Jones v. FS/KKR Advisor Alleges Fiduciary Breach Over Fee Increases of More Than 290% From 2018 to 2025
Larry Jones, a shareholder of FS KKR Capital Corp. (FSK), has initiated a derivative lawsuit on behalf of the company against its investment manager, FS/KKR Advisor, LLC. The plaintiff alleges a breach of fiduciary duty under Section 36(b) of the Investment Company Act concerning the compensation structure of the investment advisor, FS/KKR Advisor, LLC, and the rapid increase in various fees charged to FSK. The complaint claims that the fees were excessively high and disproportionate to the services provided, reflecting no reasonable relationship and unlikely to have resulted from arm's-length bargaining.
The complaint highlights a substantial increase in various fees charged to FSK, a Maryland-based Business Development Company. According to the filing, the defendant's base management fees surged by over 240% from 2018 to 2025, reaching $206 million by 2025. Similarly, incentive fees rose by more than 420% over the same period. Jones alleges these fees were unduly large relative to FSK's net asset growth, which only increased by 40% from 2018 to 2025.
Jones seeks damages and the disgorgement of fees deemed excessive, arguing that the fee structure constituted a breach of fiduciary duty by FS/KKR Advisor, LLC. The complaint requests that the court mandate compensation for FSK, alongside attorneys' fees and costs, emphasizing the disparities between the charged fees and the services provided during the relevant timeframe. These allegations remain unproven, and FS/KKR Advisor, LLC has not yet responded to the complaint.
Alleged Breach of Fiduciary Duty Mechanism
The complaint filed by shareholder Larry Jones on behalf of FS KKR Capital Corp. (FSK) accuses FS/KKR Advisor, LLC of charging excessive fees that lack a rational correlation to the services provided. According to the complaint, these fees could not have been the product of arm's-length bargaining, constituting a breach of fiduciary duty under Section 36(b) of the Investment Company Act.
FS/KKR Advisor, LLC's compensation structure is cited as evidence of fee escalation. The Base Management Fee saw an increase of 243% from $60 million in 2018 to $206 million in 2025, according to the complaint. The complaint underscores that while FSK's gross assets doubled between 2018 and 2024 and stood 180% higher in 2025 compared to 2018, the fees charged grew at a disproportionately greater rate (Compl. ¶3). The absence of breakpoints in the Defendant’s Advisory Agreement is highlighted as a contributing factor to this unchecked increase in fees.
Further, Jones contends that the incentive structure, particularly the Incentive Fee on Capital Gains, includes unrealized gains, thereby incentivizing the overvaluation of loans (Compl. ¶58). Additionally, the investment advisor allegedly retained fees on accrued interest even when these were subsequently written off, effectively misaligning the advisor's interests with those of FSK and raising questions about the fairness and reasonableness of the fee structures (Compl. ¶59).
Financial Implications and Money Details
The complaint filed by Larry Jones details significant financial changes experienced by FS KKR Capital Corp. (FSK) between 2018 and 2025. Notably, FSK's net assets grew by 40% during this period. However, the total fees paid to FS/KKR Advisor, LLC, the investment manager, allegedly surged over 290%, suggesting a disproportionate increase in compensation compared to the company's asset growth (Compl. ¶3).
The financial structure and compensation of FSK directors were also emphasized in the filing. The complaint highlights director compensation totals, which amounted to $1,288,565 for FSK, $12,174 for KKR FS Income Trust Select, and $139,000 for FSIC II (Compl. ¶8). These figures provide insight into the remuneration practices within FSK and associated entities.
Moreover, the level of complex securities within FSK's portfolio was notable. However, the plaintiff contends that the rapid escalation in fees paid to FS/KKR Advisor, LLC, along with the compensation of directors and the valuation of complex assets, underscores the alleged breach of fiduciary duty under Section 36(b) of the Investment Company Act. The ongoing evaluation of these financial elements forms a central aspect of the plaintiff's case against the defendant.
Asset Management and Valuation Details
As of December 31, 2025, KKR Credit managed assets valued at approximately $288 billion, and KKR & Co. had assets under management totaling about $744 billion (Compl. ¶11, 12). Meanwhile, Future Standard managed assets of approximately $86 billion as of September 30, 2025 (Compl. ¶13).
The complaint discusses specific enterprises and financial instruments such as the nonaccrual values of KBS and Worldwise. KBS had a nonaccrual cost of $94 million and a fair value of $48 million, while Worldwise had a cost of $20 million and a fair value of $11 million (Compl. ¶38, 39).
The valuation of Medallia's loans is also scrutinized, with principal amounts projected to $226 million against a valuation of $220.9 million, highlighting potential discrepancies in asset appraisals that could affect fee structures (Compl. ¶41).
FS KKR Capital Corp. Net Asset Fluctuation
The complaint notes that FS KKR Capital Corp.'s net assets peaked at $7.7 billion in 2021 before declining to $5.85 billion by 2025, indicating significant fluctuations in net asset values that further call into question the appropriateness of fee structures and valuations associated with the fund (Compl. ¶44).
Director Roles and Compensation Increases
The compensation for directors saw noticeable increases over the years spanning from 2018 to 2025, with yearly compensation detailed as follows: $369,165 in 2018, $221,100 in 2019, $221,230 in 2020, $280,000 in 2021, $320,000 in 2022, $418,110 in 2023, $441,250 in 2024, and $445,000 in 2025 (Compl. ¶8). The significant jump in director compensation alongside the escalating fees charged to FSK is a key concern driving the fiduciary breach allegations.
Tender Offers and Fee Developments
The complaint also highlights significant tender offers and fee developments impacting FSK. On May 11, 2026, a KKR affiliate announced a tender offer to buy $150 million of FSK stock at $11 per share, ostensibly to address stock price valuation concerns, which had shown a persistent discount to net asset value (Compl. ¶49).
The Administrative Fees were reported to have increased significantly, seeing a 150% rise from 2018 to 2025 (Compl. ¶3). The Defendant's Subordinated Incentive Fee on Income rose sharply as well, by over 423% since 2018 (Compl. ¶60).
Investment Advisory and Administration Agreements
Over the years, several amendments and restatements of the investment advisory and administration agreements were executed. Specifically, the Administration Agreement was initially dated April 9, 2018. Significant restatements and amendments followed, including the Amended and Restated Investment Advisory Agreement effective June 16, 2021, and subsequent agreements dated November 1, 2022, and January 31, 2024 for K-FIT and K-FITS (Compl. ¶19). These agreements, and the approval process by the board, are under scrutiny for their role in facilitating the fee structure at issue.
Key Parties and Their Roles
The complaint in this case has been filed by Larry Jones, who is acting as a shareholder derivative plaintiff on behalf of FS KKR Capital Corp. (FSK), a business development company organized as a Maryland corporation. As a shareholder of FSK, Jones seeks to hold the company's investment advisor accountable for its compensation practices.
FS/KKR Advisor, LLC is named as the defendant in the lawsuit. The entity functions as both the investment manager and an administrator for FSK. In this capacity, FS/KKR Advisor is responsible for managing the investment portfolio of FSK and providing necessary administrative services. The complaint alleges that this firm has breached its fiduciary duty under Section 36(b) of the Investment Company Act by charging excessive fees that lack a reasonable relationship to the services provided.
FS KKR Capital Corp. (FSK), the nominal defendant in this matter, operates as an externally-managed business development company. While Jones brings the suit derivatively on FSK's behalf, FSK itself is not directly participating in the litigation in an adversarial role. The complaint challenges how FS/KKR Advisor's compensation scheme, which significantly increased since 2018, aligns with its fiduciary responsibilities to FSK and its shareholders.
Detailed Examination of the Claims Related to Statutes
Larry Jones, a shareholder acting derivatively on behalf of FS KKR Capital Corp. (FSK), alleges that FS/KKR Advisor, LLC, breached its fiduciary duty under Section 36(b) of the Investment Company Act, 15 U.S.C. §80a-35(b). This provision offers a federal cause of action addressing excessive compensation or fees extracted by investment advisors without reasonable alignment to services rendered. The complaint claims that the fee structure implemented by FS/KKR Advisor, LLC, does not reflect arm's-length bargaining.
The complaint also highlights the disparity between FSK's stock price and its net asset value (NAV), which serves as evidence of potential asset overvaluation. As of the first quarter of 2026, FSK's shares were trading at a significant discount, valued at $10.18 while the NAV was reported at $18.83. The persistent divergence is alleged to imply inflated valuations of underlying assets, reflecting negatively on FSK's reported financial health and indicating possible valuation discrepancies maintained to support the fee structure (Compl. ¶44).
Jones further contends that the compensation and fee architecture, particularly incentive fee components, improperly motivated the overvaluation of assets. The incentive fees allegedly accommodate unrealized gains, thus promoting over-optimistic asset appraisals to increase fees paid to FS/KKR Advisor, LLC. This fee structure, the plaintiff argues, skews the valuation practices towards overstating the financial stability of FSK's investments, compromising the fiduciary responsibilities expected under the statutory duties (Compl. ¶59).
The filing seeks corrective measures, including disgorgement of excessive fees and damages related to these alleged violations of Section 36(b), aiming to realign the compensatory framework with fair and arm's-length standards that accurately reflect the services provided and the financial reality of FSK's asset portfolio.
Loan Valuation Disputes and Director Conflicts
The plaintiff contends that FS/KKR Advisor, LLC, in its capacity as investment manager for FS KKR Capital Corp. (FSK), inadequately assessed the risks associated with certain loan valuations. The complaint specifically highlights the Medallia loan, citing a $500 million payment-in-kind (PIK) balance as an indicator of the loan's distressed status, yet alleges the loan was valued near its principal, rather than reflecting its potential impaired state (Compl. ¶41).
In addition to valuation issues, the plaintiff alleges potential conflicts of interest concerning FSK’s directors. These directors are noted to have dual roles, also serving as trustees for other related investment funds, namely K-FIT and K-FITS. This dual involvement raises concerns about impartial decision-making, as these directors were responsible for approving the advisory and administration agreements that the complaint challenges (Compl. ¶19).
These valuation practices and potential conflicts of interest are central to the plaintiff's allegations under Section 36(b) of the Investment Company Act, which protects shareholders from excessive advisor compensation that might result from insufficiently arm's-length negotiations.
Relief Sought and Procedural Posture
Larry Jones, acting derivatively on behalf of FS KKR Capital Corp. (FSK), has filed a complaint against FS/KKR Advisor, LLC, seeking multiple forms of judicial remedy. The complaint requests damages and disgorgement of what the plaintiff claims are excessive fees collected by the investment advisor. Additionally, the complaint seeks attorneys' fees and costs, as well as any other relief the court may find appropriate in light of the alleged breaches of fiduciary duty under Section 36(b) of the Investment Company Act.
The case centers on alleged statutory violations under the Investment Company Act of 1940, serving as a barometer for assessing the appropriateness of the fees in question. The outcome of this litigation could hold broader implications for how advisory fees are evaluated in the context of externally-managed business development companies.
As the case is in its early stages, no responses or defenses from the defendant have been filed at this time.
The allegations described here are taken from the filing and remain unproven; no responsive pleading is reflected in the source document.
Questions about this topic: david@newmanbrunk.com