By Matt Wirz
KKR's largest private-credit fund held by individual investors took a $560 million loss in the first quarter when a growing number of loans tipped into default.
The write-down -- equivalent to about 10% of the fund's net asset value -- is one of the biggest indicators so far of underlying problems in a large private-credit fund. Defaults in the fund jumped to 8.1% in the first quarter from 5.5% in December, KKR said.
The $12.3 billion fund -- a business-development company called FS KKR Capital -- has been under pressure since last year, when it disclosed its l argest investment was underwater. The stock tumbled further this year when big loans to software maker Medallia and dental service company Affordable Care went into default.
The fund's stock has almost halved its value over the past year and the loan losses are starting to affect its ability to borrow money to make new loans, a crucial way private-credit funds boost their performance. Two credit-ratings firms downgraded FS KKR Capital's bonds to junk status in recent months and the fund was forced to renegotiate the terms of a large loan from JPMorgan Chase and other banks.
To support the ailing fund, KKR will buy $150 million of new convertible preferred shares. It will also launch a tender offer to buy $150 million of common shares at $11, slightly above Friday's closing price. The fund itself will repurchase another $300 million of common stock in the open market.
The bulk of the recent losses came from previously disclosed problem loans and the stock selloff is an overreaction, KKR said. Larger private-credit portfolios that KKR manages for institutional investors have performed better, according to presentations to investors last week.
"We believe FSK's current stock price underappreciates the long-term value," the fund's Chief Executive Michael Forman and Chief Investment Officer Daniel Pietrzak said in a joint statement. The capital injections from KKR "underscore our confidence in FSK," they said.
Most large BDCs are performing better than the KKR fund but its losses show that some companies that got loans during the recent private-credit boom are struggling. Many fund managers have argued that the investor angst enveloping private credit is overblown and that the bulk of the loans they make are sound.
KKR built the fund into a powerhouse by taking over assets managed by FS Investments in 2017. The resulting fund has struggled with losses for years, something KKR initially blamed on loans made by Blackstone, which had managed FS Investments' portfolios before KKR took them over.
The recent underperformance stems from investments KKR made in companies including Cubic, a software maker, and Peraton, a technology, intelligence and cybersecurity firm contracting with the U.S. government. The fund made high-yielding junior loans to the firms that helped pay high dividends when the companies were booming but now put shareholders first in line for losses.
KKR also said it would forgo half of its quarterly incentive fees for the next year. That would amount to about $50 million if the incentive fee charged in the first quarter remains constant through March 2027.
KKR would be on pace to collect about $200 million in separate management fees over the same period.
Write to Matt Wirz at matthieu.wirz@wsj.com
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KKR will forgo its portion of the incentive fees paid by FS KKR Capital for the next year and be on pace to collect about $100 million in management fees over that time. "KKR Private-Credit Fund Takes $560 Million Loss," at 6:30 a.m. and 7:15 a.m., incorrectly said KKR would forgo half of its incentive fees and be on pace for about $200 million in management fees. The fees are split with another management firm.
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May 11, 2026 11:00 ET (15:00 GMT)
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