Some of the most established private equity firms are starting to risk a bit more of their own money alongside their limited partners, finally acceding to limited partner desires that their interests truly be aligned.
In March, KKR & Co. turned heads when it made a whopping 10% commitment — including employee capital — to its latest flagship fund, the $13.9 billion KKR Americas XII. That's a major increase from the 7.84% average general partner commitment to vintage alternative investment funds in 2016, which itself was up from 6.96% in 2015, according to London-based alternative investment research firm Preqin. Only 2% of the funds raised in 2015 and 2016 had GP commitments of 7% to 7.99% and 4% of those funds had GP commitments of 6% to 6.99%. The 2015 and 2016 vintage funds mainly — 48% — had GP commitments of between 1% and 2.99%.
For KKR's latest fund, the firm invested $1.4 billion, with $1 billion coming from balance sheet assets and $400 million from employees, said Alexander Navab, KKR member and head of Americas private equity.
“(Our) having skin in the game will be a great thing for our investors,” Mr. Navab said.
The large sum also shows KKR and its employees have a lot of conviction concerning the fund's success, he said.
When KKR began raising the fund, executives planned to commit $750 million in firm and employee capital, but the commitment rose as fundraising progressed. In the prior North American private equity fund, KKR committed about $500 million in combined capital.
And over time, employees generally committed additional money in deals during the fund's life, he said.
KKR invested a large sum in its newest fund in part because it can, Mr. Navab said. “We have a very large balance sheet compared to others. I think on both fronts (the firm and KKR employees), it shows a lot of commitment and a lot of conviction.”
KKR executives also believe increasing the firm's commitment to its fund was “the best use of resources,” Mr. Navab said.
KKR has been slowly increasing its GP commitment. In its two most recent flagship funds in each region, that commitment averaged 7.4%, up from about 3% in earlier funds. Since 2000, KKR's flagship funds — including its global, European, Asian and North American private equity funds — together averaged 6% in GP and employee commitments.
By comparison, The Blackstone Group LP committed about $500 million to its latest fund, the $18 billion Blackstone Capital Partners VII, with half from employees, said people close to the firm. Johan Oberg, a senior partner in the Stockholm office of The Boston Consulting Group, in an email said it seems general partner commitments appear to be trending up, “driven by a combination of macro-sector conditions and the shifting alignment dynamic between GPs and LPs.”
KKR is expected to make a 10% commitment to KKR Asia III and Leonard Green & Partners' senior partners committed $500 million to its 2016 buyout fund, the $9.6 billion Green Equity Investors VII L.P., amounting to roughly 5% of GP capital, Mr Oberg said.
“The condition we see is higher competition among GPs, growing LP bargaining power and tighter regulation on the alternative asset management space overall,” he noted.
Private equity fundraising remained fairly strong last year, with the amount of capital up 5% to $345 billion for 807 funds, from $328 billion for 944 funds in 2015, according to Preqin. Still, the 2,965 alternative investment funds in the market seek to raise a combined $1 trillion.
A meaningful general partner commitment is important to investors, Mr. Oberg wrote. “It is perhaps the best indicator of GP/LP alignment and provides a source of comfort to LPs, knowing that decisions undertaken (with regard to) various portfolio companies will be unencumbered by any other motivation other than to secure an optimal financial return for investors.”