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The News The largest privately held janitor service in the US is either a thriving business or a bankruptcy waiting to happen. It depends on which numbers you’re looking at. Shares of Kellermeyer Bergensons Services, whose janitors clean 2 billion square feet of commercial property every day, have been written down to nothing. And valuations on several loans held by its biggest financial backer, a private-credit affiliate of KKR, range from nearly 100 cents on the dollar — a full recovery that is nearly unheard of when equity is wiped out — to around 10 cents. The chief investment officer of the fund, FS KKR Capital Corp., said on an earnings call a year ago that Kellermeyer had stabilized and was receiving interest from buyers. None has materialized. Kellermeyer is one of a number of companies referenced in lawsuits filed in recent months that accuse funds managed by some of Wall Street’s biggest names of inflating their marks, often to increase their own payouts. The cases against FS KKR, Ares, and Blue Owl strike at the biggest question hanging over private credit: Can anyone trust its marks? The firms dispute the allegations and say the fees they charge are fair and industry-standard. Kellermeyer didn’t respond to requests for comment. Step Back Unlike stocks and bonds, whose prices are quoted on screens across Wall Street, managers of private lenders have broad leeway to value their loans, with varying degrees of input from third-party services. These firms charge fees based on the value of their holdings, adding a financial incentive to keep the marks higher to avoid public scrutiny. Last week, the Securities and Exchange Commission sent a rare warning shot to accountants, urging additional “rigor” in how private-credit firms are valuing the loans they hold and how risks are disclosed to investors. While it was couched in a technical note to in-house accountants, it signaled a watchful eye from regulators that have so far left the market alone. The second-order effects are also crystallizing. Semafor reported this week that the Federal Reserve has been probing how banks that lend to private-credit firms vet the loans that serve as their collateral, an admission that has spooked investors on Wall Street and around the world. FS KKR said it plans to “defend the matter vigorously through the appropriate legal process.” A Blue Owl spokesman said the lawsuits’ claims were “without merit and we intend to zealously defend ourselves.” Know More The series of lawsuits, filed on behalf of investors in the funds, come not from a Wall Street ankle-biter but one of its consummate insiders. Jim Woolery was a dealmaker at the white-shoe law firm Cravath before leaving to run M&A at JPMorgan. He later became a hedge fund investor and now runs a boutique law firm, Woolery & Co., which is accusing Wall Street firms of clinging to high valuations to boost their own fees. The lawsuits also attack the practice of charging fees on paper IOUs that are racked up by borrowers unable to make cash interest payments. The additional debt, known as “payment-in-kind,” gives temporary breathing room to companies but can encourage can-kicking by lenders reluctant to acknowledge a dud in the portfolio. In other words, the lawsuits claim, fund managers are charging fees based on interest they may never collect. More than one-third of the net investment income Blue Owl’s technology-focused lending fund reported last year was PIK interest, according to securities filings. The fund charged $468 million in fees, including an estimated $62 million of incentive fees related to PIK income that the lawsuits say investors should be able to claw back. Notable - There’s “good PIK” and “bad PIK.” Not all pay-in-kind is created equal.
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