KKR sees long-duration assets as source of stability in uncertain times

The core PE strategy, which since inception has earned a 26% gross IRR, oversaw $32bn of assets at the end of March. This is set to grow as KKR wrap ups Fund II, targeted at $16bn.

KKR, which is raising what could be private equity’s biggest long-term fund, views the strategy as a key advantage as the market takes on more uncertainty.

KKR’s core PE strategy has a portfolio with “many of the right attributes to outperform if we go through a period of volatility and real inflation,” CFO Robert Lewin said in the firm’s first-quarter earnings call. That includes having “real pricing power.”

Launched five years ago, the strategy backs businesses that need capital to pursue a growth plan over a 10-to-15-year horizon. Investments of this type, carrying a more modest risk-return profile compared with traditional PE, are expected to deliver gross IRRs in the mid-to-high teens that can be compounded over time.

Since then, Lewin said, KKR has built a global portfolio of 15-plus companies with features that are especially well-suited to navigating a more challenging environment. “These are businesses we believe have strong secular tailwinds with defensible market positions, solid cashflow dynamics and, as a result, benefit from a more stable earnings profile,” he said.

Balance sheet exposure

Uniquely, KKR uses a large balance sheet to amplify the core PE strategy. Since the close of an inaugural vehicle in 2018 at $8.5 billion, the firm has combined balance sheet capital with third-party capital raised from LPs.

In the process, long-dated assets have emerged as a substantial piece of the balance sheet. In fact, long-term investments were at the end of March the largest allocation, accounting for 30 percent of all balance sheet investments, or $5.5 billion.

Using the balance sheet contributed to KKR becoming “the leading asset manager in the space,” Lewin said. Long-duration assets have, in turn, provided “a stable long-term compounder for our balance sheet.” In times of market dislocation, he added, this has helped make the balance sheet “a meaningful differentiator and a real positive.”

The core strategy, which since inception has earned a 26 percent gross IRR, oversaw $32 billion of assets at the end of March. This is set to grow as the firm wrap ups KKR Core Platform II. Targeted at $16 billion, the offering last year secured $12 billion and is now seeking $4 billion more from LPs, Buyouts reported. If this happens, KKR will have raised the biggest long-term fund on record.

The firm plans to expand its disclosure of balance sheet positions in the next 10-Q filing to “enhance transparency” on a portfolio that has increased in scale and diversification, Lewin said. Of the top 20 positions, 13 are core PE investments.

‘Not really being impacted’

KKR Core Platform II is among the few major PE funds presently on offer. Last month, KKR announced the close of a 13th flagship buyout vehicle at $19 billion, well ahead of an original target of $14 billion. KKR North America Fund XIII is also more than 35 percent larger than its predecessor.

Because of this, factors roiling PE fundraising, such as uncertainty, an over-crowded marketplace and LPs who are cash-strapped or over-allocated, are not relevant to the firm, co-CEO Scott Nuttall said in the earnings call. “We’re not really being impacted by this dynamic,” he said.

“If you look at where we’re raising money this year, most of the dollars we’re raising is around real estate, infrastructure and credit, where we have a lot of investor interest,” he said. “If anything, we’re seeing that interest go up as inflation and rates rise.”

KKR brought in $26 billion of fresh capital in the first quarter, following record inflows of $121 billion in 2021. This boosted managed assets to $479 billion, up 30 percent from a year earlier.