KPS’s Psaros: ‘Market has spoken’ on 30% carry

KPS Capital Partners has collected $7 billion in less than four weeks of fundraising across two funds it has closed on.

The New York-headquartered firm, which invests in industrials in the US and Europe, raised $6 billion for KPS Special Situations Fund V and $1 billion for KPS Mid-Cap Fund, according to a statement. KPS Fund V had a $5 billion target while KPS mid-cap was targeting $750 million target.

Here we present performance data from KPS’s previous funds.

Founder Mike Psaros spoke to Private Equity International about the latest fundraising round, and how KPS funds justify a 30 percent carried interest rate.

How did the LP base change in this fundraising round?

We launched the fundraising on 4 September and limited partners had until 4 October, exactly four calendar weeks later, to submit executed subscription books. And then our law firm needed a week to mechanically close the fund. The last fund closed in about seven to eight weeks.

Approximately 70 percent of the capital that we closed on was from existing investors and approximately 30 percent was from new investors.

Our investor base has also expanded globally, and 25 percent of capital in KPS Fund V is from Asian investors, up from 16 percent in Fund IV and 8 percent in Fund III.

One of the things that amazed us is the ocean of capital available in Asia for all alternative assets and specifically private equity. We have been in this business for 30 years, and back in the old days, it used to be that the largest sources of capital were large US public pension funds in the United States; they remain very important investors. But really we could have raised easily the entire $7 billion in Asia – there’s just that much capital there.

How do you deal with LP expectations for fund commitments?

We are very proud of our discipline and we’re very proud that quite literally we have turned down more capital than we have closed on over the years. We had over $15 billion of capital interest in our two latest funds, so the allocation process was extremely difficult for us. In terms of new investors, they are quite happy with whatever allocation they receive. The more difficult conversation is with existing investors, who have been with us forever and are integral to the success of our franchise. We had a constructive dialogue with them on allocations and everyone was satisfied.

How do you justify the 30 percent carried interest?

Well, first of all, the market has spoken. There was $15 billion of demand for this fund, and a $10 billion demand for the $3.5 billion Fund IV. We easily cleared the market because of what I call ‘net returns’. Including the 30 percent carry, the two decades of consistent outperformance are compelling enough for our investors to want to invest in our fund.

Why did KPS launch a mid-cap fund?

My partners and I made our LPs a fortune investing through what we refer to now as mid-cap funds. Obviously our fund sizes have gotten bigger and over the decade we had to turn down opportunities because they were too small for our size. We should have launched this mid-cap fund 10 years ago when our fund sizes became bigger. Now the new strategy will focus exclusively on the lower mid-market opportunity.