KKR ramps up lending after strong second quarter

Following a second quarter in which KKR’s net income rose 73% from last year’s figure, the firm has established a $300m joint venture to lend to mid-market companies, says KKR's Scott Nuttall.

Kohlberg Kravis Roberts is stepping up its mid-market lending efforts to fill the gap left from banks that have reduced their lending activities recently, Scott Nuttall, head of Kohlberg Kravis Robert’s global capital and asset management group, said during an earnings call Friday.

“What we hear from our clients in that space is that the banks have pulled back meaningfully from the standpoint of providing capital,” Nuttall said. “As we’ve been out with our mezzanine business, our direct lending business and our capital markets businesses, we hear that as a recurring refrain.”

In response to the lending void left by banks, KKR has formed KKR – SPC Merchant Advisors, a $300 million joint venture with Stone Point Capital to provide debt and equity for mid-market businesses, split evenly with $150 million from Stone Point’s Trident V Fund and $150 million from KKR’s balance sheet. The business will be separate from KKR's existing capital markets arm that lends to the firm’s own portfolio companies as well as third parties.

“A lot of this frankly we were already doing as part of KKR – 40 percent of capital markets revenues in the [second] quarter were actually from third parties – but this JV will allow us to have a dedicated pool of capital and a dedicated effort against that third party space,” Nuttall said. “We feel great about the [lending] opportunities in front of us.”

In terms of performance, during the second quarter KKR’s private equity investment portfolio appreciated 5.1 percent, helping driving economic net income – a measure of earnings that includes realised and unrealised investments – of $546.1 million for the quarter, up a dramatic 73 percent from $315 million during the same period in 2011. For the first six months of the year, the value of the firm’s private equity portfolio has risen 14.5 percent.

KKR’s total distributable earnings during the second quarter were $406 million, up from $142 million during Q2 2011 and the largest in any quarter since going public.

“The progress we’ve made at the portfolio company level is translating into fund performance,” Nuttall said. “If our portfolio companies perform, exits tend to take care of themselves. Dollar General and Alliance Boots are great examples.”

Last month, KKR sold a 45 percent stake in portfolio company Dollar General, the firm’s fourth offering in the last nine months, and sealed a $2 billion partial exit from drug store Alliance Boots.

“Our funds have been marked up meaningfully by $1.6 billion because of Alliance Boots,” Nuttall said. “With co-investments, it’s $2 billion.”

On the fundraising front, the firm recently held a first close on $3 billion for its KKR Asia Fund II, targeting $5.75 billion.

“It was frankly a faster and larger close than we had anticipated,” Nuttall said. Roughly 45 percent of investors in the first close are brand new investors to KKR.

Earlier this year, the firm held a first close on about $6 billion for its KKR North American XI Fund, which is targeting $10 billion.

“We were quite pleased with that first close given the challenging environment for this type of fund,” Nuttall said. “Our perspective is it’s a great time to be investing in North American buyouts.”