Kohlberg Kravis Roberts is giving itself a bit more time to deploy capital from its latest flagship fund, which is in market targeting at least $12.5 billion, according to public pension documents and a person with knowledge of the offering.
Terms on traditional private equity funds are fairly consistent across the market, though some GPs like KKR are able to command more customized structures on their funds.
KKR includes a six-year investment period and an 11-year fund life on its North America Fund XIII, according to information from NEPC, prepared for the Louisiana State Employees’ Retirement System. Market terms generally are a five-year investment period with a 10-year fund life (with one or two one-year extensions), and an 8 percent preferred return.
The terms are consistent with past KKR funds, the source said. Documents from Oregon Investment Council show the prior flagship, Fund XII, also had a 7 percent preferred return.
A KKR spokesperson declined to comment. A first close on Fund XIII is expected in May, sources told Buyouts. The firm is offering a fee break for LPs who commit before the first close, Buyouts previously reported. The pool is charging a 1.5 percent management fee during the investment period, though LPs who get in before the first close will pay a 1.35 percent fee.
While the documents show a target of $12.5 billion, sources told Buyouts they expect Fund XIII to raise $14 billion or more.
KKR was formed by Henry Kravis, Jerome Kohlberg and George Roberts in 1976 after they worked at Bear Stearns in the fledgling strategy of buyouts. Fund XII, a 2017 vintage that closed on $13.5 billion, was generating a 1.49x total value to paid-in multiple and a 24.1 percent internal rate of return as of Dec. 31, 2020, according to NEPC.
Fund XI, a 2012 vintage that raised about $8.7 billion, was producing a 1.91x TVPI and a 18.5 percent IRR as of the same date, NEPC said.
GPs have pushed to lower preferred returns from the traditional 8 percent level, which dates back to the early 1980s when interest rates were significantly higher than today. The 8 percent level was at the time considered the “risk free” rate.
LPs have generally not accepted requests to abandoned the preferred return, though several high-profile firms like Hellman & Friedman have been able to grow without ever adding such a hurdle rate to their funds.
Some GPs asked for longer deployment periods in their funds after the global financial crisis, arguing they needed more time to find strong deals in the battered markets. However, five-year investment periods withstood the market cycle and remain the standard today. Firms from time to time will request extensions of those investment periods as they expire, if they haven’t yet deployed enough capital.
LPs push back on longer investment periods for several reasons, according to Kelly DePonte, managing director at Probitas Partners.
A six-year deployment period would result in a wider gap between gross and net IRRs; the GP would collect more management fees as the time is extended before the fees step down during the investment harvesting period. Given those two factors, LPs argue the GP should simply raise less money to “an amount you think you can invest in five years,” DePonte said.
“Overall, this did not get wide lift in the market,” he said.