Fs Investments Merger: Finalization And What It Means For The Industry

On December 19, 2018, FS Investments announced the closing of its merger with Corporate Capital Trust, creating the second-largest publicly traded business development company. The merger, which was approved by shareholders of both companies, resulted in FS Investment Corporation being renamed FS KKR Capital Corp. and trading under the ticker symbol FSK on the New York Stock Exchange. The combined entity, with over $9.5 billion in assets, aims to provide customized credit solutions to private middle-market U.S. companies. In June 2024, FS Investments also announced its merger with Portfolio Advisors, a private equity, credit, and real estate manager, further expanding its institutional client base and diversifying its offerings.

Shareholder approval of the merger of FS Investment Corporation and Corporate Capital Trust

On December 3, 2018, FS/KKR Advisor, LLC (FS/KKR) announced that the shareholders of FS Investment Corporation (FSIC) and Corporate Capital Trust, Inc. (CCT) had voted to approve the merger of the two companies. The merger was expected to close on or around December 19, 2018, subject to the satisfaction of certain other closing conditions.

The merger of FSIC and CCT created the second-largest publicly traded business development company (BDC). FSIC was renamed FS KKR Capital Corp. and began trading on the New York Stock Exchange (NYSE) under the ticker symbol "FSK" on December 20, 2018. The combined entity is focused on providing customized credit solutions to private middle-market U.S. companies, primarily investing in senior secured debt.

The approval of the merger by FSIC and CCT shareholders followed a period of challenges for FS Investments, during which the company publicly acknowledged various shortcomings, including the eroding valuation of its flagship fund, FSIC. In the lead-up to the merger, FSIC shares had been trading below their initial offering price, and the company was working to address underperforming credits in its portfolio.

The merger with CCT was part of a broader strategy by FS Investments to improve performance and create a path to liquidity for its non-traded funds. The combined entity, FS KKR Capital Corp., benefited from increased scale, diversification, operating efficiencies, and a more flexible capital structure, positioning it to drive shareholder value.

The merger creates the second-largest publicly traded business development company

On December 18, 2019, FS Investments and KKR Credit Advisors (US) LLC, a subsidiary of KKR & Co. Inc., announced the closing of the mergers of four non-traded business development companies (BDCs): FS Investment Corporation II, III, and IV, and Corporate Capital Trust II. The combined entity, named FS KKR Capital Corp. II, became the second-largest BDC with over $9.5 billion in assets and 210 portfolio companies across 21 industries.

The merger was first announced on December 3, 2018, when shareholders of FS Investment Corporation and Corporate Capital Trust, Inc. voted to approve the proposals related to the merger. The merger was expected to close on or around December 19, 2018, and the new entity would begin trading on the New York Stock Exchange under the ticker symbol "FSK" the following day.

The merger created a leading asset manager dedicated to helping individuals, financial professionals, and institutions design better portfolios. The combined entity provides access to alternative sources of income and growth and focuses on setting industry standards for investor protection, education, and transparency.

Michael Forman, Chairman and CEO of FSK II, stated that the scale, diversification, operating efficiencies, and capital structure flexibility of the combined entity would drive shareholder value. The merger also represented a major milestone in their plan to list FSK II in 2020. Additionally, the merger was expected to reduce annual operating expenses by eliminating duplicative legal, administrative, printing, and other expenses.

FS Investments admits to shortcomings in a move unusual for investment companies

In a highly unusual move for an investment company, FS Investments has admitted to several shortcomings as it worked to pull off a merger. The company, a business development company and alternative investments behemoth, publicly acknowledged its various shortcomings, including the eroding valuation of its flagship fund, the publicly traded FS Investment Corp., and managing underperforming credits in that fund, which was working on a merger with another listed business development company (BDC), Corporate Capital Trust (CCT).

In a recent call with analysts and a meeting with advisers, FS Investments’ senior management publicly acknowledged the issues the company was facing. The company's CEO and chairman, Michael Forman, said that they were "disappointed with the company's recent performance" but accepted responsibility for the challenges. He added that they were focused on managing underperforming credits, executing the FSIC-CCT merger, and underwriting high-quality new originations.

The goal of the merger with CCT was to make FSIC a publicly traded behemoth with $18 billion in assets. However, in a conference call with analysts, Mr. Forman sounded less confident about the prospects of a successful merger, citing recent trading performance and the need for any consolidation to be accretive to FSIC shareholders.

FS Investments also acknowledged that investors and advisers might be confused about calculating the total returns of its BDCs. The company was creating a new reporting tool for advisers to address this issue and show clients the total return of a BDC, which was likely to be positive for investors.

The company's managing director for business development, Brian Boulerice, admitted that "we haven't been easy to work with" and that they would be spending a lot of time and money to improve the situation. FS Investments takes pride in its transparency and candour with advisers and investors, and Mr. Forman emphasised that they hold themselves accountable for any dips in performance.

The future of the FSIC-CCT merger remained uncertain, with the question of whether it would be completed and successful.

The merger of four non-traded business development companies

On December 18, 2019, FS/KKR Advisor, LLC (FS/KKR) announced the closing of the mergers of four non-traded business development companies (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). The combined entity, named FS KKR Capital Corp. II (FSK II), became the second-largest BDC, with over $9.5 billion in assets and 210 portfolio companies across 21 industries.

The merger of these four non-traded BDCs was intended to drive shareholder value through increased scale, diversification, operating efficiencies, and capital structure flexibility. The mergers were also expected to reduce annual operating expenses by eliminating duplicative legal, administrative, and printing costs.

The exchange ratios for the merger were based on the closing net asset value (NAV) per share of the respective companies as of December 16, 2019, ensuring that the NAV of shares held by investors in FSK II would be equal to the NAV of their previous holdings. FSK II's board of directors also announced their intention to pay distributions on the company's common stock on a quarterly basis, with the first distribution expected to be declared in March 2020 and paid in early April 2020.

Prior to this merger, FS/KKR had also announced the closing of the merger between FS Investment Corporation and Corporate Capital Trust on December 19, 2018, creating the second-largest publicly traded BDC. This merger resulted in the renaming of FS Investment Corporation to FS KKR Capital Corp. (FSK), which began trading on the New York Stock Exchange under the ticker symbol "FSK" on December 20, 2018.

In addition to these mergers, FS Investments has also expanded its alternative investment offerings and recently merged with Portfolio Advisors, a private equity, credit, and real estate manager. This merger further diversified FS Investments' revenue streams and broadened their institutional client base.

The merger of FS Investments and Portfolio Advisors

The merger is part of FS Investments' strategy to expand its institutional client base, diversify its offerings, and enhance its financial profile. By joining forces with Portfolio Advisors, FS Investments gains access to the institutional market, which has been a traditional focus for Portfolio Advisors. In contrast, FS Investments has primarily served retail wealth managers since its founding in 2007.

The combined entity will be named FS KKR Capital Corp. II (FSK II) and will become the second-largest business development company (BDC) with over $9.5 billion in assets and 210 portfolio companies across 21 industries. FSK II will be advised by FS/KKR Advisor, LLC, a partnership between FS Investments and KKR Credit Advisors (US) LLC.

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