KKR Adds $14 Billion in Debt Assets as Blackstone, FS Split

Updated on
  • Blackstone to build direct-lending platform in-house
  • KKR, FS may create mega-BDC larger than Ares Capital

KKR & Co. and FS Investments agreed to co-manage $18 billion in lending assets as Blackstone Group LP transitions away from helping manage them for FS.

KKR and FS plan to manage the largest middle-market platform of lending vehicles known as business development companies, consisting of KKR’s $4.4 billion Corporate Capital Trust Inc. and four FS pools, including the $4.1 billion FS Investment Corp., according to a statement Monday.

The agreement will add about $14 billion in assets under management to the $153 billion that New York-based KKR oversaw as of Sept. 30.

Blackstone’s credit arm GSO Capital Partners, which has sub-advised six of FS’s 10 funds, including the four that will be part of the new platform with KKR, is ending its agreement with FS as it looks to launch a direct-lending business in-house. GSO and FS formed the partnership in 2008.

FS Energy & Power Fund, a $4 billion BDC that isn’t publicly traded, will be jointly managed by FS and EIG Global Energy Partners. EIG, where former KKR executive Bill Sonneborn is president, and FS intend to diversify the assets by exploring midstream and renewables investments, lessening the fund’s concentration in upstream and oil-field services holdings, Sonneborn said in a phone interview.

FS will assume sole management of the sixth pool sub-advised by GSO, FS Global Credit Opportunities Fund, according to the statement. FS hired Andrew Beckman from DW Partners to lead the fund’s investment team.

GSO’s Plan

The transactions reflect continued expansion for BDCs among alternative-asset managers. The vehicles, which lend to small and midsize companies, are gaining momentum as direct lenders increasingly win business from banks that are hampered by regulations. BDCs, which mostly attract money from individuals seeking current income, pay out most of their earnings in the form of dividends in exchange for avoiding corporate taxation.

“The BDC space is attractive because as an investor, having quasi-permanent capital allows us to invest for the long term,” GSO co-founder Bennett Goodman said in a phone interview. “We’re eager to internalize all aspects of our direct-lending business and want to fully control origination, portfolio management and fundraising for these middle-market companies.”

As part of the agreement with FS, Blackstone will receive $640 million -- approximately three years of revenue from FS funds -- according to a statement Monday from New York-based Blackstone.

Peter Grauer, chairman of Bloomberg LP, is a non-executive director at Blackstone.

‘Scale Matters’

The arrangement allows KKR to access a more permanent capital base and expand in an increasingly competitive lending market, said Todd Builione, president of KKR credit and capital markets. Portfolio companies in the FS funds can also benefit from KKR’s capital markets group, which arranges debt and equity financing, FS Investments Chief Executive Officer Michael Forman said on a conference call Monday with analysts and investors.

“Very few firms can write $300-, $400-, $500-, $600-million checks,” Builione said in a phone interview. Larger borrowers generally are less risky, he added, because they attract higher-quality management teams, have stronger competitive dynamics and can better persist through economic cycles.

KKR and FS envision one day rolling up the platform’s BDCs into one if the boards and shareholders approve the plan, according to Builione and Forman. The resulting pool could exceed the size of Ares Capital Corp., currently the largest BDC at about $12 billion in assets.

“We believe this is a market of scale and that scale matters,” Forman said in a phone interview.

Unlike the arrangement with GSO, FS is forming a co-management structure with both KKR and EIG, where dealmakers across the firms will source and manage investments. The companies are also seeking provisions called exemptive relief for the funds involved, whereby the U.S. Securities and Exchange Commission would permit the BDCs to co-invest in deals alongside KKR’s and EIG’s institutional funds.

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