KKR's largest private-credit fund for individual investors reported a $560 million loss in the first quarter, representing about 10% of the fund's net asset value. Defaults in the FS KKR Capital fund jumped to 8.1% during the period from 5.5% in December, signaling growing problems in the private-credit sector that could ripple through markets.

The $12.3 billion business-development company has faced mounting pressure since revealing its largest investment was underwater last year. The stock has lost nearly half its value over 12 months as loans to Medallia and Affordable Care defaulted. Credit rating firms downgraded the fund's bonds to junk status, forcing renegotiation of a loan from JPMorgan Chase and other banks.

KKR will inject $300 million through convertible preferred shares and a tender offer while the fund repurchases $300 million of its stock. The firm claims most losses came from previously disclosed problem loans and the stock decline is an overreaction. Larger private-credit portfolios for institutional investors have performed better, suggesting this may be an isolated rather than systemic issue.