KKR & Co. (NYSE:KKR) is committing $300 million of its own capital to a private credit fund it co-manages with Future Standard, as the strategy faces pressure from rising loan defaults that contributed to a $560 million loss in the first quarter.
KKR Alternative Assets will buy up to $150 million of FS KKR Capital shares at $11 each through a tender offer and also invest $150 million in newly issued preferred stock, Bloomberg reported.
At the end of Monday's market close KKR's stock price was down 3.2%.
The BDC's board of directors approved a $300 million share repurchase program, which is understood to be running for approximately one year. The program will expire on June 1, 2027. It can be extended or end sooner, depending on when the $300 million is reached. KKR agreed to waive its incentive fees for four quarters.
FS KKR placed the software company on non-accrual in Q1, marking the loan down to 54 cents. Medallia is not paying interest on its loans from FS KKR, Bloomberg added.
Approximately 16% of FS KKR's portfolio is in software and services companies. Chief Investment Officer Daniel Pietrzak noted that Medallia, Cubic Corp, and Affordable Care drove nearly 33% of the fund's NAV decline in the first quarter.
Discounts Widen Amid Credit Quality Concerns
Moody's Ratings downgraded FS KKR to junk status in March due to "continued asset quality challenges.” It now trades at one of the widest discounts to net asset value among publicly listed BDCs.
Medallia has been under recent pressure as investors reassess software assets amid worries that artificial intelligence could reduce demand for some services.
Thoma Bravo is reportedly inching closer to a deal that would transfer control of software provider Medallia to its lenders, effectively erasing $5.1 billion tied to the private equity firm.
On a February conference call, Blackstone’s private credit chief Brad Marshall said Medallia had been “underperforming, not because of anything related to AI, but due to what we believe to be execution-driven issues."
“We also expect there to be discussions around the capital structure,” he added.
The software-as-a-subscription model that powered a multi-decade bull market depended on two assumptions: growing seat counts and annual price increases. AI threatens both. Software multiples have been cut in half. For the first time in decades, price-to-earnings ratios for software stocks sit below the broader market multiple.
Private equity poured trillions into software companies between 2018 and 2022. Every single one of those deals is now underwater “and probably by a lot,” according to Steve Eisman, the fund manager who called the subprime crash before anyone wanted to hear it.
Blackstone, KKR and Carlyle Group (NYSE:CG) were all down 25% or more in Q1. Oaktree’s Howard Marks warned that private credit underwriting standards were “too low and setting the scene for a correction.”
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