FS KKR Capital Corp. II
FS KKR Capital Corp. II (NYSE: FSKR) is presently a publicly traded entity on the New York Stock Exchange. It is commonly referred to as a Business Development Company or BDC. A BDC is a company that invests assets into small and/or medium-sized entities as well as distressed businesses. BDCs are set up like mutual funds in that they will have portfolios with equity or debt interests in start-ups or distressed companies. Generally, these types of investments are risky propositions. FS KKR is a partnership between Franklin Square Investments and KKR (originally Kohlberg Kravis Roberts & Co) Credit. That partnership acts as the investment adviser to the BDC (FS KKR).
FS KKR Capital Corp. II, as a BDC, focuses on credit solutions for private mid-tier domestic companies. FS KKR also claims to focus on investments in the senior secured debt market. Secondarily, the BDC will partake in the subordinated debt of U.S. mid-tier companies. According to FS KKR Capital II's website, the BDC invests in approximately 164 different companies. 26% of that portfolio is concentrated in 10 companies. 77% of the investments are in senior secured debt, but it is in the senior debt of smaller less established companies. 88% of the debt owned is in floating rate debt, meaning it is not fixed and stable. In an environment of rate cuts, that is inherently bad. Sector exposure is largely spread out amongst capital goods, software and software services, commercial and professional services and healthcare and equipment services. Lastly, the entity utilizes leverage, which exponentially increases risk.
FS KKR was created via a merger between four privately traded BDCs, FS Investment Corporation II (FSIC II), FS Investment Corporation III (FSIC III), FS Investment Corporation IV (FSIC IV), and Corporate Capital Trust II (CCT II). A private or non-traded BDC is the same as the publicly traded BDC described above except that instead of trading on an public exchange, such as the New York Stock Exchange, it is non-tradeable or privately traded. The big difference is that when something is publicly traded it can be sold on any given day the market is open. The private BDCs are illiquid and cannot be sold. FS KKR was originally a privately traded BDC, but then it went public in June of 2020. Prior to going public FS KKR effected a 4 to 1 reverse split of its shares of common stock. What that means is that every four shares in an investor's portfolio turned into one share. The Net Asset Value ("NAV") of that one share then increased in value four times. This was probably viewed as a bad sign by Wall Street.
It is immaterial how good or bad a BDC is managed. The issue is that a BDC such as FS KKR Capital II is a very risky investment. Many investors are claiming that their financial advisors recommended the product as a safe fixed-income alternative. These advisors never informed their clients of the risks of ownership and especially the risk associated with concentration in the product and other non-traded private investments.
FS KKR paid financial advisors/brokers and their firms large commissions when their clients made purchases. Many of the unwitting purchasers were retirees for which this investment was wholly inappropriate. Traditional fixed-income investments pay fees in the 1-2% range while private placement type investments usually pay the advisor and the firm 7-10% in fees. Moreover, many of the brokers/advisors and/or their firms failed to do the proper due diligence on FS KKR Capital II. Furthermore, supervision of the advisors/brokers marketing BDCs, in general, was lax, with supervisors neglecting to note client concentrations in these illiquid products and their own employee's affinity for high commission, non-traded products.Our Experienced Investor Lawyers
For over 30 years, Shepherd Smith Edwards & Kantas has helped countless investors recover both lost savings from financial advisors, brokerage firms, and their registered representatives. Our firm has experience in representing investors in securities matters including, privately traded BDCs. Contact our stockbroker fraud lawyers today if you lost money in FS KKR Capital Corp. II.