FS Specialty Lending Fund Highlights Q1 2025 Performance
As FS Specialty Lending Fund – a non-traded business development company sponsored by FS Investments and formerly known as FS Energy and Power Fund – moves forward in its intention to list on a national securities exchange by the end of 2025, the BDC shared metrics associated with its first quarter 2025 performance, especially detail on its portfolio transition to diversified credit investments.
As of March 31, 2025, diversified credit investments represented 88% of the portfolio compared to 85.5% as of Dec. 31, 2024.
The fund generated a net asset value-based total return of 2.29% during the first quarter of 2025, compared to 0.94% for the high yield bond index and 0.48% for senior secured loans.
According to the company, performance during Q1 was driven by strong earnings as net investment income of $0.06 per share and NAV appreciation of approximately $0.02 per share offset by distributions of $0.0068 per share during the quarter attributable to the enhanced distribution for the fourth quarter. The fund’s NAV increased to $3.37 per share as of March 31, 2025, compared to $3.30 per share as of Dec. 31, 2024.
FS Specialty Lending Fund’s board declared cash distribution of $0.1053 per share for the first quarter of 2025, which represented an annualized distribution rate of 12.5% based on the then-estimated NAV as of March 31. The distribution was paid on April 23.
The BDC made continued progress transitioning the portfolio to diversified credit investments during the first quarter – exiting legacy energy holdings and reducing the level of debt investments on non-accrual.
Its position in Maverick Natural Resources, previously one of the fund’s largest legacy equity energy investments, was exchanged during the first quarter for cash and shares of Diversified Energy PLC in connection with the company’s acquisition of Maverick. As a result, energy investments represented just 12% of the portfolio’s fair value as of March 31, compared to 14.5% at the close of 2024 and 94.9% during Q2 2023, at the time the transition plan was announced.
As of the end of Q1 2025, Diversified Energy PLC, Ascent Resources Holdings and USA Compression Partners – which were previously among the Fund’s largest energy holdings – represented 58% of the fund’s remaining energy holdings, but just 6.9% of the portfolio, based on fair value. The BDC said it seeks to further reducing exposure to these and other energy investments as it aims to grow the portfolio’s earnings power.
As of March 31, three investments were on non-accrual, representing just 0.4% of the portfolio’s fair value and approximately 1.4% based on amortized cost, compared to 1.1% and approximately 2.3%, respectively, as of the end of 2024.
In Q4 2024, the fund received exemptive relief from the U.S. Securities and Exchange Commission to co-invest in privately originated investments with other funds managed by FS Investments’ global credit team, which it believes will continue to help increase the earnings power of the Fund and accelerate the transition to diversified credit. Purchases totaled $357 million during the first quarter of 2025.
Private credit investments represented 57.2% of total purchases during the quarter of which $182 million, or 89% of which were co-investments across other portfolios managed by the global credit team. During the first quarter, 76.7% of purchases were in senior secured debt.
Sales and repayments totaled approximately $385 million during the quarter. The BDC continued to focus on reducing the fund’s exposure to legacy energy investments.
As of March 31, 2025, approximately 87% of the portfolio consisted of senior secured debt, unchanged from the previous quarter. Equity/other investments represented approximately 8% of the portfolio’s fair value as of March 31, compared to 9% as of Dec. 31, 2024. As noted, the decline in the fund’s equity exposure has primarily been driven by the sale of several legacy equity investments.
As previously reported by AltsWire, the BDC completed a 1-for-6 reverse share split on May 15. The action increased the fund’s NAV per share, aiming to meet NYSE rules which mandate a minimum listing price of $4.00 per share, and align the share price with peers without changing shareholders’ aggregate investment value or ownership percentage.
In conjunction with the listing plan, the board determined to convert the BDC into a registered closed-end fund under the Investment Company Act of 1940. This conversion will be structured as a merger, or reorganization, of the current fund into a newly formed entity: New FS Specialty Lending Fund. Shareholders will vote on this reorganization agreement at a special meeting anticipated later this year.
Post-reorganization, the successor fund plans to adopt the FS Specialty Lending Fund name and seek listing under the ticker symbol “FSSL.”
The listing is subject to final board and shareholder approvals, as well as market conditions.
When FS Specialty Lending Fund changed its name in May 2023, it also changed its investment focus. Per reporting by AltsWire, the BDC began investing primarily in a portfolio of secured and unsecured floating and fixed rate loans, bonds, and other types of credit instruments. Its aim was to invest 80% of the fund’s total assets this way instead of its prior 80% focus on securities of energy and/or energy and power-related companies.
If the BDC succeeds in listing on the NYSE, it would join other formerly non-traded entities that have gone public in the last few years. SmartStop Self Storage REIT (NYSE:SMA) debuted on the NYSE earlier this month. American Healthcare REIT (NYSE:AHR) and Sila Realty Trust (NYSE:SILA) – two formerly non-traded real estate investment trusts – listed on the NYSE in 2024.
AR Global’s Healthcare Trust, now known as National Healthcare Properties Inc., has also declared its intention to pursue a listing. In October 2024, National Healthcare internalized management and also completed a reverse stock split in preparation for such an event.
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