KKR eyes $1bn to $3bn for debut mezz fund

The mega-firm will join the ranks of other private equity players looking to offer mezzanine financing, which surges in demand when senior lenders withdraw from the LBO market.

Kohlberg Kravis Roberts is raising a mezzanine fund targeting between $1 billion and $3 billion that will invest globally in “large” companies through senior notes, subordinated debt or preferred stock.

The mega-firm has a dedicated mezzanine team to make investments in the asset class, KKR said in a recent filing with the Securities and Exchange Commission.

KKR declined to comment.

KKR is moving into the mezzanine space because of the “historically attractive risk-reward characteristics of mezzanine investments”, the firm said in the filing.

“Given these characteristics of mezzanine financing, the returns that it can generate and its presence in the leveraged loan market, we believe that expanding into mezzanine products will allow us to take advantage of synergies with our existing fixed income and private equity businesses,” the firm said in the filing.

Mezzanine financing is unsecured debt with high interest rates that can produce higher returns than traditional bank debt. Mezzanine lenders can often convert their stake to an equity stake through warrants.

KKR is the most recent of several mega-firms that have moved into the mezzanine space. The Carlyle Group closed its second mezzanine fund earlier this month on $553 million after closing its debut mezzanine fund on $436 million in 2006.

Babson Capital Management, part of international financial services firm MassMutual Financial Group, closed mezzanine and private equity fund Tower Square Capital Partners on $1.58 billion in December. 

Also, The Blackstone Group, Apollo Global Management and Goldman Sachs Principal Investment Area manage mezzanine debt.