KKR targets long-term core investments

The firm will create SMAs to invest alongside capital from its balance sheet.

KKR is targeting around eight to 12 long-term core investments from its balance sheet over the next five years, according to Scott Nuttall, the firm’s co-president and co-chief operating officer.

The deals, which could also include credit and infrastructure, would focus on more predictable targets with recurring revenue and no exposure to commodities, Nuttall said in a second-quarter earnings call on 27 July.

Although the firm denied raising a fund “per se”, it will utilise separate accounts alongside its balance sheet investments, according to Craig Larson, head of investor relations.

“The way I would think about is, you can basically think of it as just a synthetic fund in terms of what it means economically for the firm,” Nuttall said. “The partnerships we’re talking about creating will pay us fee and carry economics that will be similar to what you'd see in a fund format.”

KKR completed the first of these with the $4.3 billion acquisition of USI alongside Caisse de dépôt et placement du Québec in March, Private Equity International reported. Both parties invested $500 million, with KKR receiving a fee and a carry from the separate “fund of one”, chief financial officer William Janetschek said in the call.

KKR also made a balance sheet investment in its existing portfolio company PortAventura during Q2. The firm offered LPs the opportunity to roll into the transaction and raised a portion of outside capital on which it will receive management fees and a 20 percent carry, Janetschek said.

The investments come as part of KKR’s aims to have its balance sheet asset allocation at around 40 or 50 percent private equity, according to Nuttall. The firm will continue to invest in its private equity funds in addition to the new core co-investments.

KKR’s balance sheet investments recorded a 10 percent gross return for the year to date, rising to 18 percent over the past 12 months, according to the Q2 earnings. The firm currently holds $4.1 billion of total private equity investments, with its portfolio appreciating 11.7 percent in the six months ending 30 June 2017.

In June, KKR closed its Asian Fund III on $9.3 billion. The fund, which had an initial target of $7 billion, included commitments from Washington State Investment Board and New York State Common Retirement Fund, according to PEI data.