Friday Letter: How do you RDU?

Readers of PEO’s Friday Letter of two weeks ago will know that Kohlberg Kravis Roberts’ $5 billion listing of KKR Private Equity Investors Ltd on Euronext caused more than a ripple not just across the asset class but across the capital markets too.  

But contrary to the perception of some members of the public and the press, this new vehicle remains an investment off-limits to unaccredited investors, even though the vehicle has, in effect, gone public.

The great, unwashed masses of American stock buyers are, for example, going to have a hell of a time getting in and out of this new entity.

The heavyweight affiliate of the New York private equity giant Kohlberg Kravis Roberts is a strange beast, although it is being described as “elegant” by some admirers (most of whom either want a similarly elegant vehicle for themselves, or who want to be hired to create one).

It is a limited partnership created under the laws of Guernsey, offered globally as a private placement under the 1955 Dutch Act on the Supervision of the Securities Trade, and delivered in the form of restricted depository units (RDUs) – representing common units – that are deposited with the Bank of New York. And in case you were wondering, the subscription agreement is governed by the laws of the State of New York.

Purchasers of the global private placement had to have been “qualified purchasers” as defined by the US Investment Company Act of 1940 ($5 million upwards in investments) and “accredited investors” as defined by Regulation D of the Securities Act of 1933. US ERISA investors are not welcome.

In this context, KKR Private Equity Investors did not have an IPO so much as create a mechanism whereby units from the private placement may be resold on the Euronext exchange in Amsterdam. Depending on where you live, this will be a bit of an ordeal.

For example, unit holders in the US cannot “trade” KKR’s “stock”. Instead, the units may be “transferred” by US holders in a way that seems far removed from the easy liquidity one associates with a public listing. A review of the prospectus for KKR Private Equity Investors will give you a better idea of what’s involved:

“Each subsequent transferee of RDUs who is within the United States or a US person will be required to execute and deliver a US Transferee’s Letter in the form set forth in Appendix D. . . Common units. . . may be transferred only to a non-US person in an offshore transaction. . . and only upon the surrender by the transferor of the [RDUs] evidencing such RDUs and the execution and delivery by the transferor of a Surrender Letter. . .”

So much for day trading.

Clearly, the KKR offering does not represent the democratisation of private equity that some had mooted, but rather a different structure that will have a certain appeal to certain qualified institutional LPs. That said, shares of KPE are at present down by more than three percent on the Euronext, which may present difficulties for the next private equity firm that tries to raise a similar all-cash vehicle. Global investors may reason that it pays to wait and simply buy units post-listing at a discount on the Euronext.

That’s the trouble with qualified purchasers – they tend to be sophisticated.