KKR’s special sits fund pivots focus back on the US

Having closed its second special situations fund on $3.35bn, the firm now expects the global vehicle to invest more money in the US.  

KKR has held a final close on its KKR Special Situations Fund (KSSF) II at $3.35 billion, the firm announced yesterday (5 April). The vehicle has a global mandate, though KKR expects to invest more than half of it in the US, a slight departure from its previous preference for European and Asian assets.

KKR was looking to raise $2.5 billion to $3.5 billion for this vehicle as PEI's sister publication PDI previously reported. The predecessor fund was invested half in Europe, with a quarter each dedicated to the US and Asia. Previous reports and conversations with KKR executives suggested that the US-based firm planned to invest even more internationally, though the manager is now pivoting its focus back on America, as market turmoil in the US has made distressed opportunities more interesting locally, said Jamie Weinstein (pictured), co-head of special situations at KKR. 

“Half or more of the fund will be invested in the US based on the environment we see today. Nine months ago I would have said the opposite but the US has gotten a lot more interesting,” Weinstein told PDI. He noted that retail has seen signs of stress, where several businesses have been facing pressure from the transition online. Sports Authority filed for bankruptcy protection earlier this year, while Quiksilver and American Apparel saw the same fate in 2015. 

In the US, Weinstein is also seeing opportunities in basic industrials and media. About 22 percent of fund’s capital has already been committed and most of that has gone to the US.  

In Asia, the firm is already active in several countries, particularly in India where KKR has a dedicated debt fund. “Asia is far from monolithic. The overarching macro picture is the slowdown in economic activity in China that’s had an echo effect on Australia and Southeast Asia,” Weinstein said.  Australia is becoming more interesting from an export perspective, Weinstein said.  

In India, there is a large base of non-performing loans that need to be worked out, which is creating opportunities for KKR and other alternative lenders. The firm recently bought a stake in the Indian International Asset Reconstruction Company (IARC) to address this. 

In Europe, KKR hired John Davidson from the Royal Bank of Scotland last year to form its Pillarstone platform that partners with banks on European non-performing loans. The firm already runs a partnership with Italian banks UniCredit and Intesa Sanpaolo. Weinstein said KKR is close to signing a deal for another such partnership in Southern Europe, though he couldn’t yet share specifics. 

The fund’s remit also allows for investing in loans on the secondary liquid market, though Weinstein said the firm has been less active there lately as the prices have been too high.  

The special sits vehicle has a three-year investment period and a four year run-off, for a total of seven years from the date of final close. 

The predecessor KSSF I finished fundraising in December 2013 on $2 billion. That fund is now fully committed and has finished its investment period.  

KSSF II garnered commitments from a range of investors globally, including public and corporate pensions, sovereign wealth funds, insurance companies, foundations, endowments, private banking platforms, family offices and individual investors. Almost all investors in the first fund re-upped in the second, Weinstein said. 

According to PDI Research & Analytics, some of these investors included the Virginia Retirement System, the South Carolina Retirement System and the Maine Public Employees Retirement System. 

KKR formed its special situations strategy in 2009. Since inception, KKR raised about $9.1 billion for the strategy across closed-end funds, separate accounts and the firm’s own capital. 

KKR's special situations platform is part of the firm’s $33.8 billion credit business. The special situations business includes 29 investment professionals in Hong Kong, London, New York, Mumbai, Singapore, San Francisco and Sydney.