KKR & Co., the private-equity
investor behind three of the four biggest leveraged buyouts in
history, has raised more than $1 billion for its first fund to
originate debt for takeovers.
KKR Mezzanine Partners I aims to finance private-equity
investments and corporate acquisitions, the firm said today in a
statement. The mezzanine business will finance mostly third-
party transactions.
KKR Co-Chairmen Henry Kravis and George Roberts have
charged William Sonneborn, chief of KKR Asset Management, with
adding products and exploiting investment opportunities beyond
traditional leveraged buyouts as the 35-year-old firm seeks new
sources of revenue. The mezzanine fund will try to take
advantage of a climate in which financial turmoil has crimped
bank lending.
“The fact that firms like KKR and others are able to
successfully raise mezzanine funds demonstrates that investors
are increasingly looking to alternative credit for returns,”
said Leon Wagner, who co-founded GoldenTree Asset Management LP,
a New York hedge fund focused on debt markets.
Diversification has become a driving theme at the biggest
private-equity firms, especially those seeking to woo public
shareholders. Blackstone Group LP (BX), the largest firm by assets,
has expanded non-LBO businesses in real estate, hedge funds and
debt investments. Carlyle Group, which filed to become a listed
company this month, has diversified its non-LBO business beyond
its original focus on illiquid credit by buying a stake in hedge
funds that trade equities.
Blackstone’s Fund
Blackstone, based in New York, is raising its second
mezzanine fund and told investors in July it had an initial
close of $1.5 billion earlier that month. Mezzanine at
Blackstone is managed through its GSO Capital Partners business,
which was acquired in 2008 and forms the core of the firm’s
credit unit. The overall credit business had $34 billion in
assets under management as of June 30.
KKR Asset Management’s biggest business is its bank-loan
and high-yield debt funds, which have combined assets of about
$12.7 billion. The unit has grown to 57 employees making
investments from San Francisco, London and New York, up from 32
at the end of 2009.
Investors in earlier funds include the state of Oregon’s
employee pension plan, a longtime backer of KKR that put money
into the firm’s first private-equity pools in the 1980s.
As of the end of July, Oregon had about $2.3 billion
invested in KKR’s credit funds, according to a report on the
pension’s assets. The investment had a one-year return of 13
percent and averaged 12 percent over three years, beating
Oregon’s benchmarks of 9.6 percent for both periods, according
to the document.
Mezzanine Financing
Mezzanine loans are often used in leveraged buyouts, as
part of the debt paired with buyout funds’ equity to takeover a
company. KKR Asset Management provided financing for Advent and
Bain’s 2009 purchase of payment processor WorldPay Ltd. as well
as last year’s acquisition of Marsh & McClennan Cos.’ Kroll
consulting operation by Altegrity Inc., a company backed by
Providence Equity Partners.
Similar opportunities are likely to arise as private-equity
managers seek to buy companies at attractive prices, Sonneborn
said. A lack of financing from traditional lenders means the
managers increasingly may turn to the mezzanine market.
“These are the times when you want to be active in
mezzanine,” Sonneborn said in an interview. “Mezzanine tends
to do well when the credit markets and economic activity are OK,
but not great.”
Hedge Fund
KKR is also courting outside investors for its first hedge
fund, and earlier this year hired a group of former Goldman
Sachs Group Inc. (GS) traders led by Bob Howard. KKR has told
investors it seeded the team with capital. The firm declined to
comment on fundraising.
Howard’s team, now known as KKR Equity Strategies, left
Goldman in part due to new regulatory restrictions that limit
Wall Street banks’ ability to trade their own money, and began
investing in August. Washington-based Carlyle has entered the
equity trading business with the purchase of majority stake in a
$1.6 billion hedge fund that focuses on emerging markets, and it
plans to make additional purchases. Carlyle raised a mezzanine
debt fund in 2004.
KKR is counting on businesses such as hedge funds and
mezzanine lending to convince public investors that it’s more
than a buyout shop whose fortunes rest on acquiring companies,
holding them for three to five years and selling them. Because
of the unpredictability of when managers buy and sell their
private-equity targets, public investors often don’t model
buyout profits, known as carried interest, into their
valuations.
‘Misunderstood’ Market
“We find the alternative managers intriguing because we
believe they are misunderstood by the market,” Roger Freeman, a
Barclays Capital analyst, said in a Sept. 9 note to clients
initiating coverage of KKR and Apollo Global Management LLC. He
rated KKR shares “overweight,” saying he expected them to
reach $22 apiece within 12 months.
KKR, which closed yesterday at $11.98 a share, gained a
listing on the New York Stock Exchange in 2010 after combining
with its European publicly listed fund a year earlier. That
fund, known as KPE, went public in 2006 in Amsterdam for $25 a
share.
KKR, which Kravis and Roberts created with Jerome Kohlberg
in 1976, has participated in some of the largest deals in
private-equity history, including the record-setting takeover of
energy producer TXU Corp. for $43.2 billion in 2007. That
followed the 2006 acquisition of hospital operator HCA Inc. in
2006, the third-biggest deal, at $32.2 billion, and the fourth-
largest, the $30.1 purchase of RJR Nabisco Inc. in 1988
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