The wave of litigation involving private credit continues to expand. FS KKR Capital Corp. (“FSK”), one of the largest publicly traded business development companies (“BDCs”), is already defending a securities class action lawsuit (KKR SCA) alleging that it overstated asset valuations and misrepresented the effectiveness of its efforts to address troubled portfolio companies. On July 15, 2026, a shareholder of FSK filed a separate derivative lawsuit against the company’s external investment adviser, FS/KKR Advisor, LLC (FS/KKR), alleging that the adviser extracted grossly excessive advisory fees in violation of its fiduciary duties under Section 36(b) of the Investment Company Act of 1940.
The D&O Diary has been following developments in the private credit industry closely, including litigation involving valuation and redemption, Payment In Kind (PIK) structures, and conflicts of interest. Indeed, we recently queried whether litigation challenging adviser compensation tied to PIK income and related valuation practices was likely to emerge. This newest lawsuit against FS/KKR appears to be a manifestation of that possibility, as shareholders allege that the adviser’s compensation structure incentivized conduct that breached the fiduciary duties it owed to investors. The case is also the latest example of developing litigation arising out of problems in the private credit industry.
A copy of the complaint filed against FS/KKR can be found here.
The Lawsuit
The derivative complaint against FS/KKR was filed on July 15, 2026, in the Southern District of New York, by plaintiffs, the Employees Retirement System of the City of St. Louis on behalf of FSK against FS/KKR, FSK’s external investment adviser.
According to the complaint, the adviser allegedly controlled both the valuation of FSK’s largely illiquid Level 3 private credit investments and the calculation of its own compensation, which was based in significant part on those valuations. The plaintiffs contend that this structure created an inherent conflict because higher valuations increased the adviser’s management fees.
Similarly to the June 18, 2026, complaint filed against Blue Owl Technology Credit Advisors LLC (Blue Owl) the lawsuit against FS/KKR also focuses heavily on FSK’s growing use of PIK income (payment-in-kind interest, under which interest is not paid currently in cash but instead is added to the borrower’s outstanding debt balance and recognized as income by the lender as it accrues).
Discussion
While the prior KKR SCA alleges improper valuation and disclosure deficiencies, the new derivative lawsuit against FS/KKR shifts the focus of legal liability to improper adviser compensation. Instead of challenging what the company said about the strength of its investment portfolio, the plaintiffs allege that FS/KKR’s fee arrangements violated Section 36(b) because they inflated advisory compensation at shareholders’ expense.
In that respect, the case resembles the recent litigation against various Blue Owl entities. In that case, shareholder plaintiffs challenged arrangements in which an adviser allegedly exercised significant influence over the valuation of illiquid private credit assets, PIK, while receiving compensation tied to those valuations. Whether this emerging theory against fund advisors succeeds remains to be seen, suggest that shareholders are increasingly challenging private credit valuation decisions, fee generation, and fiduciary conduct.
However, we previously noted that claims against private credit advisor entities may face hurdles. Section 36(b) excessive-fee actions historically have been difficult for plaintiffs to pursue successfully. Under the Jones v. Harris Associates and the Gartenberg framework, plaintiffs bear the burden of proving that an adviser’s fee is so disproportionately large that it could not have been the product of arm’s-length bargaining, a standard that courts have applied deferentially to board-approved advisory contracts. Nevertheless, the complaint against FS/KKR could reflect a growing willingness among shareholder plaintiffs to test whether claims that fees were not the product of arm’s-length bargaining will succeed under the ICA.
For insurers of private credit risk, litigation against third-party advisors could implicate investment adviser liability, asset management E&O, or similar professional liability coverages. With respect to public company D&O programs, there may be exposure if shareholder plaintiffs assert claims against directors and officers based on alleged failures to oversee valuation practices, adviser compensation arrangements, or potential conflicts associated with PIK income.
The recent derivative litigation against private credit advisory firms also arrives at a time when public scrutiny over the private credit industry continues to build. A recent Troutman Pepper Locke article noted that banks are tightening lending terms for private credit funds, increasing back-leverage costs, restricting concentrations in certain sectors, and responding to heightened regulatory attention focused on leverage, valuations, and liquidity risks.
Whether this latest wave of allegations against private credit advisors ultimately gains traction remains uncertain. Nonetheless, these lawsuits underscore a continuing willingness by plaintiffs to directly challenge the incentive and compensation structures that underpin private credit business models. As these theories are tested in court, excessive-fee litigation targeting private credit practices may continue to proliferate. For D&O and E&O insurers, this trend bears close attention, as it may signal an expanding range of liability exposures stemming from private credit compensation arrangements, governance practices, and potential conflicts of interest.