Side Letter: KKR’s $8bn close; 5x continuation vindication; CalSTRS’ two-pronged climate plan

KKR has closed its latest European flagship. Plus: How CalSTRS aims to deploy billions into climate investing; and the SEC is taking a closer look at third-party valuations. Here’s today's brief, for our valued subscribers only.

Just happened

KKR’s Freise: Europe is undergoing a radical change (Source: KKR)

And the latest brand name fund to close is…
KKR, the top-ranked firm according to the PEI 300, has become the latest firm to close a flagship fund amid what most consider the toughest fundraising market in more than a decade. The firm said this morning it had gathered $8 billion for European Fund VI, raising roughly 20 percent more than its 2018-vintage predecessor.

Side Letter has spent the last few hours trying to figure out what the fund’s target was, as the statement did not include this figure. PEI‘s Research & Analytics team has had the vehicle seeking somewhere between €8 billion and €10 billion (yes, in euros) when it began raising capital in 2021. It’s worth noting that the firm does not usually disclose targets or hard-caps. A spokesperson for KKR declined to provide further details on the fund’s targets or hard-cap when contacted by Side Letter. Tricky, then, to gauge whether this fundraise really knocked the lights out.

When it comes to skin in the game, though, it’s clear as a bell: KKR and its employees, alongside investors from the firm’s balance sheet, are committing $1 billion to the vehicle, representing a 12.5 percent GP commitment – significantly larger than the industry average of between 3-5 percent, per data compiled by law firm Paul, Weiss. By comparison, KKR’s GP commitment to its €5.8 billion Fund V was just under 7 percent of capital.

On the deployment side, expect this latest fund to capitalise on long-term trends in the region including digitalisation, energy transition and ageing populations. Speaking to PEI senior reporter Carmela Mendoza last year, co-head of European private equity Philipp Freise said Europe was experiencing a period of “radical and accelerating change” alongside a “very significant generational change” in the very fabric of the region’s business and political community. The firm now has $8 billion to capitalise on that.

Continuation vindication
Continuation funds that have been formed since the tools were reimagined for prized assets are beginning to bear fruit. Investors in healthcare specialist ArchiMed’s €242 million continuation fund PolyMED – set up to house the majority of the firm’s stake in Polyplus, a developer of technology used in gene and cell therapy – have netted returns of between 4.5x and 5x, Denis Ribon, chairman and managing partner of ArchiMed, told Private Equity International in an interview this week.

Compared with other continuation funds that have closed recently, the vehicle had an abnormal characteristic: no investor was able to commit to PolyMED if they weren’t already an investor in one of ArchiMed’s existing funds. The vehicle received backing from existing LPs in MED I – ArchiMed’s €146 million 2014-vintage fund, which had originally backed Polyplus in 2016 – and other existing ArchiMed investors, Ribon explained. The price was set by a full sale process managed by Jefferies that saw Warburg Pincus emerge as buyer of approximately half of ArchiMed’s stake in 2020.

Last year, Nordic Capital secured a 19x multiple of invested capital on its exit of UK-headquartered diagnostics business the Binding Site to Thermo Fisher Scientific, affiliate title Secondaries Investor reported. It is understood that the 19x relates to Nordic’s original investment in 2011 and is not based on the return made for continuation fund investors. Investors in the GP-led process still delivered a “very strong outcome”, according to one of the investors in the continuation vehicle.

It’s still early days for prized-asset continuation funds when it comes to returns on eventual exit. If returns for these vehicles aren’t exceptional, Side Letter doesn’t anticipate that firms will be shouting about them from the rooftops; for those LPs who did choose to sell, meanwhile, there could be some feelings of seller’s remorse.

Getting acclimated
The California State Teachers’ Retirement System is taking a two-pronged approach towards climate investing. The $306 billion fund is splitting sustainable investments into two portfolios – “scaling” and “opportunities” – with the aim of accessing new opportunities while simultaneously managing climate-related risks, Nick Abel, a portfolio manager for sustainable investments, tells our colleagues at New Private Markets (registration required). The former exists to “opportunistically improve the risk-adjusted return profile for CalSTRS at the fund level” via existing teams and relationships; the latter boasts the flexibility to “explore new investments” with a demonstrable contribution to a more sustainable global economy, Abel says.

The whole sustainability portfolio has an unconstrained allocation of up to 5 percent of the pension’s assets, equivalent to around $15 billion of capital, according to NAV figures from the end of February. As of the end of last year, the sustainability portfolio held a mix of funds and directs totalling $490 million. The state pension deployed $96 million last year to its scaling portfolio.

Despite its strong appetite for the nascent strategy, CalSTRS is under no illusions about the level of uncertainty climate investing carries. On top of navigating technology and regulatory risks, the strategy is also challenged by a limited pool of experienced managers and firms. For CalSTRS, this means “extensive channel checking and reference calls, [and] reviews of transaction history at prior firms” are needed to make sure managers have the right skills to successfully execute the strategy, Abel notes.

Climate investing is drawing interest from many of CalSTRS’ LP peers. Climate-related strategies were most commonly cited by LPs when asked by placement firm Rede Partners where they were focusing their impact allocations; 51 percent identified it as a core focus. This excitement is translating into capital formation: NPM’s latest database offering contains over 100 funds in market with a climate-action angle.


Outsourcing under fire
US Securities and Exchange Commission examiners are asking private fund managers to explain how they police the boundaries between their firms and the valuation experts they hire, opening a potential new regulatory front against an industry that already feels under siege, our colleagues at Regulatory Compliance Watch report (registration required). In recent months, at least two different PE real estate managers have received document requests asking them questions about their firm’s “input” into the valuations from the third-party firms they’ve hired.

Regulators are also asking the firms’ compliance officers whether they are monitoring communications between fund staff and the valuation company’s staff, a source tells RCW. They’re asking for samples of surveyed chats as part of the document request.

A heightened focus on valuations comes at a time when some within the industry are calling in to question approaches to private market valuations, as we explored in our March Deep Dive.

Today’s letter was prepared by Alex Lynn with Madeleine Farman, Carmela Mendoza and Katrina Lau.