KKR targets SMAs to safeguard future fundraising

KKR is focusing on growing the number of multi-billion dollar strategic partnerships it has with limited partners to give it greater visibility on future fundraising.

On the firm’s third-quarter earnings conference call on Thursday, Scott Nuttall, co-president and co-chief operating officer, said KKR signed two new strategic partnerships during the quarter, and “upsized” an existing partnership for a combined $7.5 billion.

The firm did not specify which LPs these partnerships were with. KKR already has an account with the Teacher Retirement System of Texas, however it is unclear whether it is the fund that is being topped of. Earlier this year Bloomberg reported the firm was working on a partnership with Aflac, the insurer, and was nearing the close of a $3 billion commitment from New York City’s pension system to invest across private equity, infrastructure, real estate and credit.

While each partnership is fully customised, they do have some common characteristics: most have an expected life of 20 to 30 years; they invest across multiple asset classes, with many encompassing private equity, credit and real assets; and they have recycling provisions that allow KKR to recycle cost plus a percentage of profits generated; and they are generally $3 billion or larger, according to the firm.

Nuttall declined to share details on how the economics of these vehicles work, but said the aggregate economics the firm can generate in the first five- to seven-year period are “significantly more than what we think we would generate in a status quo partnership basis with that partner”, and the recycling element gives the firm “line of sight for a much longer period of time than we normally do with a traditional fund approach”.

“In a way, we’re using this fundraising environment and cycle to raise funds for the next several fund cycles,” he said. “It’s a win-win for the partner because they’re able to actually have some discounted economics, and from our standpoint we can show some creativity in terms of structuring.”

Nuttall said interest in these vehicles is driven by institutions “beginning to act out some of the themes we’ve been hearing from them the last few years”, namely that they over-diversified their portfolios during the last cycle and “they’re trying to figure out how to do more with fewer partners”.

“They’re just basically acting on that view that they have a lot of capital, a small amount of staff, and desire to partner closely with firms like ours to basically be an extension of their team on a global basis in a long-term structure.”

Nuttall said growing the number of these partnerships is “a strategic priority” for the firm, but stressed that they can take one to two years to form and negotiate, and the requirement to commit a large amount of capital across multiple asset classes for an extended period narrows down the potential pool of partners.

“From a servicing standpoint and the amount of time they take to get done, we will not have 20 or 30 of these, would be my guess. We will continue to scale the number, but it will take time and it’s going to be a bit lumpy.”

The firm has “more or less three to four in place” today, he said.

Having capital available in this form, ready to commit to future fund vehicles, is “a big deal and a lot different than how we’ve traditionally raised funds where we have to go back and start over”, Nuttall said.

“The real power is not just the next five years, it’s the subsequent 25.”

KKR’s assets under management increased 17 percent year-on-year to $153 billion. The firm had $47 billion in dry powder at 30 September. Its private equity flagship funds – the $9 billion North America XI, the $6 billion Asian Fund II and the €3.36 billion Europe IV – produced a gross return of 20 percent over the last 12 months.

Chief financial officer Bill Janetschek said “realisation events” at seven private equity portfolio companies drove a 58 percent increase in cash carry compared to the previous quarter, and on a blended basis those exits were done at 2.7x cost.