8-K: FS Specialty Lending Fund Converts to Closed-End Fund

FS Specialty Lending Fund completed its conversion from a business development company to a closed-end fund, with plans for a NYSE listing and revised fee structures.

Summary

• FS Specialty Lending Fund completed its reorganization on October 28, 2025, converting from a business development company (BDC) to a closed-end fund registered under the Investment Company Act of 1940.
• The Predecessor Fund merged into New FS Specialty Lending Fund, which subsequently changed its name to FS Specialty Lending Fund.
• The Fund intends to seek a listing of its common shares on the New York Stock Exchange (NYSE), with the Proposed Listing currently expected in mid-November.
• New agreements were entered into with FS/EIG Advisor, LLC (now FS Specialty Lending Advisor, LLC) for investment advisory and administration services.
• Prior to listing, the base management fee is 1.75% of gross assets, and the income incentive fee is 20% of pre-incentive fee net investment income, subject to a 6.5% annualized hurdle rate.
• After listing, the base management fee will be 1.50% of gross assets, and the income incentive fee will be 20% of pre-incentive fee net investment income, subject to a 6.0% annualized hurdle rate.
• A Fee Waiver Agreement will become effective upon listing, reducing the base management fee by 0.15% to 1.35% and the income incentive fee to 10% of pre-incentive fee net investment income, with a 6.0% annualized hurdle rate and a catch-up to 6.667% annualized.
• Franklin Square Holdings, L.P. (FS) acquired EIG Asset Management, LLC's interest in the Adviser, making the Adviser an indirect wholly-owned subsidiary of FS.

Sentiment

Score: 7

Explanation: The completion of the reorganization and the planned NYSE listing are positive steps for the fund, potentially enhancing liquidity and investor appeal. The fee reductions post-listing are also favorable. However, the uncertainty surrounding the NYSE listing's timing and completion introduces a degree of risk, preventing a higher score.

Positives

• Conversion to a closed-end fund structure under the 1940 Act may offer greater flexibility and potentially broader investor appeal.
• The planned NYSE listing could enhance liquidity and visibility for shareholders.
• The post-listing fee structure, especially with the fee waiver, reduces the base management fee from 1.75% to 1.35% and the incentive fee from 20% to 10%, which is beneficial for shareholders.
• The lower post-listing hurdle rate for the incentive fee (6.0% vs 6.5% pre-listing) could align adviser incentives more closely with shareholder returns.

Negatives

• The Proposed Listing on the NYSE is subject to market conditions and board approval, with no assurance of completion or timing.
• Operating as an unlisted closed-end fund prior to listing may limit liquidity for shareholders.
• The fee waiver is subject to termination with Board consent, meaning the lower fees are not guaranteed indefinitely.

Risks

• There is no assurance that the Fund will be able to complete the Proposed Listing on the New York Stock Exchange within the expected mid-November timeframe or at all, due to factors including market conditions and board approval.

Future Outlook

The Fund intends to seek a listing of its common shares on the New York Stock Exchange, with the Proposed Listing currently expected to occur in mid-November. Prior to listing, the Fund will operate as an unlisted closed-end fund.

Management Comments

• The Fund intends to seek to list its common shares on the New York Stock Exchange (the Proposed Listing).
• The Proposed Listing is currently expected to occur in mid-November.
• There can be no assurance that the Fund will be able to complete the Proposed Listing within the expected time frame or at all.

Industry Context

The conversion from a Business Development Company (BDC) to a closed-end fund registered under the 1940 Act is a strategic move that can broaden the investor base and potentially reduce regulatory complexities associated with BDCs. The trend towards listing on major exchanges like the NYSE is common for closed-end funds seeking enhanced liquidity and visibility, aligning with broader market preferences for accessible investment vehicles. The fee reductions post-listing, especially the incentive fee, could make the fund more competitive in the actively managed closed-end fund space.

Comparison to Industry Standards

• The post-listing base management fee of 1.35% (after waiver) and incentive fee of 10% (after waiver) are generally competitive within the closed-end fund and BDC sectors, which often see base fees ranging from 1.0% to 2.0% and incentive fees typically at 20%. The 10% incentive fee is notably lower than the standard 20% often seen in private equity and BDC structures, potentially making the fund more attractive to investors.
• The 6.0% annualized hurdle rate for the incentive fee is also within a reasonable range for credit-focused funds, aiming to ensure a baseline return for shareholders before the adviser earns a performance fee.
• The shift from a BDC to a 1940 Act closed-end fund structure aligns with some market participants' preference for the regulatory framework and liquidity characteristics of listed closed-end funds over BDCs, which can sometimes trade at significant discounts to NAV.

Corporate Governance

Related Party Transactions

• The Fund entered into Investment Advisory, Fee Waiver, and Administration Agreements with FS Specialty Lending Advisor, LLC, which became an indirect wholly-owned subsidiary of Franklin Square Holdings, L.P. (FS) concurrently with the reorganization. This establishes a related-party relationship where the Adviser is affiliated with the Fund's ultimate parent.

Stakeholder Impact

• Shareholders: Potential for enhanced liquidity and visibility through NYSE listing, reduced management and incentive fees post-listing, but also uncertainty regarding the listing's completion.
• Management/Adviser: The Adviser (FS Specialty Lending Advisor, LLC) benefits from continued advisory and administrative roles, albeit with reduced fees post-listing due to the waiver. The ownership change to Franklin Square Holdings, L.P. consolidates control.
• Employees: The filing states that Adviser personnel from FS who provided services to the Fund prior to the Adviser Transaction will continue to provide services, suggesting no immediate impact on employment for existing personnel.

Next Steps

• Seek listing of common shares on the New York Stock Exchange.
• Complete the Proposed Listing, currently expected in mid-November.
• Operate as an unlisted closed-end fund until the Proposed Listing is completed.

Key Dates

Recommendation

The completion of the reorganization and the planned NYSE listing are positive developments that could improve the fund's liquidity and appeal. The reduced fee structure post-listing is also a favorable change for shareholders. However, the explicit uncertainty regarding the timing and completion of the NYSE listing introduces a significant risk factor. Until the listing is confirmed and executed, the stock remains in a transitional phase with potential for delays, warranting a 'hold' recommendation rather than a 'buy' or 'strong buy' due to this uncertainty. Investors should monitor the progress of the listing before making further investment decisions.

Keywords

FS Specialty Lending Fund, closed-end fund, BDC conversion, SEC filing, NYSE listing, investment advisory agreement, fee waiver, 1940 Act, Franklin Square Holdings, asset management