KKR is on its way to becoming a fully diversified money manager, but it looks like it will be a long trip.
It's been two years since the $54 billion New York-based firm first said it would pursue broad-based asset management, covering everything from real estate, infrastructure and mezzanine debt to public equities and public debt.
But KKR executives are in no hurry; they do not expect to have the full complement of strategies any time soon, if at all.
Instead, the private equity firm is building its $13.4 billion asset management division, KKR Asset Management, with below-investment-grade credit for institutional investors, including both liquid fixed-income and alternative investment strategies, which it started offering retail investors in a publicly traded vehicle in 2004.
KKR has run into a few speed bumps on its journey. Its infrastructure fund has been on the fundraising road for two years, despite cutting fees in half and its target by one-third, and the head of its infrastructure business left after only six months on the job. KKR's U.S. IPO was also delayed due to the economic meltdown.
KKR is “leveraging what we've learned in private equity and using it to create performance across other business lines,” said William C. Sonneborn, partner and head of KKR Asset Management, based in San Francisco.
KKR is directing more resources to its asset management business. This year, Nathaniel Zilkha, a principal at KKR, moved from its North American private equity group to co-head KKR Asset Management's global special situations strategy, which includes structured finance, distressed debt, debtor-in-possession and rescue financing. KKR Asset Management also promoted Jamie Weinstein to co-head of global special situations from portfolio manager.
Last year, Frederick M. Goltz, KKR general partner, was named to lead KKR Asset Management's mezzanine business. He was co-head of KKR's private equity energy business. Also last year, Lee D. Stern joined the asset management unit as director of mezzanine, from The Blackstone Group LP's GSO Capital Partners, New York.
KKR Asset Management also promoted portfolio managers Erik A. Falk and Chris A. Sheldon to head its leveraged credit strategy, including leveraged loans and high yield bonds.
KKR's business model has been to build “a non-siloed, integrated firm,” said Mr. Sonneborn, who joined KKR 18 months ago from TCW, where he was president and chief operating officer of TCW Group Inc. and CEO of TCW Funds Inc.
KKR Asset Management's below-investment-grade debt business mixes liquid and illiquid, private equity-type investment strategies. Its liquid fixed-income strategies include bank loans, leveraged loans and high-yield securities, while the illiquid, alternative credit strategies cover mezzanine, distressed and rescue investments, Mr. Sonneborn said.
Since signing its first institutional client in July 2008, KKR Asset Management has been gaining institutional assets, which now account for almost one-third of the unit's total. KKR Asset Management has $4.3 billion in separate accounts for institutional investors, including $800 million raised in the fourth quarter for what it calls capital solutions opportunities, which provides all the debt needed from term loans to mezzanine capital for companies needing refinancing.
A big chunk of KKR Asset Management's institutional business is $2.8 billion managed for a longtime KKR investor, the Oregon Investment Council, Tigard, which manages the $51.5 billion Oregon Public Employees Retirement Fund, Salem. The account is Oregon's only non-private equity investment with KKR, James Sinks, council spokesman, wrote in an e-mail response to inquiries.
Some separate account investors, like Oregon, are funding the separate accounts through their fixed-income allocations, while others include KKR Asset Management separate accounts in their private equity portfolios, Mr. Sonneborn said. He declined to say how many institutional investors have separate accounts or identify them.
Last year, KKR Asset Management started raising a $1 billion to $3 billion mezzanine fund, according to Securities and Exchange Commission filings. Mr. Sonneborn declined to talk about fundraising.
He said KKR's going public is not the reason the firm is adding investment capabilities. Expanding investment offerings helps develop a relationship with Wall Street because there are a wide variety of strategies and transactions with companies, he said.
KKR isn't the first private equity firm to expand its investment management capabilities. Blackstone and The Carlyle Group are becoming more broad-based firms..
Whether private equity firms should expand is “an interesting debate in the industry,” said Heino Meerkatt, Munich-based senior partner, managing director and global topic leader for The Boston Consulting Group.
There is no consensus among private equity firms as to whether it is better to diversify investment offerings or stick with only private equity, he noted. Some firms, mostly in the U.S., expand into strategies like distressed debt that their executives say involve skills they already have, offer other sources of income and help retain talent. Even so, European private equity firms are mainly offering private equity, Mr. Meerkatt said.