KKR Wins Key Supporter For European LBO Fund –

Kohlberg Kravis Roberts & Co. cleared a hurdle this month in raising its European fund when one of its biggest backers quickly got behind the effort.

KKR has set out to raise the largest fund a U.S. firm has sought for offshore buyouts-the debut fund targeting Europe has a target of $2 billion, and a cap of $3 billion (BUYOUTS Jan. 11, p. 1)-and it may need to build early momentum to easily raise the vehicle, sources said.

The firm initially is marketing the fund to its key investors, including two limiteds in the Northwest-the Washington and Oregon state pensions-that represent almost 30% of the capital in the $5.7 billion KKR 1996 Fund.

A Washington State Investment Board sub-committee decided this month that the pension should commit $400 million to KKR’s European fund despite an objection from Washington’s non-discretionary adviser, Brinson Partners. Washington’s full board is making a decision at press time and is expected to approve the recommendation.

Washington is seeking more exposure to Europe and believes KKR can create opportunities on the continent now that it has a common currency.

“Brinson really felt that the deal environment would be slow to develop in Europe, but we feel that KKR can create opportunities that others will not recognize,” said Christopher Ailman, chief investment officer at the pension.

He said he was more concerned that KKR would face competition for deals from indigenous European firms such as Cinven, Ltd. and Doughty Hanson & Co. than from U.S. firms now targeting Europe, such as Clayton, Dubilier & Rice and Hicks, Muse, Tate & Furst Inc.

“I’m not sure all of the U.S. firms can invest properly in Europe, but I recognize that KKR is the oldest buyout fund in the world and if anyone can step up to the plate, they can,” he said.

Mr. Ailman said Washington occasionally commits to funds over Brinson’s objections because the two groups do not always have similar interests. “When our staff generates ideas, there are subtle disagreements,” he said. “Our objectives are different. Brinson’s mandate is to get into the top-tier funds but, because of our size, we have to shift priorities,” he said, referring to the pension’s need to commit large amounts of capital.

Washington is the lead investor in KKR’s U.S. fund, having committed $850 million to that effort.

For Oregon, the Jury Is Still Out

Oregon Public Employees’ Retirement System, meanwhile, committed $800 million to KKR’s 1996 fund and will review the European fund in the next week, said Jay Fewel, a senior investment officer.

“We will make the determination whether they have expertise there,” he said. “Just by the virtue of our relationship with KKR, we’ll give it a critical review.”

Oregon, unlike Washington, has significant exposure to the big deal market in Europe already through a $250 million investment it made in Doughty Hanson’s $2.5 billion fund; a $100 million commitment to CVC Capital Partners and a $100 million commitment to HarbourVest Partners LLC’s international fund-of-funds.

Washington, and Oregon if it decides to commit to the European effort, will be major players in negotiating the terms of the as-yet-unnamed KKR fund. A discussion of terms has yet to start, Mr. Ailman said.

“We are looking for an alignment of interests, and the 1996 fund was a step in the right direction” Mr. Ailman said.

Meanwhile, KKR has adjusted the terms in its U.S. fund to reduce that vehicle’s exposure to international investments. KKR is scaling back its allocation for international deals to 20% from 33% of the partnership. The two funds will then co-invest with each other on a pro-rata basis until the 20% level is reached, Mr. Ailman said.

KKR has invested about half of its present fund and has committed 10% of the partnership to overseas investments.