US buyout firm Kohlberg Kravis Roberts is in talks to set up a debt hedge fund underwritten by US bank Citi targeting $12.5 billion (€8.9 billion), according to a source with knowledge of the negotiations.
The vehicle will have around $10 billion of financing from Citi and $2.5 billion in equity, he said. Citi is currently in talks with KKR to guarantee the debt tranche.
The hedge fund is called the Strategic Capital Fund and it would be part of KKR’s listed investment company KKR Financial.
“This is an opportunistic attempt to profit from the discrepancy between the strong underlying credit of the debt and the fact it is trading at a discount,” the source said. KKR declined to comment.
The vehicle is believed to have a cornerstone $1.5 billion investment from KKR Financial and it is seeking $1 billion from investors. The source said: “It may attempt to raise more if there is sufficient investor demand.”
The debt vehicle is attempting to take advantage of the $300 billion backlog of US leveraged loans. Other groups are attempting to raise funds to clear the leveraged loan pipeline, including hedge fund GLG, which is raising $300 million, and distress investor Oaktree of California, which is raising a $5 billion fund.
Also reportedly raising funds are the US buyout firm Apollo Management and the alternative asset manager The Blackstone Group as well as fund manager Blackrock. The UK newspaper Financial Times estimated the vehicles in the market are set to raise up to $170 billion to help clear the backlog.