FS Investments struck a partnership this week with the private equity giant KKR to create what they hope will be a top player in the $1.4 trillion private loan market.

FS and KKR will offer a suite of what are known as BDC funds, typically closed-end funds that accept investors' money and invest it in small- and medium-size companies. These funds total $18 billion. FS will run another $6 billion separately.

KKR takes the place of FS Investments' sub-advisory agreement with Blackstone. FS will pay Blackstone $640 million in cash, or about three years of revenues, to end the partnership.

The new partnership will take "KKR Credit from a top 10 player in private credit to a top three player," KKR Credit and Markets president Todd Builione told Reuters.

Separately, FS also partnered with the private equity firm EIG Global Energy Partners in a $4 billion joint venture to finance energy and infrastructure companies. FS will oversee 10 funds when all the deals are done; FS and KKR still need stockholder approval for some of the funds.

Philadelphia-based Franklin Square Capital Partners, as FS Investments was previously known, got the BDC market rolling back in 2009 as an alternative investment that paid out relatively high yields through dividends.  On the downside, BDC fees are very high compared with more conventional asset classes and many are illiquid.

FS Investments and other BDCs charge fees similar to hedge funds – 1.5 percent of assets as the management fee annually and 20 percent of profits. FS executive Michael Gerber said the firm isn't disclosing its new fee arrangements with KKR, But SEC filings show annual fees total between 1.5 percent and 1.75 percent of assets annually, plus incentive fees.

BDCs recently have generated 7 percent yields, similar to REITs and dividend-paying mutual funds.

BDCs also rely on borrowed money to juice returns and fees. According to FS' filings, annual fees are calculated based on gross, not net assets, which means the fund managers are incentivized to use as much leverage, or borrowed money, to increase both gross assets and fees.