Washington State slashes KKR re-up by $1bn

The state’s investment board committed $500m to KKR’s eleventh North American fund. Despite the re-up reduction, KKR has already raised more than $1bn since launching the fund earlier this year.

Kohlberg Kravis Roberts has been feeling the love from limited partners, but maybe not as much love as in the past.

The firm got a $500 million commitment to its eleventh North American fund this week from the Washington State Investment Board, one of its earliest limited partners. While $500 million is a massive commitment in this tough fundraising environment, the amount is a significant reduction from the pension’s $1.5 billion commitment to KKR’s prior flagship 2006 fund.

Washington State’s commitment comes weeks after the Oregon Investment Council, another long-time KKR LP, slashed its re-up to the firm by about $800 million, committing $525 million to the eleventh fund after previously granting about $1.3 billion to the 2006 fund.

KKR’s 2006 fund closed on $17.6 billion, making it one of the largest private equity funds ever raised. Anticipating the tougher fundraising environment, the firm cut the target of the 11th Fund to between $8 billion and $10 billion, though KKR hasn’t set a hard cap on the vehicle.

Washington State Investment Board couldn’t be reached for comment about the reduced re-up. The pension also committed $1.5 billion to KKR’s “millennium” fund, $850 million to the firm’s 1996 fund, $350 million in 1993, $626 million in 1987, $84 million in 1986 and $127 million in 1982.

The pension also has a big stake in KKR’s European-focused funds, the more recent of which haven’t been outperformers in the portfolio. Washington State committed $400 million to KKR European Fund in 1999. That fund was generating a 2x total value multiple and a 20 percent internal rate of return as of 30 September, 2010.

European Fund II, to which the pension committed $500 million in 2005, was producing a 0.8x total value multiple and a negative 6.62 percent IRR. The pension also committed $600 million to KKR’s European Fund III in 2008, which had a 0.9x total value multiple and a negative 13.42 percent IRR, as of 30 September, 2010.

The pension also committed $94 million to an annex fund KKR raised to its second European fund, which was generating a 1.3x TVA and a roughly 51 percent IRR.

While Washington State couldn't be reached for comment, Oregon investment staff said at the time of the reduced re-up that the reduction had nothing to do with “any doubts about KKR’s ability to generate future returns”.

The reduction, instead, was 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 Oregon pension documents.

In related news, Washington State also made a $250 million commitment to BC Partners' ninth fund, which is targeting €6 billion.