KKR wins $525m Oregon commitment

The $70bn public pension system - which is over-allocated to private equity - has made a smaller re-up to KKR's North American XI fund, targeting $8bn to $10bn.

The Oregon Investment Council has committed $525 million to KKR's eleventh North American fund, which is targeting between $8 billion to $10 billion.

Oregon's commitment, while one of the biggest over the past year by a US public pension to a private equity firm, is significantly reduced from the pension's commitment to KKR's prior flagship fund. Oregon committed $1.3 billion to KKR's prior fund, called the 2006 Fund, which closed on $17.6 billion. Oregon also committed $1 billion to the firm's $6 billion “Millennium” fund in 2001.

Pension investment staff made clear the smaller commitment did not reflect any kind of disappointment over the firm's performance.

“This reduction is not a result of any doubts about KKR's ability to generate future returns, or the attractiveness of the investment opportunity,” Oregon's investment staff said in meeting documents.

The reduction, instead, is the result of the private equity portfolio being over its target range of 12 to 20 percent. “In an effort to 'manage down' the allocation, staff has reduced the planned commitment amounts for most managers returning to market in 2011”, according to the documents.

Also, Oregon's past large commitments to KKR resulted in “higher levels of fund and manager concentration risks than staff believes is optimal, going forward”. To alleviate the concentration, Oregon has committed to other large managers, including TPG, Apollo and The Blackstone Group in the past several years.

Oregon has committed more than $6 billion to KKR since 1980.

Smaller goals

KKR appears to have made a choice that will face many fund managers coming to market this year – setting a target that is smaller than the prior fund.

Fund managers are faced with fundraising obstacles in 2011, including limited partners that are expected to write smaller cheques, and a fundraising market that will be crowded with an estimated 1,500 funds.

This reduction is not a result of any doubts about KKR's ability to generate future returns.

Oregon investment staff

Managers could face fundraising periods that will drag on for an average of close to two years if they try to match or beat what they raised in the prior fund, sources have said. This is because LPs are expected to cut their commitments to existing managers, and one source at an industry conference this week said a re-up of 50 percent should be looked at as a great success.

Oregon's smaller commitment to KKR should be viewed in the context of the firm's target for North American XI Fund, which is much smaller than the prior fund. With a target of $8 billion to $10 billion, the spectre of existing LPs cutting commitments is perhaps not as daunting. It should be noted that KKR has apparently not set a hard-cap on the fund, which gives the firm some flexibility to blow past the target range if it finds LPs lining up to get into Fund XI.

KKR, founded in 1976 by Jerome Kohlberg, Henry Kravis and George Roberts, has certainly bulked up its in-house fundraising team in preparation for the challenging fundraising environment this year. Last September, the firm hired senior investment relations professional Elizabeth O'Reilly from LBO France. The firm's fundraising team grew from about five to eight people three years ago to about 30 people as of last autumn.