Franklin Square KKR Capital Corp. II (FSKR) Investors May Have FINRA Arbitration Claims
On June 17, 2020, FS KKR Capital Corp. II (NYSE: FSKR) began trading after being publicly listed on the New York Stock Exchange, opening at $13.75 and closing at $14.30 per share. FSKR is a business development company (BDC) that invests primarily in the senior secured debt of middle market companies. Currently the third largest publicly traded BDC, FSKR has portfolio assets of $7.5 billion, placing it behind only Ares Capital Corporation (NASDAQ: ARCC) at $14.4 billion in assets under management and Owl Rock Capital Corporation (NYSE: ORCC) at $8.9 billion.
FSKR is the product of a roll-up strategy whereby four non-traded BDCs merged to form FS KKR Capital Corp. II (FSKR) in December 2019:
FS Investment Corporation II
FS Investment Corporation III
FS Investment Corporation IV
Corporate Capital Trust II
On June 10, 2020—in anticipation of its public listing—FSKR undertook a 4:1 reverse stock split. As a result, and as disclosed by FSKR through a Form 8-K filed with the SEC, the number of outstanding shares was reduced from approximately 691.2 million to approximately 172.8 million. Therefore, as adjusted for the 4:1 reverse stock split, FSKR’s net asset value (NAV) per share as of March 31, 2020 would have been $24.68 per share instead of $6.17 per share.
Pre-IPO FSKR investors, including those who acquired their shares through an initial investment in any of the above-referenced non-traded BDCs, are likely carrying considerable unrealized losses. Following the 2008 financial crisis, many retail investors were steered into so-called non-conventional investments (NCIs) including non-traded BDCs and non-traded REITs, with marketing pitches touting these investments for their supposed non-correlation to stock market volatility and their generous dividend yield.
Unfortunately for some FSKR investors, they may have received an unsuitable recommendation to invest, or may have otherwise been misled by their financial advisor into purchasing a complex and risky financial product without being adequately informed of the investment’s many risk components. In fact, in January 2017, the Financial Industry Regulatory Authority (FINRA) highlighted many of the risks associated with investing in non-traded NCIs through the following cautionary guidance:
“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, [brokerage] firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”
If you have invested in FSKR, or another non-traded BDC or REIT, and have suffered losses, you may be able to recover your losses in securities arbitration before FINRA. The attorneys at Giarrusso Law Group LLC have considerable experience working closely with investors in complex and illiquid non-conventional investments, including non-traded BDCs and REITs, to recover their investment losses. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.