KKR Taps Merrill Lynch To Help Raise Euro Fund –

Merrill Lynch & Co. this month started raising capital for Kohlberg Kravis Roberts & Co. from European L.P.s to support its $3 billion European fund, according to industry sources. The move has led to speculation among industry observers that KKR-which has not hired a placement agent since its 1977 founding-may have anticipated a difficult time attracting the attention of investors across the Atlantic. Partners at KKR did not return calls.

“This shows they think this is going to be a hard fund raising,” said a U.S. placement agent, who declined to be identified.

Directors at Merrill Lynch said KKR’s decision to hire their group was based on KKR never having tapped European investors in previous fund raisings. “They rightly felt that, for a European fund, they should have European investors, and they had never marketed to that audience before,” said Kevin Albert, a Merrill Lynch placement agent.

KKR launched its European fund with a $2 billion target and a $3 billion cap six months ago (BUYOUTS Jan. 11, p. 1). The firm received early backing from several of its loyal U.S. investors, quickly rounding up about $1 billion and looking as though it might not need much European support. Washington State Investment Board committed $400 million (BUYOUTS Jan. 25, p. 6), Oregon State Treasury committed $300 million and Chase Manhattan Corp. threw in $100 million, while Michigan Department of Treasury has signed on for an undisclosed amount. However, the firm has rounded up only one other investor in the intervening months, an L.P. said.

While KKR certainly has a reputation as an international player, sources said the firm may not have had enough direct contact with European L.P.s, many of whom only now are broadening their exposure to private equity. “Although KKR is well known in the U.S., European L.P.s have no loyalty to the firm,” said Jeremy Coller of secondary investor Coller Capital.

Other sources noted that many European private equity firms have long-standing relationships with their L.P.s, similar to those KKR has developed with U.S. pensions, and that that level of commitment cannot be garnered over a single fund raising. “You can’t come out of the woodwork when you need funding-people need to have been familiar with you,” said Regina Kreischer, who raised money in Europe for Patricof & Co. Ventures and Apax Partners. “It’s more relationship driven because you have to win trust as you are not a common national.”

To place the fund raising in perspective, KKR took 12 to 14 months to raise its last domestic effort, the record-breaking $5.7 billion KKR 1996 Fund (BUYOUTS Jan. 13, 1997, p. 6), and the group has been raising this effort only half that time. Also, if the firm hits its $2 billion target, it will still manage one of the largest buyout funds ever raised for European investments. CVC Capital Partners set the mark last year when it raised a $3 billion partnership.

Facing a similar challenge, Hicks, Muse, Tate & Furst Inc. has been building relationships in Europe for its domestic funds for the last three to four years with the help of Helix Associates, a London-based placement agency. The group is now raising the $1.5 billion Hicks, Muse, Tate & Furst European Partners, L.P. by tapping European connections it has developed along the way. “It’s taken several years for European L.P.s to get comfortable with us,” said Dan Blanks, a managing director at Hicks Muse.

Even so, the Dallas-based firm has yet to hold a first closing for its European fund, which was launched at roughly the same time as the KKR vehicle (BUYOUTS Dec. 21, 1998, p. 4). Mr. Blanks predicted the firm would be holding a first close some time in September and said he hopes to raise at least a third of the fund from European limited partners.

Helix raised $730 million for Hicks, Muse, Tate & Furst Equity Partners IV, L.P. last year mainly from European investors. Helix also raised more than $200 million from Euro L.P.s for Hicks Muse’s 1996 fund.

Meanwhile, The Carlyle Group successfully raised a $1.1 billion Europe fund last year, attracting much of its capital from European L.P.s (BUYOUTS April 6, 1998, p. 10). The firm’s fund raising relied greatly on the strength and contacts of its advisory board-which includes former British Prime Minister John Major; even so, the effort took more than a year to raise.