Friday Letter: KKR Forever

And in the 30th year of its life, KKR said, “Let there be a $5 billion pool of permanent capital.” And lo, there was a $5 billion pool of permanent capital.  

Take a look inside the prospectus for KKR Private Equity Investors Ltd, listed this Wednesday on the Euronext exchange in Amsterdam, and you’ll find a pot of highly flexible money with very GP-friendly terms. This structure, and reportedly intense investor demand, may prove too attractive for other GPs to resist.

The 315-page document is the most information PEO has ever seen on Kohlberg Kravis Roberts, not being a limited partner. The two most crucial sentences from the legalese-laden prospectus seem to be the following – first: “The Investment Partnership will continue as a limited partnership unless the partnership is terminated or dissolved in accordance with its limited partnership agreement”; and second: “[W]e are permitted to engage in any business activity that is approved by our Managing General Partner. . .”

KKR Private Equity Investors (ticker code: KPE) will invest as a secondary buyer of previous KKR fund interests, as an LP in new KKR funds, as a co-investor directly in KKR deals, and in any opportunistic venture that KKR deems attractive. About the only thing KKR Private Equity Investors can’t do is look like a US corporation for tax purposes.

To its credit, KKR will not be charging the public fund a “double carry” on its LP commitments. However, the public fund will not have its management fees (1.25 percent on the first $3 billion, 1 percent above that) offset by monitoring and transaction fee income, as is commonly the case now in LP-GP terms.

An investor that never wants its money back, allows its GP to do almost anything, and doesn’t ask for a share of the deal fees? The KKR public fund is a very friendly LP to KKR, indeed.

KKR investment professionals are personally investing $75 million in this vehicle. No word though on whether this amount has increased along with the take from the IPO. KKR had initially planned to sell 60 million common units at $25 per share, but because of demand decided to sell 200 million units. And while all that capital waits around to be invested, KKR will invest much of it in fixed-income securities and money market instruments.

It remains to be seen how many other private equity firms follow suit. It must be remembered that following Apollo Advisors successful “business development company” [BDC] IPO in 2004, none of the other big names in private equity were able to raise similar vehicles – the demand for such an entity had been quickly exhausted. And with investor appetite for private equity funds at an all-time high, it is unclear whether, for example, another buyout behemoth like Texas Pacific Group, will see the need to gain extra capital from a public market. Don’t forget that a public listing entails public levels of reporting and not many GPs are accustomed [or receptive] to the idea of being required to open their kimonos, so to speak, as KKR will be.

But the allure of permanent capital to a GP should not be underestimated, nor should the opportunity to raise a few extra billion. We get the feeling that big private equity is going to be doing some hard thinking this weekend.