%
											6,199,893		835,000			0.43	%
FST Technical Services, LLC		Technology & Telecom		12% Cash, 5.0% PIK			11/18/2018		12,659,722		12,659,722		12,659,722			6.49	%
Total Senior Secured – First Lien											18,859,615		13,494,722			6.92	%
Equity/Other — 1.15%
DRC Emergency Services, Preferred Shares		Disaster Recovery Services		10% PIK					7,885,459	$	6,623,838	$	969,817			0.49	%
FST Technical Services, LLC, Common Shares		Technology & Telecom		9% PIK					1,750,000		1,806,542		1,284,000			0.66	%
Total Equity/Other											8,430,380		2,253,817			1.15	%
Total Investments in Controlled, Affiliated Portfolio Companies											27,289,995		15,748,539			8.07	%
Total Investments											303,431,733		296,341,611			151.94	%
Liabilities In Excess Of Other Assets													(101,309,400	)		(51.94	)%
Net Assets												$	195,032,211			100.00	%

Denotes investments in which the Company is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2015 in these affiliated investments are as follows:

Name of Issuers	Fair Value at December 31, 2014		Gross Addition		Gross Reductions		Interest/ Dividend/ Other income		Fair Value at December 31, 2015
ACT Lighting	$	10,849,399	$	321,902	$	—	$	1,393,060	$	12,753,733
Battery Solutions, Inc.		4,576,000		3,688,255		3,333,333		617,795		6,095,154
DBI Holding, LLC		16,102,785		1,677,744		—		2,866,050		22,894,780
Net Access Corporation		9,412,000		—		10,729,267		34,748		—
Show Media, Inc.		4,596,000		3,639,487		3,423,107		651,883		3,610,000
Southern Technical Institute, Inc.		15,717,008		61,333		—		1,372,069		13,890,332
	$	61,253,192	$	9,388,721	$	17,485,707	$	6,935,605	$	59,243,999

Denotes investments in which the Company is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2015 in these affiliated and controlled investments are as follows:

Name of Issuers	Fair value at December 31, 2014		Gross Addition		Gross Reductions		Interest/ Dividend/ Other income		Fair Value at December 31, 2015
The DRC Group	$	12,596,562	$	533,333	$	—	$	564,704	$	1,804,817
FST Technical Services, LLC		17,459,000		159,722		—		1,939,967		13,943,722
	$	30,055,562	$	693,055	$	—	$	2,504,671	$	15,748,539

***

Pledged as collateral under the Credit Facility with ING Capital LLC.

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

(1)

The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

(2)

The investment has an unfunded commitment as of December 31, 2015 which is excluded from the presentation (see Note 13).

(3)

(4)

The investments are portfolio companies of Enhanced Equity Fund, L.P. (“EEF”). EEF has guaranteed the portfolio company's obligations to the company pursuant to this investment.

(5)

City Carting Holding Company, Inc. is in the process of exploring strategic alternatives. As a result, maturity dates of Preferred Shares have been extended to 4/30/16.

(6)

Non-income producing security.

Abbreviation Legend
PIK — Payment-In-Kind

See notes to consolidated financial statements

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

Organization and Purpose

Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”) and is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ending December 31, 2014.

The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY is wholly-owned by BNY Alcentra Group Holdings, Inc. (“Alcentra Group”), which is wholly-owned by The Bank of New York Mellon Corporation.

On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the Offering to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes. This subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.

The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization) through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. It sources investments primarily through the network of relationships that the principals of its investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Agreement”) with State Street Bank and Trust Company (the “Administrator”).

Summary of Significant Accounting Policies

Basis of Presentation – The accompanying financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2016.

The accounting records of the Company are maintained in United States dollars.

Alcentra NY purchased the initial 100 shares for $1,500 on March 12, 2014.

Use of Estimates – The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.

Consolidation – In accordance with Regulation S-X Article 6.03 and ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.

Portfolio Investment Classification – The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

Cash – At September 30, 2016, cash balances totaling $6.7 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that the risk of loss associated with any uninsured balance is remote.

Deferred Financing Costs – Deferred financing costs consist of fees and expenses paid in connection with the credit facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.

Deferred Note Offering Costs – Deferred Note Offering costs consist of fees and expenses paid in connection with the series of Senior Securities issued (as defined in Note 9) and are capitalized at this time as these fees and expenses were incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.

Valuation of Portfolio Investments – Portfolio investments are carried at fair value as determined by the Board of Directors (the ‘‘Board’’) of Alcentra.

The methodologies used in determining these valuations include:

(1) Preferred shares/membership units and common shares/membership units

In determining estimated fair value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Company’s own assumptions and taking into account all material events and circumstance which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:

(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment; (ii) pending disposition by the Company of all or a major portfolio investments; and (iii) sales prices of recent public or private transactions in identical or comparable investments.

One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).

(2)

Debt

The yield to maturity analysis is used to estimate the fair value of debt, including the unitranche facilities, which are a combination of senior and subordinated debt in one debt instrument. The calculation of yield to maturity takes into account the current market price, par value, coupon interest rate and time to maturity.

(3)

Warrants

Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.

Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value. The valuation process begins with each investment being initially valued by the investment professionals of the Company or its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professional of the Company and its Adviser. The Investment Committee reviews the valuation of the investment professionals and then determines the fair value of each investment in good faith based on the input of the investment professionals.

With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter, as described below:

•

Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

•

preliminary valuation conclusions will then be documented and discussed with Alcentra’s senior management and the Adviser;

•

the audit committee of the Board then reviews these preliminary valuations;

•

at least once quarterly, independent valuation firms engaged by the Board prepare preliminary valuations on a selected basis and submit the reports to the Board; and

•

the Board then discusses valuations and determine the fair value of each investment in Alcentra’s portfolio in good faith, based on the input of the Adviser, the independent valuation firms and the audit committee.

The Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board is ultimately and solely responsible for the valuation of its portfolio investments at fair value as determined in good faith pursuant to its valuation policy and a consistently applied valuation process.

Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a readily available market for the securities existed or from those which will ultimately be realized.

Organizational and Offering Costs – Organization expenses, including reimbursement payments to the Adviser, are expensed on the Company’s Consolidated Statements of Operations. These expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and have been expensed as incurred. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in the Consolidated Statements of Changes in Net Assets.

Paid-In-Capital – The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions

Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.

Investments – Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.

Original Issue Discount – When the Company receives warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.

Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There were no non-accrual investments as of September 30, 2016 and December 31, 2015.

Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment. These fees are non-recurring in nature.

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

Income Taxes – The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner so as to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to our stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.

Alcentra BDC Equity Holdings LLC has elected to be a taxable entity (the “Taxable Subsidiary”). The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements. For the three and nine months ended September 30, 2016, we recognized a benefit for income tax on unrealized gain on investments of $3.6 million and $3.1 million for the Taxable Subsidiaries, respectively. For the three and nine months ended September 30, 2015, we recognized a benefit for income tax on unrealized gain on investments of $1.1 million and $0.5 million for the Taxable Subsidiaries, respectively. As of September 30, 2016 and December 31, 2015, $6.0 million and $1.4 million was included in the deferred tax asset on the Consolidated Statements of Assets and Liabilities, respectively.

Indemnification – In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

Recently Issued Accounting Standards - In April 2015, FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. Amortization of the costs are included in Amortization of deferred financing costs and Amortization of deferred note offering costs. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016. The new guidance will be applied retrospectively to each prior period presented.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB's fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.

Fair Value of Portfolio Investments

The Company accounts for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of September 30, 2016 are as follows:

	Level 1		Level 2		Level 3		Total
Senior Secured - First Lien	$	—	$	—	$	95,469,146	$	95,469,146
Senior Secured - Second Lien		—		—		94,270,368		94,270,368
Subordinated Debt		—		—		82,358,617		82,358,617
Equity/Other		—		—		33,850,424		33,850,424
Total Investments	$	—	$	—	$	305,948,555	$	305,948,555

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2015 are as follows:

	Level 1		Level 2		Level 3		Total
Senior Secured - First Lien	$	—	$	—	$	88,453,325	$	88,453,325
Senior Secured - Second Lien		—		—		83,266,558		83,266,558
Subordinated Debt		—		—		80,458,554		80,458,554
Equity/Other		—		—		44,163,174		44,163,174
Total Investments	$	—	$	—	$	296,341,611	$	296,341,611

The changes in investments classified as Level 3 are as follows for the nine months ended September 30, 2016 and September 30, 2015.

As of September 30, 2016:

	Senior			Senior
	Secured -			Secured -			Senior			Equity/
	First Lien			Second Lien			Subordinated			Other			Total
Balance as of January 1, 2016	$	88,453,325		$	83,266,558		$	80,458,554		$	44,163,174		$	296,341,611
Amortized discounts/premiums		144,594			131,754			404,812			-			681,160
Paid in-kind interest		1,386,572			458,903			1,348,038			2,010,973			5,204,486
Net realized gain (loss)		(5,332,826	)		11,657			269,964			6,683,040			1,631,835
Net change in unrealized appreciation (depreciation)		3,382,226			(4,086,261	)		(3,605,737	)		(12,798,141	)		(17,107,913	)
Purchases		48,899,858			18,793,557			57,230,872			8,178,668			133,102,955
Sales/Return of capital		(41,464,603	)		(4,305,800	)		(53,747,886	)		(14,387,290	)		(113,905,579	)
Balance as of September 30, 2016	$	95,469,146		$	94,270,368		$	82,358,617		$	33,850,424		$	305,948,555

Net change in unrealized appreciation(depreciation) from investments still held as of September 30, 2016	$	(1,084,115	)	$	(4,086,262	)	$	(3,506,057	)	$	(10,148,417	)	$	(18,824,851	)

As of September 30, 2015:

	Senior			Senior
	Secured -			Secured -			Senior			Equity/
	First Lien			Second Lien			Subordinated			Other			Total
Balance as of January 1, 2015	$	97,395,708		$	46,748,798		$	54,986,207		$	51,343,141		$	250,473,854
Amortized discounts/premiums		213,171			48,358			89,048			-			350,577
Paid in-kind interest		519,512			34,419			2,123,245			2,180,878			4,858,054
Net realized gain (loss)		2,876			94,675			-			-			97,551
Net change in unrealized appreciation (depreciation)		2,391,120			(218,033	)		651,914			(3,398,893	)		(573,892	)
Purchases		10,728,040			21,297,356			35,000,000			6,756,440			73,781,836
Sales/Return of capital		(29,218,097	)		(7,500,000	)		(3,333,333	)		-			(40,051,430	)
Balance as of September 30, 2015	$	82,032,330		$	60,505,573		$	89,517,081		$	56,881,566		$	288,936,550

Net change in unrealized appreciation(depreciation) from investments still held as of September 30, 2015	$	2,289,884		$	(40,437	)	$	246,154		$	(3,947,892	)	$	(1,452,291	)

The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of September 30, 2016 and December 31, 2015, respectively.

As of September 30, 2016:

	Fair Value at				Range
Assets at Fair Value	September 30, 2016		Valuation Technique	Unobservable Input	Of Inputs		Weighted Average

Senior Secured - First Lien	$	95,469,146	Yield to Maturity	Comparable Market Rate		9.0% - 17.0%		11.36	%

Senior Secured - Second Lien	$	94,270,368	Yield to Maturity	Comparable Market Rate		9.6% - 20.1%		12.18	%

Senior Subordinated	$	82,358,617	Yield to Maturity	Comparable Market Rate		4.0% - 16.0%		12.81	%

Preferred Ownership	$	10,456,415	Market Approach	Enterprise Value/ LTM EBITDA Multiple		4.00x - 13.00x		7.33	x

Common Ownership/ Common Warrants	$	23,394,009	Market Approach	Enterprise Value/ LTM EBITDA Multiple		4.00x - 13.00x		13.56	x

Total	$	305,948,555

As of December 31, 2015:

	Fair Value at				Range
Assets at Fair Value	December 31, 2015		Valuation Technique	Unobservable Input	of Inputs		Weighted Average

Senior Secured - First Lien	$	88,453,325	Yield to Maturity	Comparable Market Rate		8.75% - 17.0%		12.29	%

Senior Secured - Second Lien	$	83,266,558	Yield to Maturity	Comparable Market Rate		10.0% - 13.5%		11.28	%

Senior Subordinated	$	80,458,554	Yield to Maturity	Comparable Market Rate		8.0% - 26.2%		13.80	%

Preferred Ownership	$	20,810,175	Market Approach	Enterprise Value/ LTM EBITDA Multiple		6.84x - 8.06x		7.45	x

Common Ownership/ Common Warrants	$	23,352,999	Market Approach	Enterprise Value/ LTM EBITDA Multiple		8.97x - 9.14x		9.05	x

Total	$	296,341,611

Share Transactions

On January 18, 2016, the Board of Directors approved a $5.0 million open market stock repurchase program. Pursuant to the program, we are authorized to repurchase up to $5.0 million in the aggregate of our outstanding common stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. The open market stock repurchase program will be in effect until the earlier of (i) January 18, 2017 or (ii) the repurchase of $5.0 million of the Company’s common stock. The program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the program. The program may be suspended, extended, modified or discontinued at any time.

The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program for the nine months ended September 30, 2016:

Month Ended		Shares Repurchased		Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
	March 31, 2016		10,509		$10.7700 - $11.2444	$	115,828
	May 31, 2016		9,547		$11.5596 - $12.3333		114,762
	June 30, 2016		6,074		$12.2335 - $12.3586		74,860
			26,130			$	305,450

For the nine months ended September 30, 2015 there was no common stock repurchased.

Distributions

The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually. If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of September 30, 2016 and September 30, 2015, we accrued $117,294 and $0, respectively, for any unpaid potential excise tax liability and have included these amounts within income tax liability on the accompanying Consolidated Statements of Assets and Liabilities.

The following table reflects the Company’s dividends declared and paid on its common stock for the nine months ended September 30, 2016:

Date Declared	Record Date	Payment Date	Amount Per Share
March 7, 2016	March 31, 2016	April 7, 2016	$	0.340
May 5, 2016	June 30, 2016	July 7, 2016	$	0.340
August 4, 2016	September 30, 2016	October 6, 2016	$	0.340

The following table reflects the Company’s dividends declared and paid on its common stock for the nine months ended September 30, 2015:

Date Declared	Record Date	Payment Date	Amount Per Share
March 10, 2015	March 31, 2015	April 6, 2015	$	0.340
May 11, 2015	June 30, 2015	July 6, 2015	$	0.340
August 10, 2015	September 30, 2015	October 6, 2015	$	0.340

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the Plan Administrator, before any associated brokerage or other costs.

Related Party Transactions

Management Fee

Under the Investment Advisory Agreement, the Company has agreed to pay Alcentra NY an annual base management fee based on its gross assets as well as an incentive fee based on its performance. The base management fee is calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% if its gross assets are between $625 million and $750 million; and 1.5% if its gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to the Company’s entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee will be payable quarterly in arrears and shall be calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company’s ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a ‘‘catch-up’’ feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until the Company has received such income in cash.

For the three and nine months ended September 30, 2016, the Company recorded expenses for base management fees of $1,335,294 and $3,908,093, respectively, of which $0 and $0, respectively, was waived by the Adviser and $1,335,294 was payable at September 30, 2016. For the three and nine months ended September 30, 2015, the Company recorded expenses for base management fees of $1,273,705 and $3,641,673, respectively, of which none was waived by the Adviser and $1,273,705 was payable at September 30, 2015.

The Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by the Company, through the quarter ended June 30, 2015 and to the extent required in order for us to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis). For the three and nine months ended September 30, 2016, the Company incurred income-based incentive fees of $607,739 and $2,324,624, respectively, of which none was waived by the Adviser. For the three and nine months ended September 30, 2015, the Company incurred income-based incentive fees of $546,027 and $1,749,155, respectively, of which none was waived by the Adviser. For the three and nine months ended September 30, 2016, the Company incurred capital gains incentive fees of $0 and $0, respectively, of which $0 and $0, respectively, was waived by the Adviser. For the three and nine months ended September 30, 2015, the Company incurred capital gains incentive fees of $(434,217) and $1,001,467, respectively, of which $0 and $1,001,467, respectively, was waived by the Adviser.

Directors' Fees

The independent directors of the Company each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person each board of directors meeting and $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting telephonically. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee, the nominating and corporate governance committee and the compensation committee will receive an annual fee of $10,000, $5,000 and $5,000, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.

For the three and nine months ended September 30, 2016 the Company recorded directors' fee expense of $83,313 and $232,608, respectively, of which $117,000 was payable at September 30, 2016. For the three and nine months ended September 30, 2015 the Company recorded directors' fee expense of $57,635 and $171,826, respectively, of which $36,500 was payable at September 30, 2015.

Purchases and Sales (Investment Transactions)

Investment purchases, sales and principal payments/paydowns are summarized below for the nine months ended September 30, 2016 and September 30, 2015.

	For the nine months ended September 30,
	2016		2015
Investment purchases, at cost (including PIK interest and dividends)	$	126,263,519	$	78,639,890
Investment sales, proceeds (including Principal payments/paydown proceeds)		101,861,657		48,051,430

Alcentra Capital InterNotes®

On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for our issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.

These notes are direct unsecured obligations and each series of notes will be issued by a separate trust (administered by U.S. Bank). These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

During the nine months ended September 30, 2016, the Company issued $15 million in aggregate principal amount of the Alcentra Capital InterNotes® for net proceeds of $14.7 million. These notes were issued with a stated interest rate of 6.50%, 6.375% and 6.25%. These notes mature on February 15, 2021, June 15, 2021 and July 15, 2021. For the three and nine months ended September 30, 2016, the Company borrowed an average of $54.6 million and $47.9 million with a weighted average interest rate of 6.35% and 6.40%, respectively.

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding during the nine months ended September 30, 2016.

Tenor at	Principal		Interest	Weighted
Origination	Amount		Rate	Average
(in years)	(000’s omitted)		Range	Interest Rate	Maturity Date Range
5	$	53,582	6.25% - 6.50%	6.38%	February 15, 2020 - June 15, 2021
7		1,418	6.50% - 6.75%	6.63%	January 15, 2022 - April 15, 2022
	$	55,000

During the nine months ended September 30, 2016, we redeemed $0 aggregate principal amount of our Alcentra Capital InterNotes®. The net proceeds of this offering were used to repay outstanding indebtedness under the Credit Facility.

In connection with the issuance of the Alcentra Capital InterNotes®, we incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of September 30, 2016. During the nine months ended September 30, 2016 we recorded $0.257 million of interest costs and amortization of offering costs on the Alcentra Capital InterNotes® as interest expense.

10.

Credit Facility/Line of Credit

On May 8, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender to provide liquidity in support of its investment and operational activities. The Credit Facility has an initial commitment of $80 million with an accordion feature that allows for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250 million, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.

On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured primarily by the Company’s assets. Costs of $3.5 million were incurred in connection with obtaining and amending the Credit Facility, which have been recorded as deferred financing costs on the Consolidated Statements of Assets and Liabilities and are being amortized over the life of the Credit Facility.

Amounts available to borrow under the Credit Facility are subject to a minimum borrowing /collateral base that applies an advance rate to certain investments held by the Company. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, portfolio company leverage which may affect the borrowing base and therefore amounts available to borrow.

The Company pays a commitment fee between 0.5% and 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations.

The Company has made customary representations and warranties and is required to comply with various covenants and reporting requirements. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of September 30, 2016, the Company was in compliance in all material respects with the terms of the Credit Facility.

As of September 30, 2016 and December 31, 2015 the Company had United States dollar borrowings of $70.9 million and $63.5 million outstanding under the Credit Facility, respectively. For the three and nine months ended September 30, 2016, the Company borrowed an average of $46.0 million and $48.2 million with a weighted average interest rate of 3.89% and 3.82%, respectively. For the three and nine months ended September 30, 2015, the Company borrowed an average of $37.5 million and $45.5 million with a weighted average interest rate of 3.56% and 3.52%, respectively.

11.

Market and Other Risk Factors

At September 30, 2016, the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is concentrated in the twenty-three industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.

Economic conditions in 2016 continued to impact revenues and operating cash flows for most businesses and continued to impact the lending markets, leaving many businesses unable to borrow or refinance debt obligations. These restrictions on obtaining available financing, coupled with the continuing economic slowdown, have resulted in a low volume of purchase and sale transactions across all industries, which have limited the amount of observable inputs available to the Company in estimating the fair value of the Company’s investments. The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.

Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.

The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.

12.

Commitments and Contingencies

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2016 and December 31, 2015, the Company had $4.3 million and $1.0 million in unfunded commitments under loan and financing agreements, respectively. As of September 30, 2016 and December 31, 2015, the Company’s unfunded commitment under loan and financing agreements are presented below.

	As of
	September 30, 2016		December 31, 2015

A2Z Wireless Holdings, Inc.	$	-	$	1,004,270
Superior Controls, Inc.		2,500,000		-
Healthcare Associates of Texas, LLC		1,300,000		-
IGT		500,000		-
Total	$	4,300,000	$	1,004,270

13.

Classification of Portfolio Investments

As of September 30, 2016, the Company’s portfolio investments were categorized as follows:


Industry		Cost		Fair Value	% of Net Assets*
Healthcare Services	$	62,508,149		64,283,000	34.81	%
Telecommunications		26,778,796		27,534,998	14.91	%
Industrial Services		28,238,653		27,326,932	14.80	%
Waste Services		26,637,714		23,194,778	12.56	%
High Tech Industries		20,400,000		20,507,000	11.11	%
Automotive Business Services		20,090,093		20,207,269	10.94	%
Industrial Manufacturing		15,451,862		15,596,000	8.45	%
Technology & Telecom		14,954,174		13,814,627	7.48	%
Education		14,837,424		13,610,173	7.37	%
Capital Equipment		12,824,415		13,078,000	7.08	%
Security		12,625,000		12,909,589	6.99	%
Media: Advertising, Printing & Publishing		11,750,000		10,870,000	5.89	%
Oil & Gas Services		13,783,926		9,062,000	4.91	%
Environmental/Recycling Services		6,971,326		6,159,326	3.34	%
Media & Entertainment		12,576,051		6,001,508	3.25	%
Wholesale/Distribution		5,090,909		5,090,909	2.76	%
Technology & IT		4,142,089		4,226,622	2.29	%
Food & Beverage		5,000,000		3,984,000	2.16	%
Aerospace		4,000,000		3,877,000	2.10	%
Transportation Logistics		6,028,277		2,352,000	1.27	%
Call Center Services		1,190,785		1,200,000	0.65	%
Packaging		1,062,821		1,062,821	0.58	%
Restoration Services		3,204,126		3	0.00	%
Total	$	330,146,590	$	305,948,555	165.68	%

Geographic Region

Eastern	$	84,555,770	$	79,922,044	43.28	%
South		86,261,157		78,198,435	42.35	%
Mid West		48,820,923		48,783,263	26.42	%
South East		46,090,373		39,817,824	21.56	%
South West		29,779,174		28,864,627	15.63	%
North East		15,732,874		15,933,622	8.63	%
West		18,906,319		14,428,740	7.81	%
Total	$	330,146,590	$	305,948,555	165.68	%

Investment Type

Senior Secured - First Lien	$	96,440,709	$	95,469,146	51.70	%
Senior Secured - Second Lien		98,105,480		94,270,368	51.05	%
Senior Subordinated		85,864,674		82,358,617	44.60	%
Equity/Other		49,735,727		33,850,424	18.33	%
Total	$	330,146,590	$	305,948,555	165.68	%

*Fair value as a percentage of Net Assets

As of December 31, 2015, the Company’s portfolio investments were categorized as follows:

Industry	Cost		Fair Value		% of Net Assets*
Healthcare Services	$	38,677,488	$	40,672,488		20.85	%
Infrastructure Maintenance		17,611,477		22,894,780		11.74	%
Waste Services		23,743,476		22,743,634		11.66	%
Automotive Business Services		19,963,981		19,963,981		10.24	%
Telecommunications		17,829,891		18,825,219		9.65	%
Transportation Logistics		15,475,386		15,475,386		7.93	%
Technology & Telecom		14,466,264		13,943,722		7.15	%
Education		14,338,600		13,890,332		7.12	%
Restoration Services		12,830,771		13,232,437		6.78	%
Oil & Gas Services		13,127,489		13,127,489		6.73	%
Wholesale		10,330,768		12,753,733		6.54	%
Healthcare: Orthopedic Products		11,810,851		12,000,000		6.15	%
Media: Advertising, Printing & Publishing		11,750,000		11,750,000		6.02	%
Industrial Services		10,203,840		10,068,757		5.16	%
Security		9,500,000		9,500,000		4.87	%
High Tech Industries		5,168,000		7,007,913		3.59	%
Media & Entertainment		12,323,985		6,860,544		3.53	%
Environmental/Recycling Services		6,623,154		6,095,154		3.13	%
Wholesale/Distribution		5,981,818		5,981,818		3.07	%
Technology & IT		4,869,375		4,968,750		2.55	%
Aerospace		4,000,000		4,000,000		2.05	%
Packaging		3,792,657		3,792,657		1.94	%
Food & Beverage		5,000,000		3,788,000		1.94	%
Disaster Recovery Services		12,823,731		1,804,817		0.93	%
Call Center Services		1,188,731		1,200,000		0.62	%
Total	$	303,431,733	$	296,341,611		151.94	%

Geographic Region
South East $		78,199,153	$	80,722,968		41.39	%
Eastern		51,779,326		54,523,091		27.95	%
South		67,214,814		54,400,549		27.89	%
West		34,068,929		34,419,331		17.65	%
Mid West		32,695,872		33,163,200		17.00	%
South West		18,466,264		17,943,722		9.20	%
North East		11,007,375		11,168,750		5.73	%
North West		10,000,000		10,000,000		5.13	%
Total	$	303,431,733	$	296,341,611		151.94	%

Investment Type
Senior Secured - First Lien	$	92,807,114	$	88,453,325		45.35	%
Senior Secured - Second Lien		83,015,409		83,266,558		42.69	%
Senior Subordinated		80,358,874		80,458,554		41.26	%
Equity/Other		47,250,336		44,163,174		22.64	%
Total	$	303,431,733	$	296,341,611		151.94	%

*Fair value as a percentage of Net Assets

14.

Financial Highlights

The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the nine months ended September 30, 2016 and September 30, 2015.

	For the nine months ended			For the nine months ended
	September 30, 2016			September 30, 2015
	(Unaudited)			(Unaudited)
Per share data⁽¹⁾
Net asset value, beginning of period	$	14.43		$	14.87

Net investment income (loss)		1.21			1.09
Net realized and unrealized gains (losses)		(1.16	)		(0.06	)
Benefit for taxes on unrealized appreciation on investments		0.23			0.04
Net increase (decrease) in net assets resulting from operations		0.28			1.07

Distributions to shareholders:⁽²⁾
From net investment income		(1.02	)		(1.02	)

Net asset value, end of period	$	13.69		$	14.92
Market value per share, end of period	$	12.99		$	11.59

Total return based on net asset value⁽³⁾⁽⁴⁾		1.9	%		7.2	%
Total return based on market value⁽³⁾⁽⁴⁾		20.8	%		0.9	%

Shares outstanding at end of period		13,490,636			13,516,766

Ratio/Supplemental Data:
Net assets, at end of period	$	184,658,193		$	201,733,672
Ratio of total expenses before waiver to average net assets⁽⁵⁾		9.36	%		7.60	%
Ratio of interest expenses to average net assets⁽⁵⁾		3.47	%		2.31	%
Ratio of incentive fees to average net assets⁽⁵⁾		1.62	%		1.82	%
Ratio of waiver of management and incentive fees to average net assets⁽⁵⁾		—	%		0.66	%
Ratio of net expenses to average net assets⁽⁵⁾		9.36	%		6.94	%
Ratio of net investment income (loss) before waiver to average net assets⁽⁵⁾		11.37	%		9.12	%
Ratio of net investment income (loss) after waiver to average net assets⁽⁵⁾		11.37	%		9.78	%

Total Credit Facility payable outstanding	$	70,872,238		$	52,654,738
Total Notes payable outstanding	$	55,000,000		$	40,000,000

Asset coverage ratio⁽⁶⁾		2.5			3.2
Portfolio turnover rate⁽⁴⁾		35	%		18	%

(1)

The per share data was derived by using the average shares outstanding during the period.

(2)

The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.

(3)

Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan.

(4)

Not Annualized.

(5)

Annualized.

(6)

Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.

15.

Unconsolidated Significant Subsidiaries

In accordance with the SEC’s Regulation S-X and GAAP, we have subsidiaries that are not required to be consolidated. We have certain unconsolidated significant subsidiaries that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented below in aggregate as of and for the nine months ended September 30, 2016 and as of and for the year ended December 31, 2015.

	As of			For the nine months ended
Balance Sheet	September 30, 2016		Income Statement	September 30, 2016

Current Assets		5,202,602	Net Sales		9,830,872
Noncurrent Assets		18,428,919	Gross Profit		3,422,132
Current Liabilities		1,355,589	Net Income/EBITDA		2,263,233
Noncurrent Liabilities		13,092,339

	As of			For the year ended
Balance Sheet	December 31, 2015		Income Statement	December 31, 2015

Current Assets		9,799,192	Net Sales		26,808,399
Noncurrent Assets		25,016,525	Gross Profit		4,817,956
Current Liabilities		3,982,975	Net Income (Loss)		(8,829,955	)
Noncurrent Liabilities		20,000,000

In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities.

For example, the business and growth of FST Technical Services, LLC (“FST”) depends in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries. There can be no assurance that this trend in outsourcing will continue, as companies may elect to perform such services internally. A significant change in the direction of this trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by it, could significantly decrease its revenues and such decreased revenues could have a material adverse effect on it or its results operations or financial condition.

DRC Emergency Services, LLC (“DRC”) was sold to a third party on January 19, 2016. As such, summary financial information for DRC is included for the year ended December 31, 2015 and is not included for the nine months ended September 30, 2016.

16.

Subsequent Events

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued.

Subsequent to September 30, 2016, the following activity occurred:

On October 6, 2016, a $0.34 per share dividend was paid to shareholders of record as of September 30, 2016.

On October 19, 2016, Alcentra sold its interest in Tunnel Hill in a secondary sale for $10,153,722.

On October 21, 2016, Alcentra sold its equity interest in Media Storm and Dentistry for Children in a secondary sale for $3,782,540.

On October 21, 2016, Alcentra assigned $8.0 million of its interest in LRI to a third party.

On October 24, 2016, Alcentra invested $6.0 million in Lugano Diamond and Jewelry, Inc (Libor + 10.75 Senior Secured Note).

On October 27, 2016, Alcentra invested $10.0 million in Safe Security (13.0% Cash/1.0% PIK Subordinated Note).

On October 28, 2016, Aphena Pharma repaid its debt investment in the amount of $1.1 million.

On November 1, 2016, after receiving more information on a recapitalization, we surrendered our preferred shares and warrant units as part of the recapitalization of a remediation services company. As a result, we realized a loss in the amount equal to the unrealized depreciation recorded on these investments as of September 30, 2016.

On November 3, 2016, the Board of Directors approved the 2016 fourth quarter dividend of $0.34 per share for shareholders of record date December 31, 2016 and payable January 5, 2017.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

the effect of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

actual and potential conflicts of interest with Alcentra NY, LLC;

•

the dependence of our future success on the general economy and its effect on the industries in which we invest;

•

the ability of our portfolio companies to achieve their objectives;

•

the use of borrowed money to finance a portion of our investments;

•

the adequacy of our financing sources and working capital;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

our ability to maintain our qualification as a business development company; and

•

the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this quarterly report on Form 10-Q.

Overview

Alcentra Capital Corporation (the “Company”, “Alcentra”, “ACC”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”), commencing with tax year ended December 31, 2014, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership” or “Fund III”) is a Delaware limited partnership, which commenced operations on May 14, 2010. The Partnership was formed for the purpose of seeking current income and long-term capital appreciation by making investments in senior debt securities, subordinated debt securities, and common and preferred equity securities with equity rights or participations in U.S.-based middle market companies. BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC (“Alcentra Group”) and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY, LLC is wholly owned by BNY Alcentra Group Holdings, Inc. which is wholly owned by The Bank of New York Mellon Corporation.

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100,000,000. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters' exercise of the overallotment option for gross proceeds of $11,250,000.

Immediately prior to the Offering, Fund III sold all of its assets other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) to the Company for $64.4 million in cash and $91.5 million in shares of the Company's common stock. Concurrent with the acquisition of the Fund III Acquired Assets from Fund III, the Company also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Manager and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the Offering.

The Company entered into a senior secured term loan agreement (the “Bridge Facility”) with ING Capital LLC as lender that it used to fund the purchase of the Warehouse Portfolio and to fund the cash portion of the consideration paid to Fund III. In May 2014, the Company used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full.

The Company's investment objective is to generate both current income and capital appreciation through debt and equity investments by targeting investment opportunities with favorable risk-adjusted returns. The Company invests primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making direct equity investments in such companies.

The Company is required to comply with certain regulatory requirements such as not acquiring any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.

Portfolio Composition and Investment Activity

Portfolio Composition

We originate and invest primarily in middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.

During the three months ended September 30, 2016, we invested $51.8 million in debt and equity investments in three new portfolio companies and two add on investments. These investments consisted of senior secured loans ($18.0 million, or 34.7%), second lien notes ($3.1 million, or 6.0%), subordinated notes ($29.7 million, or 57.3%), and equity securities ($1.0 million, or 1.9%). During the three months ended September 30, 2016 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $30.1 million. During the three months ended September 30, 2015, we invested $21.2 million in debt investments in two new portfolio companies and one add on investment. These investments consisted of senior secured loans ($1.7 million, or 8.1%), second lien notes ($4.0 million, or 18.8%) and subordinated notes ($15.5 million, or 73.0%). During the three months ended September 30, 2015, we received proceeds from repayments of principal, including return of capital dividends and realized gains, of $15.8 million.

As of September 30, 2016, the fair value of our investment portfolio totaled $305.9 million and consisted of 35 portfolio companies. As of September 30, 2016, 57% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 43% bore interest at fixed rates. Our average portfolio company investment at amortized cost and fair value was approximately $9.1 million and $8.5 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $19.0 million and $19.0 million, respectively.

As of December 31, 2015, the fair value of our investment portfolio totaled $296.3 million and consisted of 32 portfolio companies. As of December 31, 2015, 52% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 47% bore interest at fixed rates. Our average portfolio company investment at amortized cost and fair value was approximately $9.6 million and $9.3 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $17.1 million and $22.8 million, respectively.

The weighted average yield on debt investments as of September 30, 2016 and December 31, 2015 was 11.8% and 12.4%, respectively. The weighted average yields were computed using the effective interest rates for debt investments as of September 30, 2016 and December 31, 2015, including the accretion of original issue discount.

The following table shows the portfolio composition by investment type at fair value and cost with the corresponding percentage of total investments:

	Fair Value								Cost
	September 30, 2016				December 31, 2015				September 30, 2016				December 31, 2015
	(dollars in thousands)
Senior Secured - First Lien	$	95,469	31.2	%	$	88,453	29.9	%	$	96,441	29.2	%	$	92,807	30.6	%
Senior Secured - Second Lien		94,270	30.8	%		83,267	28.1	%		98,105	29.7	%		83,015	27.4	%
Senior Subordinated		82,359	26.9	%		80,459	27.1	%		85,865	26.0	%		80,360	26.5	%
Equity/Other		33,850	11.0	%		44,163	14.9	%		49,736	15.1	%		47,250	15.6	%
Total	$	305,949	100.0	%	$	296,342	100.0	%	$	330,146	100.0	%	$	303,432	100.0	%

The following table shows portfolio composition by geographic region at fair value and cost with the corresponding percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

	Fair Value								Cost
	30-Sep-16				31-Dec-15				30-Sep-16				31-Dec-15
	(dollars in thousands)
Eastern		95,856	31.3	%		65,692	22	%	$	100,289	30.4	%		62,787	21	%
Mid West		48,783	15.9	%		33,163	11	%	$	48,821	14.8	%		32,696	11	%
South	$	78,198	25.6	%	$	54,401	18	%	$	86,261	26.1	%	$	67,215	22	%
South Eastern		39,818	13.0	%		80,723	27	%	$	46,090	14.0	%		78,199	26	%
South West		28,865	9.4	%		17,944	6.1	%	$	29,779	9.0	%		18,466	6.1	%
West		14,429	4.7	%		44,419	15	%	$	18,906	5.7	%		44,069	15	%
Total	$	305,949	100	%	$	296,342	100	%	$	330,146	100	%	$	303,432	100	%

The following table shows the detailed industry composition of our portfolio at fair value and cost as a percentage of total investments:

	Fair Value		Cost
	September 30, 2016	December 31, 2015	September 30, 2016	December 31, 2015

Healthcare Services	21.01%	17.77%	18.93%	16.64%
Telecommunications	9.00%	6.35%	8.11%	5.88%
Industrial Services	8.93%	3.40%	8.56%	3.36%
Waste Services	7.58%	7.67%	8.07%	7.82%
High Tech Industries	6.70%	2.36%	6.18%	1.70%
Automotive Business Services	6.60%	6.74%	6.09%	6.58%
Industrial Manufacturing	5.11%	0.00%	4.69%	0.00%
Technology & Telecom	4.52%	4.71%	4.53%	4.77%
Education	4.45%	4.69%	4.49%	4.73%
Capital Equipment	4.27%	0.00%	3.88%	0.00%
Security	4.22%	3.21%	3.82%	3.13%
Media: Advertising, Printing & Publishing	3.55%	3.97%	3.56%	3.87%
Oil & Gas Services	2.96%	4.43%	4.18%	4.33%
Environmental/Recycling Services	2.01%	2.06%	2.11%	2.18%
Media & Entertainment	1.96%	2.32%	3.81%	4.06%
Wholesale/Distribution	1.66%	6.32%	1.54%	5.38%
Technology & IT	1.38%	1.68%	1.25%	1.60%
Food & Beverage	1.30%	1.28%	1.51%	1.65%
Aerospace	1.27%	1.35%	1.21%	1.32%
Transportation Logistics	0.77%	5.22%	1.83%	5.10%
Call Center Services	0.39%	0.40%	0.36%	0.39%
Packaging	0.36%	1.28%	0.32%	1.25%
Infrastructure Maintenance	0.00%	7.73%	0.00%	5.80%
Restoration Services	0.00%	4.47%	0.97%	4.23%
Disaster Recovery Services	0.00%	0.59%	0.00%	4.23%
Grand Total	100.00%	100.00%	100.00%	100.00%

$100.9 million of the portfolio (33%) had a first credit exposure at 0.0x – 1.0x EBITDA; $133.2 million of the portfolio (44%) had a first credit exposure at 1.0x – 3.0x EBITDA; $28.8 million of the portfolio (10%) had a first credit exposure at 3.0x – 4.0x EBITDA; $1.0 million of the portfolio (0%) had a first credit exposure at 4.0x – 4.5x EBITDA; and $39.6 million of the portfolio (13%) had a first credit exposure at >4.5x EBITDA.

Portfolio Asset Quality

We currently do not use a rating system to monitor portfolio performance. As the portfolio grows in size, we would expect to implement a portfolio rating system.

Non-Accrual

We will generally not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or we have reason to doubt our ability to collect such interest.

As of September 30, 2016 and December 31, 2015, we had one loan on non-accrual status, a specialty trucking logistics company.

Discussion and Analysis of Results of Operations

Comparison of three months ended September 30, 2016 and September 30, 2015

Investment Income

For the three months ended September 30, 2016, total investment income was $9.1 million, an increase of $0.6 million, or 7.2% over the $8.5 million of total investment income for the three months ended September 30, 2015. This increase was primarily attributable to the new investments as well as prepayment penalties on the sale of DBI Holdings, Inc.

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is payable both quarterly and monthly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect the total dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.

We may also generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and the secondary sale of certain of our investments. We are exploring the secondary sale of select equity interests in certain portfolio companies. We believe that the sale of these equity interests would allow us to rotate a portion of our non-incoming producing equity investment portfolio into income generating debt investments. There can be no assurances that these negotiations will result in a sale of any or all of the equity interests or if a sale transaction is undertaken as to its terms or timing.

Expenses

For the three months ended September 30, 2016, total expenses were $4.3 million, which was an increase of $0.9 million, or 28.7%, over the $3.4 million for the three months ended September 30, 2015. Interest and financing expenses for the three months ended September 30, 2016 were $1.8 million, an increase of $0.4 million from $1.4 million for the three months ended September 30, 2015. This is due to (i) the additional issuance of $4.5 million in Alcentra Capital Internotes® and (ii) increased borrowings in the credit facility for investing purposes. The base management fee increased $0.06 million, or 4.8%, to $1.3 million for the three months ended September 30, 2016 due to higher average total assets less cash and cash equivalents than the comparable period in 2015. The income-based incentive fee for the three months ended September 30, 2016 was $0.6, an 11.3% increase from the comparable period in 2015. The capital gains incentive fee was $0 for the period ending September 30, 2016, a decrease of $0.4 million from comparable period in 2015. The administrative service fee, professional fees and other general and administrative expenses totaled $0.52 million for the three months ended September 30, 2016 compared to a total of $0.55 million for the three months ended September 30, 2015.

Net Investment Income

Net investment income for the three months ended September 30, 2016 was $4.8 million, a decrease of $0.35 million, or (6.9)%, compared to net investment income of $5.1 million during the three months ended September 30, 2015 as a result of the $0.6 million increase in total investment income and the $0.9 million increase in total expenses.

Net Increase in Net Assets Resulting From Operations

For the three months ended September 30, 2016, the net realized gain from portfolio investments was $8.8 million largely due to the sale of DBI Holdings, Inc.

During the three months ended September 30, 2016, we recorded a net change in unrealized depreciation from portfolio investments of $19.0 million attributable to the (i) reversal of the unrealized gain on DBI Holdings, (ii) a sale of equity investments in a secondary transaction and (iii) a writedown in a weather related portfolio company. We have not received financial statements for this company, since June 2016 and understand that it may be seeking to effectuate a recapitalization transaction in the near term. As a result, the fair value of our investment has been written down to a de minimis amount, and management believes that recovery is unlikely. During the three months ended September 30, 2015, the net change in unrealized depreciation was $3.2 million.

As a result of these events, our net decrease in net assets resulting from operations during the three months ended September 30, 2016 was $1.8 million, a decrease of $5.1 million, compared to a net increase in net assets resulting from operations of $3.2 million during the three months ended September 30, 2015.

Provision for Taxes on Unrealized Appreciation on Investments

We have direct wholly owned subsidiaries that have elected to be taxable entities (the "Taxable Subsidiaries"). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are "pass through" entities for tax purposes and continue to comply with the "source income" requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended September 30, 2016, we recognized a benefit for income tax on unrealized gains on investments of $3.5 million.

Comparison of nine months ended September 30, 2016 and September 30, 2015

Investment Income

For the nine months ended September 30, 2016, total investment income was $29.7 million, an increase of $4.4 million, or 17.7%, over the $25.2 million of total investment income for the nine months ended June 30, 2015. The increase was primarily attributable to a $1.9 million increase in income resulting largely from an increase in the size of the portfolio, as well as fee income of $2.5 million.

Expenses

For the nine months ended September 30, 2016, total expenses, including income tax provision, were $13.4 million, an increase of $2.9 million or 28.1%, over the $10.5 million of total expenses after the waiver of capital gains incentive fees for the nine months ended September 30, 2015. Interest and financing expenses for the nine months ended September 30, 2016 were $5.1 million, an increase of $1.6 million or 45%, compared to $3.5 million for the nine months ended September 30, 2015 as a result of interest and commitment fees related to the Credit Facility as well as the additional cost from the issuance of $15 million of InterNotes. The base management fee increased $0.3 million, or 7.3%, to $3.9 million for the nine months ended September 30, 2016 due to higher average total assets less cash and cash equivalents than the comparable period in 2015. The incentive fee for the nine months ended September 30, 2016 was $2.3 million, a $0.06 million, or 32.9%, increase from the $1.7 million incentive fee for the nine months ended September 30, 2015. There was no capital gains incentive fee during the 2016 period. The administrative service fee, professional fees and other general and administrative expenses totaled $2.1 million for the nine months ended September 30, 2016 compared to $1.6 million for the nine months ended September 30, 2015, a 32.5% increase due largely to one-time expenses of $0.1 million or 22% of the variance.

Net Investment Income

Net investment income for the nine months ended September 30, 2016 was $16.3 million, which was an increase of $1.5 million, or 10.3%, compared to net investment income of $14.8 million during the nine months ended September 30, 2015 as a result of the $4.4 million increase in total investment income and the $2.9 million increase in total expenses, including income tax provision.

Net Increase in Net Assets Resulting From Operations

For the nine months ended September 30, 2016, the total net realized gain on investments was $1.6 million and was comprised of $11.2 million in gross realized losses and $12.8 in gross realized gains. Significant realized gains (losses) for the nine months ended September 30, 2016 are summarized as follows:

Portfolio Company	Realization Event	Net Realized Gain/(Loss) (in millions)

DRC Emergency Services	Sale of Portfolio Company	$	(11.3	)
Health Fusion	Exit of Portfolio Company		1.7
ACT Lighting	Exit of Portfolio Company		1.4
Net Access Systems	Exit of Portfolio Company		0.3
Response Team	Exit of Portfolio Company		0.2
DBI Holdings, LLC	Exit of Portfolio Company		9.3
		$	1.6

For the nine months ended September 30, 2015, the total realized gain on investments was $0.1 million.

During the nine months ended September 30, 2016, we recorded a net change in unrealized depreciation on investments of $17.1 million attributable to (i) the net unrealized loss on exits, repayments or sale of investments $2.1 (ii) a write down of various other portfolio companies of 2.9 million and (iii) the unrealized depreciation of $12.0 million on watchlist securities as well as a weather related portfolio company. We have not received financial statements for one of our portfolio companies since June 2016 and understand that it may be seeking to effectuate a recapitalization transaction in the near term. As a result, the fair value of our investment has been written down to a de minimis amount, and management believes that recovery is unlikely. During the nine months ended September 30, 2015, we recorded a net change in unrealized depreciation on investments of $0.7 million attributable to (i) net unrealized depreciation of $4.4 million on debt investments and (ii) net unrealized appreciation of $3.8 million on debt and equity investments. As a result of these events, our net increase in net assets resulting from operations during the nine months ended September 30, 2016, after benefit for taxes, was $3.8 million, or a decrease of $10.8 million, compared to a net increase in net assets resulting from operations of $14.6 million during the prior year period.

Liquidity and Capital Resources

As of September 30, 2016, we had $6.7 million in cash and cash equivalents and our net assets totaled $184.6 million. We believe that our current cash and cash equivalents on hand, our credit facility and our anticipated cash flows from operations will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from future debt offerings and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders.

Cash Flows

For the nine months ended September 30, 2016, we experienced a net increase in cash and cash equivalents in the amount of $1.8 million. During that period, we used $5.6 million in cash from operating activities, primarily from investments in new portfolio companies (of approximately $121 million which was partially offset by the return of capital of approximately $102 million and by the net change in unrealized depreciation of $17.1 million). During the same period, financing activities provided for cash of $7.5 million primarily due to the borrowing of the credit facility and the additional issuance of notes.

For the nine months ended September 30, 2015, we experienced an increase in cash and cash equivalents in the amount of $1.4 million. During that period, our operating activities used $12.9 million in cash, primarily in connection with the purchase/repayments of investments.. In addition, financing activities increased cash by $14.4 million primarily from the issuance of the InterNotes. As of September 30, 2015, we had $11.5 million of cash on hand.

Capital Resources

Our liquidity and capital resources are derived from the capital contributions and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to our stockholders. We expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from public and private offerings of securities to finance our investment activities.

In May 2014, Alcentra entered into a senior secured revolving credit agreement (“Credit Facility”) with ING Capital LLC, as administrative agent and lender. The Credit Facility had an initial commitment of $80 million with an accordion feature that allows for an increase in total commitments to $160 million. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250.0 million, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1.0% and zero or (ii) 3.00% plus the one, three or six month LIBOR rate, as applicable.

On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. We are also subject to customary covenants and events of default typical of a facility of this type.

As of September 30, 2016, we are in compliance with all covenants of the Credit Facility and there was $70.9 million outstanding.

Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. We were in compliance with the asset coverage ratios at all times. As of September 30, 2016 our asset coverage ratio was 253.3%.

Recently Issued Accounting Standards

In April 2015, FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. Amortization of the costs are included in Amortization of deferred financing costs and Amortization of deferred note offering costs. This guidance is effective for annual and interim periods beginning after December 15, 2015. We have adopted this guidance as of March 31, 2016. The new guidance will be applied retrospectively to each prior period presented.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.

Regulated Investment Company Status and Distributions

We have elected to be treated as a RIC under Subchapter M of the Code beginning the fiscal year ending December 31, 2014. If we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we qualify as a RIC, we will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).

Investment Advisory Agreement

Under the Advisory Agreement, Alcentra pays Alcentra NY, LLC (the "Adviser") a base management fee calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% of its total gross assets if our gross assets are between $625 million and $750 million; and 1.5% of its gross assets if its assets are greater than $750 million. These various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to ACC's entire gross assets in the event its gross assets exceed the various gross asset thresholds.

In addition, Alcentra pays the Adviser an incentive fee under the Advisory Agreement which consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of our "pre-incentive fee net investment income" for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a "catch-up" feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Advisory Agreement, as of the termination date) and equals 20% of ACC's aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. See Note 6.

The Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by us, through the quarter ended June 30, 2015 and to the extent required in order for us to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis).

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.

Valuation of Portfolio Investments

We generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by ACC's board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.

Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by ACC's board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available, ACC's board of directors undertakes a multi-step valuation process each quarter, as described below:

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Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

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Preliminary valuation conclusions are then documented and discussed with our senior management and the Adviser committee;

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The audit committee of ACC's board of directors then reviews these preliminary valuations;

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At least once quarterly, independent valuation firms engaged by ACC's board of directors will prepare valuations on a selected basis and submit reports to the board of directors; and

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The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based the input of Adviser, the independent valuation firm and the audit committee.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest.

Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2016, we had off-balance sheet arrangements consisting of three unfunded commitments totaling $4.3 million. As of December 31, 2015, we had one unfunded commitment totaling $1.0 million.

Recent Developments