Washington walks away from KKR deal

The state pension has rejected an offer to acquire an equity stake in Kohlberg Kravis Roberts, the buyout house.

(PrivateEquityCentral.net) The Washington State Investment Board last week rejected a proposal to buy a stake in New York-based private equity firm Kohlberg Kravis Roberts & Co. on the grounds it could not tie money up in an illiquid asset.

John Charles, chair of Washington State’s Investment Board, informed KKR co-founder George Roberts in a December 11 letter that the pension fund's private markets committee “has determined not to take further action” on KKR's offer.

“This determination is based on the Washington State Investment Board's overall investment strategy and potential issues that may impact the Commingled Trust Fund, including liquidity and recent structural changes to our retirement systems,” Charles wrote.

KKR entered into talks earlier this year with its two most loyal limited partners – Washington State and the Oregon Investment Council – in which the two pension funds would invest up to $1bn to take a direct stake in the firm.

KKR put on the table an offer whereby the funds could pay approximately $1 billion for 15 per cent of the firm, valuing KKR at as much as $7bn, and also act as evergreen investors, meaning they would provide capital for future investments on a regular basis.

KKR has produced annual returns of 16.9 per cent for Washington State since 1982, according to Bloomberg. However, the offer came as Washington State, which has $47.9bn under management, is transferring more of its assets to retirement plans where employees choose the investments from those managed solely by the board.

Since state workers may withdraw their money from time to time, the funds need to have more of their investments in assets they can readily buy and sell. “We don't have the experience of knowing what the redemptive patterns will be,” Joseph Dear, who took over as executive director of Washington State in October, said, according to the Wall Street Journal.

“We looked at the structure of the funds and liquidity requirements and determined that the proposals Kohlberg Kravis Roberts made wouldn't fit within the current strategy,” Dear said in an interview with Bloomberg. “Liquidity is something that has to be planned for.”

Washington State already has approximately 15% of its main retirement fund, the $35.9bn Commingled Trust Fund, in alternative assets such as buyouts and venture capital, and has a goal of increasing that to 17 per cent over about the next three years. The fund currently has approximately $3.1 bn committed to or under management by KKR, including $1.5bn, the largest single bloc investment by a limited partner in history, pledged to its Millennium Fund.

Being turned down by Washington State will not improve KKR’s chances of reaching an agreement with Oregon. The Oregon Investment Council first invested with KKR when the firm acquired Fred Meyer Inc. in 1981. The following year it invested in KKR's first third party investment fund and has been an investor in each subsequent fund.

Washington State began investing with KKR in 1982. When Oregon invested $800m in KKR's 1996 fund, Washington topped it with an $850m placement. In August and September last year the Oregon Public Employees Retirement Fund and Washington State Investment Board committed $1bn and $1.5bn, respectively, to the Millennium Fund.