KKR Already Thinking About Mezz Fund II

  • One-third invested from inaugural $1B fund
  • Firm diversifying its income streams
  • Special situations, direct lending also growth areas

Scott Nuttall, KKR’s global head of capital and asset management, used the mezzanine strategy as an example of the firm’s broader approach to developing new income streams. “You’ve got the mezz business, which is in the process of investing its first dedicated mezz fund,” Nutall said during an analyst call last month to discuss the publicly traded firm’s third quarter results. Thus far, he added, “the performance has been great. And we’ll seek to raise a second fund here in the not-too-distant future depending on deal flow. But we feel good about our ability to scale that business.”

KKR also is laying a foundation to expand into additional new areas. Nutall mentioned that the firm is in the process of raising a dedicated fund to invest in special situations. KKR has been investing in that area in a separate-account format, he said, earning a non-annualized IRR in the range of 17 percent to 19 percent over the nine months that it has been investing in this way. “Again, I think as we build that business over time, we’ll be able to raise larger and larger pools of capital,” he said.

Nuttall did not give any indication of the timing or the ultimate size of a special situations fund. And with respect to mezzanine, it may be some time yet before the firm returns to the market. As of Sept. 30, KKR Mezzanine Partners I has drawn roughly a third of the $1 billion that investors pledged before that fund closed last August. The firm has until August 2015 to invest the balance of that fund. Previous investments have gone to finance the sale of payment processor RBS WorldPay to Advent International Corp. and Bain Capital Partners and the sale of security company Kroll Inc. to Providence Equity Partners portfolio company Altegrity Inc., as KKR has reported previously.

The firm also has been pushing into direct lending, advising on a privately traded business development company, Corporate Capital Trust, which is being marketed to retail customers by CNL Financial Group. The private BDC has raised $150 million, as Buyouts reported in June, and Nuttall said fundraising there continues.

“It’s not a large fund, but it’s a nice strategy for the firm, good economics, given that it’s committed capital, and that fundraising process continues,” he said. ” So I think that between mezz, special sits and direct lending, we see a lot of opportunity as we get to Funds II, III, IV, to have quite a bit of growth, and, frankly, not a lot of change on the expense side, because we’ve invested ahead of revenues.”