More than 40 percent of the capital KKR raised in 2017 was for strategic partnerships and its long-term Core Investment strategy.
On the firm’s fourth-quarter earnings conference call on Thursday, head of investor relations Craig Larson said the firm had closed on $8.5 billion for its Core Investment strategy, which includes $3 billion of KKR’s own balance sheet capital.
Core Investment transactions will have an expected hold period of 15 years or more and the vehicle does not have recycling provisions.
“We see a lot of opportunities where we find great businesses that we like, that are stable, [that] we’d like to own for a long time, but it’s a bit lower risk and a bit lower return than what would fit into a traditional fund that we’d be normally managing,” said co-president and co-chief operating officer Scott Nuttall, adding that the firm had historically passed on these opportunities.
“After doing that several times we’ve kind of asked ourselves why we didn’t have a proper home for them, and so we created this strategy to be able to actually pursue those opportunities.”
After making a large balance sheet investment in insurance brokerage and consulting firm USI Insurance Services alongside CDPQ, KKR found two “like-minded partners” to join the strategy. These two partners, whom KKR did not name, contributed the remaining $5.5 billion. Core Investment announced its second investment, in PetVet Care Centers, in December.
The Core Investment strategy has return expectations in the mid-teens, which can be blended to a total of around 20 percent return on equity for the balance sheet portion, Nuttall said.
Nuttall declined to specify the fee terms on the third-party capital, but said they are “in line with what you would normally see in a fund construct for core funds, with some innovations that we built in that we’re not going to share”.
On the strategic partnership side, KKR finalised partnerships of $7.5 billion in Q3. As KKR explained on its third-quarter earnings call, while each partnership is fully customised, they do have some common characteristics: most have an expected life of 20 to 30 years; they invest across multiple asset classes, with many encompassing private equity, credit and real assets; they have recycling provisions that allow KKR to recycle cost plus a percentage of profits generated; and they are generally $3 billion or larger.
Going forward, Nuttall said KKR expects to deploy the Core Investment capital over the next three to five years before raising any more dedicated capital, while the firm will look to scale its strategic partnerships on a more continuous basis.
KKR’s permanent and strategic partnership capital base more than doubled from $11 billion in 2016 to $28 billion in 2017. This does not include the $18 billion planned business development company with FS Investments, announced in December, which has yet to close.
KKR raised $16 billion of new capital in the fourth quarter, including commitments to the Core Investment strategy, the final close of its second real estate and opportunistic private credit funds, and inflows in CLOs and alternative credit SMAs.
The firm’s three active flagship private equity funds – North America XI, Asia II, and Europe IV – appreciated 34 percent on a blended basis in 2017. Strong performance in those funds helped the firm raised $22.5 billion of third-party capital for two new flagship funds, the $13.9 billion Americas XII and the $9.3 billion Asia III, Larson said.
KKR invested $1 billion in private equity in the fourth quarter, two-thirds of which in North America and the remainder in Asia. The firm deployed almost $10 billion in private equity capital during 2017.
“We had our busiest year ever in Asia, investing over $3 billion with a particular focus on Japanese corporate carve-out opportunities,” chief financial officer William Janetschek said.
In Q4 KKR exited its investments in Visma and Gland Pharma and completed several secondaries, including the final exit from US Foods Group. These exits were made at 2.3x cost on a blended basis, Janetschek said. For the full year, KKR private equity funds distributed more than $11 billion to investors, generating around $1.2 billion of realised carry.
KKR’s assets under management were up 30 percent year-on-year to $168 billion, with its fee-paying AUM up 16 percent to $117 billion. The firm’s distributable earnings for the year were $1.56 billion.