KKR joins growing list of BDC managers selling stakes on secondary market

Kohlberg Kravis Roberts and asset manager FS Investments are working on a secondary deal valued at around $500 million for a series of business development companies, three sources told Buyouts.

The deal is a rare one, but not unusual, sources said. BDCs over the years have traded on the secondary market, usually offering equity stakes that result from restructurings or equity side pockets inside broader BDC strategies, sources said.

BDCs raise money from public investors and lend to middle-market companies. Some BDCs also have small equity allocations to help juice returns. They also might amass equity positions from restructurings of companies they finance that go through debt-restructuring processes.  

For example, equity investments in FS Investments II, which commenced operations in June 2012, were valued at about $281.8 million as of Sept. 30, 2018, according to the BDC’s third-quarter filing. That’s out of total assets of about $4.6 billion as of that date, the filing showed.

KKR Credit partnered with FS Investments in 2017, amassing around $18 billion in AUM. At the time, FS Investments dropped a partnership with Blackstone’s credit group, GSO Capital.

What KKR is looking to sell from the FS Investments portfolio isn’t exactly clear. In December, FS Investments announced its merger with Corporate Capital Trust, which created the second biggest publicly traded BDC.

BDCs aren’t necessarily a new seller on the secondary market, but they aren’t common, one source told Buyouts.

“This is what’s happening as the BDC space consolidates and good managers end up buying this stuff and finding meaningful equity portfolios that they want to get rid of,” the source, a buyer on the secondary market, said.

Secondaries have expanded into creative areas outside traditional sales of LP interests as buyers raise billions of dollars.

Newer, popular strategies that have emerged over the past few years include single-asset or concentrated-asset portfolio sales. The likes of Madison Dearborn and Hellman & Friedman transacted these types of deals.

As well, firms have explored working with independent, or fundless, sponsors to bundle investments into a single fund and raise money around the fund structure.

Spokespeople for KKR and FS Investments declined to comment.

Action Item: Check out FS Investments II quarterly filing: https://bit.ly/2Fh21UT