KKR completed a US$5bn IPO of KKR Private Equity Investors, a new listed fund intended to give public equity investors a chance to buy into private equity opportunities. The deal, led by Citigroup, Goldman Sachs and Morgan Stanley, is expected to pave the way for similar IPOs from leading private equity names.
The deal was sold at a fixed price of US$25. After almost two weeks of marketing, and with demand having built strongly going into the weekend of April 29–30, KKR announced on April 30 that it would increase the deal size from 60m shares to 200m. The greenshoe was also increased to maintain its 15% level, taking the deal to a potential US$5.75bn.
The stock closed down 1.68% at US$24.58 on its Wednesday debut, on volume of 25m shares, but observers largely discounted the immediate aftermarket performance in favour of the demand shown by the increase in the fund size – particularly as the investment is effectively just cash plus an option on KKR’s expertise. At US$25, the valuation was a premium of about 5% to net asset value (NAV), but this premium simply represented the fees and expenses on the deal.
The jump in deal size might appear extreme at first glance, but the deal was comparable with conventional IPOs only in its execution, not the nature of the investment. As a fund – and until proceeds have been deployed, nothing more than a cash vehicle – the increase in size does not bring with it any of the dilution concerns that would be raised on a corporate IPO.
That said, the dramatic change did need to be explained to many investors, who in particular needed reassurance that the increased size would not also be reflected in the deployment timeframe for the cash. It is understood that investors were initially told of a target timetable of about 12 to 18 months for full deployment, and some were concerned that this could potentially stretch to three or four years on the basis of a deal that was now 3.3 times larger than had been expected.
Those close to the KKR PEI deal would not comment on whether any orders had been pulled as a result of the new size, but most investors were said to be unmoved, with the new size confirming the popularity of the name. In any case, it is understood that the buyside had always been aware of the possibility of an increase.
There was talk in the market of orders for about 10% of the enlarged deal size, and of one order for US$600m. Still, that pales into insignificance compared with the recent ?2.8bn commitment by SVG Capital into a new European record ?8.5bn private fund being raised by Permira. That investment is thought to be the largest single commitment ever into a private equity fund.
SVG, which is a listed company, has been compared with the KKR PEI vehicle in as much as it also provides public investors with the opportunity to take exposure to private equity investments. Others include Apollo Investment Corp, a US business development corporation (BDC) that floated in April 2004, and Ripplewood’s RHJ International, which floated on Euronext Brussels in March 2005. Apax Partners also recently floated Amboise Investissement, a vehicle that contains certain of the company’s French assets.
It is thought that about 75% of the cash raised from the KKR PEI flotation will be invested in existing KKR funds, with the remainder to be put into new investments. They include the new private European fund of about US$10bn that KKR is currently raising. KKR partners are also investing US$75m in the PEI fund.
Those close to the deal said that the geographical split of allocations was slightly in favour of US accounts. Just over 80% of the deal is understood to have been taken by institutional accounts, with the remainder going to high-net worth investors through the leads’ private wealth management divisions.
One concern resulting from the larger deal size for KKR PEI – and one that many bankers feel is well-founded – is that it may have damaged the prospects for other deals in the near future, in spite of proving the extent of demand.
“There is a sense that this deal is going to bleed the market for this kind of company,” said one banker away from the leads. “That is significant when you consider that Blackstone, Texas Pacific and Carlyle are expected to be bringing similar deals.” Other bankers added CVC to the list of potential issuers.