- Firm to “lean back” on investment as prices spike
- KKR is modeling for contracting multiples on exits
- PE firms demonstrating greater discipline in leverage, structuring
“There’s probably going to be another downturn in the U.S. economy over the next five years… Our view is over the next two to three years,” Navab said on a panel at The Pension Bridge conference in Chicago on July 21. He added that the current pricing environment has made it “hard to underwrite the type of returns [we expect] for our LPs.”
The combination of active corporate buyers, low interest rates, a massive supply of private equity dry powder and the availability of cheap debt is driving deal valuations to pre-crisis levels, which has forced KKR to “lean back” in its investment approach.
After raising $9 billion through its North America Fund XI between 2011 and 2013, “we leaned in pretty aggressively across a lot of industries across the U.S.,” Navab said. “This year, our pacing has been much slower, mostly because of valuations… Our approach is to lean back, not to lean forward.”
KKR’s private markets team, which manages its private equity and real assets funds, deployed a little more than $2 billion of equity during the first quarter, according to its first-quarter earnings report. The total represented a 20 percent decline from the $2.6 billion it deployed during the first quarter of 2014.
KKR was even more conservative during the fourth quarter, when its private markets team invested just $828 million, according to earnings reports.
Even as KKR braces its investment strategy for a possible downturn, Navab said he believes private equity firms now structure their deals more conservatively than they did in the years leading up to the global financial crisis. Facing pressure from regulators, banks have kept leverage multiples on new deals within a 6x to 6.5x range, he said, and sponsors’ equity contributions to deals hover between 35 percent and 40 percent.
“While the dynamics are similar, I think the discipline and financial risk is much better,” he said. “Hopefully that means there will be a lot less mistakes, and better risk-adjusted returns.”