KKR, Stone Point Team On Capital Markets

  • JV to operate apart from KKR’s in-house business
  • Also expanding into mutual funds, BDC advisory
  • ’Now we’re talking to CIOs and CEOs’

As it continues its quest to diversify its businesses, Kohlberg Kravis Roberts & Co. has decided to expand its capital markets and related financial services business into the middle market through a joint venture.

The New York buyout firm has teamed with Stone Point Capital, a buyout shop based in Greenwich, Conn., to form KKR – SPC Merchant Advisors LLC. Each firm is putting in $150 million of equity, or $300 million in total, Stone Point through its Trident V private equity fund, and KKR from its own balance sheet. The new company, which the firms call Merchant Advisors, will provide principal and agency-based capital markets services to mid-market and sponsor-backed companies.

In forming the partnership, the firms were careful to emphasize that Merchant Advisors will operate “distinct and separate from KKR’s existing capital markets business,” including its KKR Capital Markets unit, which primarily serves KKR’s private equity portfolio companies.

“So you will see us underwriting debt, you will see us underwriting equity, you will see us providing other services to those companies. A lot of this frankly we were already doing as part of KKR,” Scott Nuttall, KKR’s global head of capital and asset management, told investors on the firm’s quarterly conference call. “This joint venture will allow us to have a dedicated pool of capital and a dedicated effort against that third party space.”

KKR and Stone Point will each provide representatives to the Merchant Advisors board, while its day-to-day activities initially will be managed by KKR Capital Markets executives. In the future, Merchant Advisors may expand its business to include other services that are valued by its clients, including risk management and fundraising services.

The move is only the latest by KKR to diversify its revenue stream beyond leveraged buyouts. The firm also has submitted regulatory filings to market two mutual funds that will invest in credit products, joining others peers that target retail investors through their institutional asset management platforms, sister news service Reuters reported. KKR also recently agreed to buy Prisma Capital Partners, a fund-of-hedge-funds manager with $7.8 billion in assets, in the firm’s first strategic acquisition.

Nuttall said the firm plans to continue broadening the services that it offers. “Eight or nine years ago, we just talked to the private equity staffs at institutional investors. Now we’re talking to CIOs and CEOs,” Nuttall said. “The conversation really has changed.”

Through moves such as the addition of mutual funds, along with its role advising an intruded business development company, Corporate Capital Trust, the firm also is extending its outreach to wealthy individuals. “Historically we focused exclusively on institutions,” Nuttall said, describing a $35 trillion marketplace that has $4 trillion invested in alternatives. “But there’s also over $20 trillion in retail hands. Historically, KKR has not spent time talking to individual investors [or] high net worth family offices.”

The common thread in all the initiatives is a growing demand among investors for the higher returns they can receive by investing in alternative investments, he said. “That’s why we see us positioning ourselves to get in the way of those flows.”