As followers of the financial markets know, in recent months, trouble has been brewing in the private credit sector. In at least some cases, the problems in the private credit markets have translated into D&O claims, including both securities class action lawsuits (for example, here) and shareholder derivative lawsuits (here). In the latest example of a private credit-related D&O claim, a shareholder plaintiff has filed a securities class action lawsuit against one of KKR’s private credit ventures, alleging that the firm overstated asset valuations and the effectiveness of its restructuring efforts. A copy of the May 4, 2026, securities class action lawsuit complaint can be found here.

Background

FS KKR Capital Corp. is a publicly traded Business Development Company (BDC). The firm specializes in making private, non-bank loans to companies. For five consecutive quarters ending in the first quarter of 2025, the company stated that it was establishing an improved loan portfolio credit profile and that any non-accrual issues with legacy investments were being adequately addressed through restructuring.

On August 6, 2025, the company released its 2Q25 financial results, disclosing, among other things, that its net asset value and total fair value of investments had declined. It also disclosed that its earnings per share (actually an operating loss) had declined and its net accrual status had increased from the prior quarter. In explaining these results, the company said that it had been “impacted by company specific issues affecting four companies, each of which have been discussed in prior earnings calls.”

Then on February 25, 2026, when the company released its results for 4Q and the full year 2025, the company disclosed that its net asset value and total fair value of investments had continued to decline; that its earnings had further declined; and that investments on a non-accrual basis had increased. The company also cut its dividend. The Company “acknowledged specific challenges” with additional companies, noting further that its ‘recent underperformance reflects challenges in certain legacy investments” in addition to those previously discussed.

The securities lawsuit complaint alleges that these disclosures showed that the “challenges ran much deeper than previously disclosed,” as the previously identified legacy customers’ problems accounted for only about 50% of net realized and unrealized losses. The company also acknowledged that its non-accrual rate is above long-term BDC industry average costs. The complaint alleges that the company’s share price declined over 15% on this news.

The Lawsuit

On May 4, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of Pennsylvania against FS KKR Capital and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between May 8, 2024, and February 25, 2026.

The complaint alleges that during the class period, the defendants failed to disclose to investors that: “(1) the Company overstated the effectiveness of its portfolio restructuring efforts for its nonaccrual companies; (2) the Company overstated the valuation of its portfolio investments and/or overstated the effectiveness of the Company’s portfolio valuation process; (3) the Company overstate the durability of its quarterly distribution strategy; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

This new securities class action lawsuit is the latest in a series of securities suits filed against private credit lenders. (There has also been a series of D&O claims filed against private credit borrowers, as discussed here and here.)

For example, with respect to the suits against lenders, beginning in December 2025, several securities suits have been filed against private credit lender Blue Owl – and in addition, Blue Owl has also been hit with a shareholder derivative lawsuit as well.

In addition, in recent months, shareholders have also filed securities suits against private credit lenders Hercules Capital (about which refer here) and Blackrock TCP (refer here).

As these lawsuits accumulate, it is becoming clear that lawsuits arising out of the problems in the private credit sector could turn out be an important contributing factor in the total number of securities class action lawsuit filings this year.

These lawsuits are accumulating due to a number of different kinds of underlying problems in the private credit sector. The lenders are under pressure for a host of reasons, among other things because of rising defaults (due in part to an increase in the sector in recent years of weaker borrowers); loan concentrations (particularly in the software sector, where valuations have recently declined because of the perceived threat of AI); liquidity issues, as investors seek near-term redemptions, while investment portfolios are longer-tail; growing concerns about valuations of debt assets and about accruals for underperforming loans; and questions about management and service fees.

As if these factors were not problems enough, the private credit now apparently is under SEC scrutiny. As discussed here, earlier in the week SEC Chair Paul Atkins said that the SEC is investigating alleged fraud in the private credit sector. Among other things, Atkins said (without naming any specific private credit firms) that “We are taking it very seriously, we are monitoring the situation.”

The likelihood for now is that these problems are likely to continue to weigh on the private credit sector in the months ahead. A bigger question may be whether or not there is a risk of a contagion effect, as problems in the private credit sector spill over into other segments. There is some concern that problems in the non-bank private credit sector could lead to problems in the commercial bank sector, as some private credit funds have drawn on significant bank loans. At least some life insurance companies are heavily invested in the private credit sector, as are some pension and sovereign wealth funds. However, at least for now, the likelihood of major contagion event for now at least seems unlikely.

In any event, as the problems in the private credit sector continue to develop, it seems likely that we will continue to see private credit sector-related securities class action lawsuits filed, with an increasing likelihood that these private credit related suits will represent an important factor in the total number of securities suits filed this year.

The Quinn Emanuel law firm, in a very detailed April 26, 2026 memo about emerging litigation risk in the private credit sector (here), observed that “Private credit does not need to trigger a financial crisis before it will create litigation. The market’s defining features — illiquidity, bespoke documentation, manager-driven valuation, retail distribution, and a growing interconnection with banks and insurers — create the kind of factual record from which complex disputes grow.” The memo concludes by noting that “For sponsors, lenders, fund managers, boards, insurers, banks, and plan fiduciaries, this moment is less about predicting collapse than about preparing for the inevitable disputes.”