KKR Pushes Further Into Mid-Market Lending

Kohlberg Kravis Roberts & Co. is advising on a privately traded business development company, Corporate Capital Trust, which is earmarked to invest in the senior and subordinated debt of U.S. companies generating $100 million to $4 billion in revenue.

CNL Financial Group, which is ultimately responsible for marketing the fund to retail investors, had raised $150 million as of earlier this year. At the current offering price of $10.85 per share, the nontraded BDC ultimately could raise some $1.6 billion in equity capital. (Nontraded BDCs can also use leverage of up to 50 percent of the value of assets.)

For KKR, Corporate Capital Trust represents a way to further diversify its lending operations while tapping a new source of capital. The firm already operates KKR Financial Holdings LLC, which is not a BDC but a publicly traded partnership that specializes in mezzanine finance, loans and special situations/distress investing. In January, the firm disclosed that it had raised $104 million for a lending strategy anchored by a fund called KKR Lending Partners LP, following the close last October of a $1 billion mezzanine fund, its first in the mezzanine space.

Although the BDC legal structure has been available since 1980 to meet a perceived gap in financing for smaller companies, typically businesses with annual revenue of less than $500 million, only since the financial crisis have backers of these vehicles turned to private fundraising rather than conventional equity markets; historically, BDCs have listed their shares on exchanges such as the New York Stock Exchange and Nasdaq, and the nontraded variety may eventually do so as well.

Corporate Capital Trust, which quietly commenced investment operations last July, is one of a growing number of nontraded BDCs affiliated with buyout shops that rely on private fundraising (see accompanying table and the letter from the editor on page ____ for more about the trend). In terms of its operation, CNL Financial Group is responsible for the overall management of the company’s activities, an affiliate CNL Securities Corp. is the managing dealer for the fund, while KKR is responsible for the day-to-day management of its investment portfolio.

The nontraded BDC gives KKR access to a category of small investor that historically would have been shut out of investing in its buyout funds and other capital pools. Corporate Capital Trust has “financial suitability standards for initial shareholders” requiring a gross annual income of at least $70,000 and a net worth of at least $70,000, or a net worth of at least $250,000. The company reported 4,700 shareholders as of March.

Investors in the vehicle face both illiquidity and relatively high fees that are not unlike the ones instituitonal investors pay in private equity funds. In its latest registration statement Corporate Capital Trust warned in a bold-face note that it did not to list shares during the offering not does it expect a secondary market for the shares to develop. However, KKR indicated in its quarterly report that by the end of 2018 the BDC may at least consider a liquidity event, such as a public offering.

The prospectus says that the shares, which are being offered only through private channels, carry a 10 percent sales load (which may be reduced based on the size of the stock purchase), a 2 percent annual management fee of average gross assets, and in effect a carried interest of 20 percent after a 7 percent hurdle rate.