ALCENTRA LIMITED

MIFIDPRU 8 DISCLOSURES

Annual disclosure of risk management objectives and policies, own funds and requirement and remuneration policies and practices, to meet the regulatory disclosure requirement set out in MIFIDPRU8. This report covers the financial position as at 30th September 2024, as extracted from the audited financial statements of Alcentra Limited at that date.

30 SEPTEMBER 2024

1 INTRODUCTION

1.1 ABOUT ALCENTRA LIMITED AND REGULATORY FRAMEWORK

Alcentra Limited (“Alcentra” or “the Company”) is a wholly owned subsidiary of Alcentra Asset Management Limited ("AAML" or the "Parent"), which is an indirect wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"). Alcentra was formed in March 2003 through the acquisition of Barclays Capital Asset Management Limited from Barclays Bank Plc. In January 2006, Alcentra became a subsidiary of Bank of New York Mellon (“BNYM”), within its group of investment management boutiques. In November 2022 BNYM sold Alcentra to Franklin, with the transaction being completed on the 1st of November 2022.

Alcentra provides investment management and related services to investors globally, through investment products focused on sub-investment grade debt-capital markets in Europe, as part of the wider Franklin corporate group. Alcentra adopts, leverages and contributes to Franklin’s wider strategy, values, policies, procedures and approach to community engagement. Franklin's corporate values are reflected throughout the organisation and are made available through its annual report on its website www.franklinresources.com.

Alcentra is authorised and regulated by the Financial Conduct Authority ("FCA") and, as a non-SNI MIFIDPRU investment firm, it is subject to MIFIDPRU rules, including the requirement to disclose the below information annually:

1. Risk management objectives and policies – MIFIDPRU 8.2
2. Governance Arrangements-MIFIDPRU 8.3
3. Own funds – MIFIDPRU 8.4
4. Own funds requirement – MIFIDPRU 8.5
5. Remuneration polices – MIFIDPRU 8.6

1.2 COMPANY OVERVIEW

Alcentra Limited provides investment management and related services to investors globally through investment products that included open ended funds, closed ended funds, and separately managed accounts. Since inception, Alcentra has evolved its product mix and offers a broader platform with an all-encompassing sub-investment grade credit suite of products. Alcentra offers solutions for Senior Secured Loans, High Yield Bonds, Direct Lending, Special Situations, Structured Credit and Multi-Strategy Credit.

Alcentra’s core strategy is to deliver risk-adjusted returns to its global institutional and intermediary investors in line with the long-term goals of its investors, while being committed to fostering lasting partnerships through transparency and outstanding service. To achieve this strategy, the Company:

1. partners with institutional investors around the world to help them make the most of market opportunities,
2. invests across the credit spectrum, from senior secured to subordinated debt, in both liquid and illiquid markets,
3. supports investors through a fully integrated global distribution and client service capabilities and operational functions, while the investment teams operate independently,
4. has investment teams which represent one of the largest and most experienced research platforms bringing significant regional and sectoral expertise for high-quality credit underwriting, the prominent scale and extensive networks which allow unique sourcing and exceptional information edge,
5. employs a disciplined, value-orientated approach to evaluating individual investments and constructing portfolios across all investment strategies,
6. strategically launches new products, fund vintages, and investment structures that seek to align with investor requirements, while ensuring these initiatives integrate seamlessly with its existing capabilities and resources across direct lending, liquid funds, collateralised loan obligations (“CLO”s), high yield, infrastructure debt, special situations and structured credit,
7. leverages the expertise of other alternatives focused businesses in the Franklin group, delivering private credit expertise and tailored solutions across the US and Europe.

Alcentra’s clients are the funds themselves, with the underlying investors typically being institutional clients, such as pension funds and insurance companies, or professional investors.

2 RISK MANAGEMENT OBJECTIVES AND POLICIES

Alcentra’s Board of Directors (the “Board”, detailed in section 3) is focused on ensuring the Company embeds an effective Risk Management Framework, consisting of 1. Corporate Risk Management and 2. Investment Risk Management. To effectively govern the risk of the Company, the Board mandates various governance committees; structures; and processes, including those outlined below, which serve to facilitate oversight and management of the relevant risks.

• Risk Appetite Statement
• Risk Control Framework
• Risk and Control Self-Assessment
• Risk Monitoring, including Key Risk Indicator reporting and, in relation to Investment Risk, Quarterly Risk and Performance Meetings
• Operational error identification, investigation, and reporting
• Monitoring and remediation of control gaps through internal risk assessment, compliance monitoring and internal audit reviews
• Alcentra’s ICARA process

2.1 STATEMENT OF RISK APPETITE

Risk is a fundamental characteristic of Alcentra’s business and is inherent in every transaction undertaken. As such, the Company’s approach to risk taking and how it considers risk relative to reward directly impacts its success. Therefore, Alcentra has established limits on the level and nature of the risk that it is willing and able to assume in achieving its strategic objectives and business plan.

Alcentra’s Risk Appetite Statement, which is set by the Board, serves this purpose and guides its decision-making processes, including how it pursues its business strategy and the method by which it manages risk and determines whether the risk position is within appetite.

Alcentra is a source of innovative investment solutions for its clients, where key risks faced are operational, inclusive of the failure to meet fiduciary obligations. Strategic risk may arise from the failure to remain relevant and competitive, and some credit risk and market risk may arise from exposure to foreign exchange or seed capital investments. Additionally, the Board recognises that reputational risk could arise from shortcomings in any of these areas.

Alcentra is committed to ensuring all business activities are conducted with a clear understanding of the risks, maintaining a robust risk management framework, delivering excellence, ensuring transparent disclosure, and treating customers fairly, and meeting the expectations of major stakeholders, including clients, shareholders, employees, and regulators. The Board expects a culture of honesty and openness from all staff with a bias to escalation in case of doubt.

2.2 RISK MANAGEMENT FRAMEWORK

Through its responsibility to ensure effective internal risk management the Board ensures that a robust Risk Management Framework is embedded within the business and that effective escalation channels exist to ensure any issues are identified and remediated. There are two key pillars of Alcentra Risk Management Framework:

1. Corporate Risk Management - risk management of the risks inherent in the operational activities of the Company; and
2. Investment Risk Management - risk management of the client funds.

Alcentra’s Board is supported in this objective through the establishment of local independent risk and compliance specialists (the “Risk and Compliance Team”), who support and guide the business in the embedding and maintenance of the risk and regulatory management requirements.

2.2.1 RISK COMMITTEE

The Alcentra Risk Committee meets on a quarterly basis; oversees the risk framework for Alcentra and makes recommendations to the Board for setting up risk appetite and risk mitigation. Agenda items include Error and Breach Reporting; AML/KYC updates; Compliance Updates; Operational Risk Updates; KRI Monitoring; Open Actions Tracking; Investment Risk and Counterparty Risk Update; and Conflicts Updates. The voting members of the Risk Committee include:

• an independent Non-Executive Chair (“INED”)
• Alcentra’s Head of Risk & Compliance
• Alcentra’s Chief Accounting Officer

2.3 RISK MANAGEMENT FUNCTION

A key aspect of Alcentra’s Risk Management Framework is the establishment of the ‘Three Lines of Defence’ model. The first line of defence (“1LOD”) includes Operations, Portfolio Management, Business Development, Finance, IT and other business functions that provide the day-to-day delivery of the business. This includes ensuring that internal controls and appropriate risk management standards and practices are designed, implemented, maintained and monitored.

The 1LOD owns and is accountable for the identification, assessment and management of risks that arise through the course of its business and service provision.

The second line of defence (“2LOD”) consists primarily of the Risk and Compliance Team. A key responsibility of the 2LOD is oversight and challenge of the 1LOD’s identification, assessment and management of its risks.

The third line of defence (“3LOD”) is Internal Audit, which is organizationally independent from both the first and second lines of defence. A key responsibility of the third line is to opine on the adequacy of the framework and governance processes and undertake periodic reviews.

The independent 2LOD Risk and Compliance Team also has oversight of the adequacy of controls of the investment process. In addition, issues; errors; guideline breaches; and other matters pertinent to the Company’s overall risk framework are subject to the oversight of this function and to the Risk Committee. Alcentra’s approach to investment risk management and operational risk management is to ensure that all material risks to which Alcentra is exposed are defined, understood and effectively managed.

2.3.1 OPERATIONAL RISK

The Operational Risk team serves to challenge and provide independent subject matter expertise to the Alcentra business in respect of Alcentra’s operational risks and controls, including appropriate resolution of errors in line with the Alcentra Errors & Breaches policy.

2.3.2 INVESTMENT RISK

The Investment Risk team serves to challenge and provide independent subject matter expertise to the Alcentra business for Investment Risk. Investment Risk is defined as the variability over a specified time horizon in the market value of a portfolio of assets due to the portfolio’s sensitivity to various underlying influences including, but not limited to:

• Credit-specific issues.
• Financial market trends and stability.
• Industry / sector dynamics.
• Fundamental factors.
• Macro-economic factors.

3 RISK MANAGEMENT PROCESS AND CONTROLS

3.1 RISK AND CONTROL SELF-ASSESSMENT

The Risk and Control Self-Assessment (“RCSA”) is the Company’s primary operational risk and control identification and assessment tool, and is used to:

• Identify material operational risks and key controls considering current/future business objectives and overall general business environment. Further, it helps senior management to gain an understanding of the level of operational risk that each business/business partner exposes the Company to by conducting their activities, thereby facilitating risk-sensitive resource allocation.
• Assess the inherent risk rating associated with each of the identified operational risks.
• Assess whether the key controls are designed and operating effectively to mitigate residual risk exposures to the level required by the risk appetite statement.
• Measure residual risk exposures and identify operational risks outside of Board-approved risk appetite.
• Document and track risk mitigation efforts and monitor progress of action plans.
• Provide a repository for documenting and tracking risk mitigation action plans (including risk acceptance) ultimately to help prevent or minimize:
  • Financial losses;
  • Errors or service delivery failures;
  • Compliance breaches;
  • Reputational Damage.

3.1.1 KEY RISK INDICATORS

Key Risk Indicators are in place to monitor residual risk levels against risk appetite. These are reported to the Risk Committee quarterly which may refer matters, as required, directly to the Board.

3.1.2 QUARTERLY RISK AND PERFORMANCE MEETINGS

Each Portfolio Manager (“PM”) has day to day responsibility for portfolio management, in relation to funds under management of the respective strategy and is supported by specialised credit analysts who provide a fundamental approach to credit analysis. Portfolio risks are monitored and reported by the Investment Risk team, which operates independently of the portfolio management functions. Risk metric reporting is provided to each Quarterly Risk and Performance meeting (“QRPMs”) for review and action. This regular touchpoint allows members to discuss the PM’s performance, portfolio weightings, and strategy, in keeping with the 2LOD’s independent oversight of portfolio risks.

The QRPM consists of the Portfolio Manager; Investment Risk; the Senior Advisor; the Head of Risk and Compliance and at least one other board member. The composition of the QRPM and the consistency of its members allows a more holistic view to be taken, as well as a cross fund and cross strategy perspective.

Investment Risk has full, independent access to Alcentra’s portfolio data. It also conducts its own calculations of risk metrics, which helps maintain Investment Risk’s independence and provides checks and balances for the Company and its clients.

3.2 INTERNAL CAPITAL ADEQUACY AND RISK ASSESSMENT

The ICARA (internal capital adequacy and risk assessment) process is the collective term for the internal systems and controls that a firm must operate to identify and manage potential material harms that may arise from the operation of its business, and to ensure its operations can be wound down in an orderly manner. The regulatory requirement to conduct an ICARA resides with Alcentra, and the outcomes of the assessment are subject to approval by the Board. The Board has delegated the day-to-day governance of the ICARA process to the ICARA Working Group (“IWG”) which has voting member representation from the Risk and Compliance Team and Finance. Alcentra’s ICARA document has been prepared in accordance with MIFIDPRU 7 and appropriately covers all risks relevant to the business. The ICARA content and processes are aligned with risk management documentation, and the relevant harms (risk to firm, risk to client, risk to market) that should be considered when performing risk assessments and management thereof. The ICARA process is a critical component of Alcentra's risk management and regulatory compliance framework. The key uses are:

• Risk Management-It provides a structured approach to identify and measure key risks within the business
• Capital and Liquidity Planning - helps ensure adequate capital and liquidity buffers are in place to withstand adverse economic/business conditions
• Improve internal Governance – The ICARA is mandated by the financial regulator and helps promote a culture of risk awareness within the organisation

The content of the ICARA document is reviewed and approved at least annually by the Board.

4 GOVERNANCE ARRANGEMENTS

4.1 CORPORATE STRUCTURE

The following chart illustrates the Company’s corporate structure as at 30 September 2024. Alcentra Limited is a wholly owned subsidiary of Alcentra Asset Management Ltd which is an indirect wholly owned subsidiary of Franklin.

4.2 THE BOARD OF DIRECTORS

The Board embraces good practice in corporate governance and is charged with the responsibility for providing oversight of the activities and internal controls within the Company. The Board meets quarterly to review financial performance and strategy and has a formal schedule of matters reserved for its decision, which includes the setting of company goals, objectives, budgets, regulatory updates, and other plans.

The Directors of Alcentra Limited and the number of other directorships held that are in scope at the disclosure date are listed below:

Franklin and its subsidiaries are equal opportunities employers and consider qualified applicants for employment without regard to race, sex, religion, colour, national origin, disability, medical condition, marital status, age, sexual orientation, or any other basis protected by local employment legislation. Appointment to the Board follows the above equal opportunity policy and is based on positions held within Franklin, knowledge, skills, and expertise.

4.3 ALCENTRA LIMITED GOVERNANCE FRAMEWORK

The Board of Directors have implemented a governance structure across Alcentra to manage its risk profile and provide a clear escalation route for any issues identified. The Board of Alcentra Ltd is supported by three Board Committees: The Management Committee; Risk Committee; and Remuneration Committees. The Board has delegated authority to these Committees to ensure the effective operational and strategic management of Alcentra’s business. The Board Committees, in addition to Alcentra’s Primary Operating Committees make up its internal governance structure.

5 OWN FUNDS

Maintaining sufficient regulatory own funds reserves is monitored and managed by the Board with any major deviation from budget or own funds forecasts investigated and considered when making material decisions. The Finance Team is responsible for ensuring that business change is reflected in the own funds maintained, and that the company continues to have sufficient reserves to satisfy regulatory requirements at all times. In addition, all business functions are responsible for appropriately managing their risks and considering the impact on own funds as part of decision-making.

5.1 OWN FUNDS COMPOSITION

Alcentra Limited’s own funds are exclusively of Common Equity Tier 1 capital (CET1).

5.2 RECONCILIATION OF OWN FUNDS TO AUDITED FINANCIAL STATEMENTS

The following table provides a full reconciliation of the CET1 as at 30 September 2024.

6 OWN FUNDS REQUIREMENTS

MIFIDPRU 8.5 requires investment firms to disclose an own funds requirement as set out under MIFIDPRU 4.3.1. The own funds requirement of a non-SNI MIFIDPRU investment firm is the higher of:

1. its permanent minimum requirement under (MIFIDPRU 4.4.4);
2. its fixed overheads requirement under (MIFIDPRU 4.5.3);
3. its K-factor requirement under (MIFIDPRU 4.6).

6.1 PERMANENT MINIMUM REQUIREMENT

Alcentra Limited is a MIFIDPRU investment firm which is not permitted to hold clients’ money or client assets in the course of its MiFID business; the applicable Permanent Minimum Capital Requirement is £75,000.

6.2 FIXED OVERHEAD REQUIREMENT

The FOR of a MIFIDPRU firm is an amount equal to one quarter of the firm’s relevant expenditure incurred during the previous year. Where there is a material change in projected revenue the company will recalculate FOR based on projected relevant expenditure during the year. The calculated FOR for the year ended 30th September 2024 is £16.99 million.

6.3 K-FACTOR REQUIREMENTS

The K-factors relevant to the business and its permissions are as follows: K-AUM - calculated as 0.02% of the Company’s average Assets Under Management (“AUM”). The average is calculated using the AUM on the last business day on each of the previous 15 months, excluding the 3 most recent monthly values. K-COH - calculated as the sum of, 0.01% of average Client Order Handling (“COH”) attributable to non-cash trades. K-DTF - calculated as 0.1% of the Company’s daily average Daily Trading Flows (“DTF”) attributable to cash trades.

Alcentra’s Own Funds Requirement (“OFR”) based on the ICARA approved by the Board in September 2024, updated for K-Factors at 30 September 2024:

6.4 ASSESSMENT OF ADEQUACY OF OWN FUNDS

Firms are required to assess the additional risks not covered wholly or partly by the K-Factors. Alcentra has considered the following risks for its ongoing operations:

6.4.1 ONGOING OPERATIONS: CREDIT RISK

As at 30th September 2024, the credit risk profile for Alcentra is limited to the risk of default from inter-company counterparties, management fees derived from the funds (clients) which Alcentra manages, and the seed capital investments. The Company does not have a trading book.

6.4.2 ONGOING OPERATIONS: MARKET RISK

Market risk is the risk to a firm’s financial condition arising because of adverse movements in the markets, such as foreign currency exchange rates, interest rates, or mark to market adjusts in the investment portfolio. Alcentra holds additional capital to cover market risk as part of its Own Funds Threshold Requirement.

6.4.3 ONGOING OPERATIONS: OPERATIONAL RISK

Operational Risk is the risk of loss resulting from people, systems, inadequate or failed internal processes, or from external events. Alcentra holds additional capital for operational risk as part of its Own Funds Threshold Requirement.

6.4.4 ONGOING OPERATIONS: LIQUIDITY RISK

Liquidity risk can arise through the firm either not having available sufficient financial resources to enable it to meet its obligations as they fall due or secure such resources only at excessive cost. Liquidity risk is not considered to be a material risk to the Company.

6.4.5 ONGOING OPERATIONS: CONCENTRATION RISK

Concentration risk can result in harm both to the firm and its clients. Concentration risk is not considered to be a material risk to the Company.

6.5 WIND-DOWN REQUIREMENT

The Own Funds necessary for orderly wind-down is assessed as part of the ICARA process through review of the Company’s wind-down plan. The wind-down plan has been prepared in line with FCA guidance.

7 REMUNERATION POLICY AND PRACTICES IN PLACE FOR 2024

7.1 DECISION MAKING PROCESS FOR REMUNERATION POLICY

Alcentra has formally adopted a remuneration policy (the “Remuneration Policy”) aligned to the FCA’s Remuneration Code. The Remuneration Committee approves and, no less than annually, reviews the Company’s Remuneration Policy to ensure compliance with the MIFIDPRU Code.

7.2 CONFLICTS OF INTEREST AND CONTROL FUNCTIONS

The Company ensures that its Remuneration Policy:

• contains measures to avoid conflicts of interest;
• encourages responsible business conduct;
• promotes risk awareness and prudent risk taking.

7.3 MATERIAL RISK TAKERS

The Company annually assesses which of its staff are Material Risk Takers (“MRTs”), meaning staff members:

• whose professional activities have a material impact on the risk profile of the Company or the assets managed. A list of the Company’s MRTs is maintained by Human Resources.

7.4 FIXED AND VARIABLE REMUNERATION

The Company ensures that:

• the fixed and variable components of total remuneration are appropriately balanced; and
• the fixed component represents a sufficiently high proportion of the total remuneration to enable the operation of a fully flexible policy on variable remuneration, including the possibility of paying no variable remuneration component.

7.5 AGGREGATE REMUNERATION COST FOR MATERIAL RISK TAKERS

For the year ending 30 September 2024, there were 13 employees categorised as MRTs. Aggregate remuneration expenditure in the year ending 30 September 2024 in respect of MRTs was £12.84 million.