Fidelity and KKR sign pact

Fidelity Investments has signed an agreement with private equity firm Kohlberg Kravis Roberts that will allow its customers the opportunity to participate directly in IPOs and follow-on offerings from KKR-backed companies. The agreement was announced last week and appears to be a first step towards expanding the mutual fund heavyweight’s IPO presence.

The terms of the agreement give Fidelity customers exclusive and direct access to the retail securities that are allocated to KKR in all deals that name its KKR Capital Markets subsidiary as an underwriter.

Customers that wish to participate in such an offering must have more than US$100,000 invested with Fidelity and have made 36 or more fixed income or auction trades over the past 12 months. Customers will be asked to commit to holding their positions for at least 15 days. Those that violate this agreement run the risk of being cut off from participation in future deals.

Fidelity has been engaged in similar agreements in the past with investment banks such as JP Morgan, Lehman Brothers and Salomon Brothers. “This is the first such arrangement with a private equity firm,” said Mark Haggerty, president of Fidelity Capital Markets.

Fidelity is not finished partnering with investment banks, but its covenant with KKR certainly narrows its selection of potential partners. “Our exclusive arrangement with KKR prohibits any arrangement with a direct competitor,” said Haggerty, “but this does not prevent Fidelity from partnering with institutions that do not offer prime brokerage services.”

KKR Capital Markets was founded in 2006 to build upon existing investment banking relationships. The group has priced just one follow-on since then – a US$340m follow-on offering from Rockwood Holdings in November 2007 – but the Fidelity agreement gives KKR a retail outlet without having to expand into the prime brokerage business.

Given the life cycle of a typical LBO, it makes sense for KKR to build on existing relationships. “KKR originates a huge amount of product for all types of capital markets participants,” explained Craig Farr, head of KKR’s capital markets group. “We’re still early in our evolution, but the distribution agreement with Fidelity is a creative and innovative way to broaden our clients’ access to capital.”