KKR collects $5.5bn, works to grow LP base

The firm has held a first close on its flagship fund for North America mostly from existing investors and has expanded its LP base from 275 to 400.

Kohlberg Kravis Roberts has held a first close on $5.5 billion, with the expectation of at least another $500 million in commitments this month, for its 11th North American fund, the firm said during its year-end 2011 earnings call Thursday.

KKR told limited partners last year it was targeting between $8 billion and $10 billion for the fund, though the earnings statement made clear: “The final size of the fund will not be known until the final close of the fund in approximately one year”.

About three-quarters of the limited partners in the first close were existing KKR investors, according to Scott Nuttall, head of KKR’s global capital and asset management group.

“We expect in the first close a higher percentage to be re-ups from prior funds,” he said during the earnings call. About half of the LPs in the first close were US-based and included public pensions, sovereign wealth funds, insurance companies and financial institutions and high net worth individuals, he said.

We expect in the first close a higher percentage to be re-ups from prior funds.

Scott Nuttall

KKR is focused on building out its LP base, which has grown from about 275 investors two years ago to around 400, the firm said. Adding new investors into the mix is a priority, as well as “cross-selling” existing LPs into more than one KKR fund. Currently, KKR LPs on average have exposure to about 1.6 KKR products, Nuttall said.

“As we’ve added to our product base, we’ve just started to make a dent in that figure,” Nuttall said. To build up the LP base, KKR has grown its marketing team from just four people who marketed funds for the firm in 2008, to 40 today, Nuttall said.

New LPs are essential as KKR continues to grow beyond its traditional private equity foundation. The firm last year added a real estate investment team, which will raise a separate fund in the future but which is now investing $300 million from KKR’s balance sheet and working with other KKR business lines like special situations and the capital markets division on deals.

“There’s about $1 trillion of [commercial mortgage-backed securities] coming due between now and the end of 2014, and about half of that doesn’t have a home,” Nuttall said. “There’s a variety of different, interesting opportunities in the US, Europe and Asia.”

Part of the opportunity has to do with more subordinated levels of debt in capital structures of real estate investments, he said. Senior financing is available in the market, but there is a dearth of junior credit like mezzanine debt, he said.
“There’s a significant need at the bottom half of the capital stack,” Nuttall said.

KKR also has investment vehicles for mezzanine and infrastructure investments, and is launching vehicles for direct lending, special situations and Asia-focused investments.

Overall, the firm raised $10 billion last year for various strategies. The firm also closed on $26 billion of private market deals in 2011, using total equity of $13 billion, of which more than $4 billion came directly from the firm's funds and the rest syndicated out to various partners, the firm said.

While successfully raising capital in a constrained fundraising environment, the firm reported declines in carried interest from its funds. Economic net income in the private equity business was $285.5 million for the fourth quarter and about $751 million for the full year, down from $714.6 million and $2.1 billion for the same time periods in 2010.

The earnings declines came from decreases in the private equity funds’ carried interest, the firm said in the earnings statement. However, fee-related earnings were up, the firm reported.

The declines reflected in part the volatility and the uncertainty that shook markets last fall as the European sovereign debt crisis roiled the Eurozone and affected economies around the world. Already, the firm said valuations on its funds were up from the lows in the latter half of last year. Over the last two years, the firm's private equity business was up about 36 percent, the firm said.