FS KKR marks one janitor company's loans anywhere from 10 cents to nearly par

At its two ends, FS KKR's Kellermeyer book values one borrower at roughly 100 cents and 10 cents on the dollar, a gap of about 90 cents ^[3][19]. That can be coherent. A senior loan with first claim on a business that cleans 2 billion square feet of commercial property a day ^[1] can be worth par while a junior loan behind it is worth a dime. The shares behind both can still be worth nothing ^[2]. The report does not say which of FS KKR's loans sit where in Kellermeyer's capital structure. Semafor's view is that a full recovery is nearly unheard of once the equity has been wiped out ^[21].

No one outside the fund can test either mark against a trade. Private loans have no screen price, and managers have broad leeway to value them, with third-party services involved to varying degrees ^[7]. The same managers charge fees on the value of what they hold ^[17]. If the fee is a fixed share of value, a loan carried at 100 cents earns ten times the fee of the same face amount carried at 10 ^[20], for as long as the mark stands.

Payment-in-kind interest does the same thing to the income line. A borrower that cannot pay cash adds the interest to its debt, the fund books it, and the manager charges fees on it; the suits say that means fees on interest that may never be collected ^[13]. More than one-third of the net investment income reported last year by Blue Owl's technology lending fund was PIK, according to securities filings ^[14]. Of the $468 million in fees that fund charged, an estimated $62 million was incentive fee tied to PIK income ^[15], or about 13.2% of the total ^[18]. The suits say investors should be able to claw that back ^[15].

The managers reject the claims and say their fees are fair and industry-standard ^[6]. FS KKR said it plans to "defend the matter vigorously through the appropriate legal process" ^[10]. A Blue Owl spokesman said the claims were "without merit and we intend to zealously defend ourselves" ^[11]. Kellermeyer did not respond to requests for comment ^[16].

The Kellermeyer case can close three ways. A buyer pays enough to clear the top loans near par, and the high marks hold up. A restructuring lands nearer 10 cents, and the fund will have carried some loans near par through a year with no sale ^[4]. Or the suits fail on the fee contracts whatever the loans fetch, and the dispute over the marks never gets a verdict.

I think the evidence supports a narrower claim than inflation. A private-credit fund's NAV is an estimate made by the party paid on its size, and on one name in FS KKR's book that estimate spans about 90 cents ^[19]. The allegations that managers inflated marks to raise their payouts ^[5] are disputed by the firms named ^[6]. A Kellermeyer sale at or near the top marks would be the clearest evidence against them.