New bookrunner role for KKR

Investment banks long ago expanded their mandate into the world of private equity. Now it would appear that private equity firms are encroaching upon the role that investment banks play as intermediaries in raising capital through the public markets.

For the first time in its history, private equity firm KKR is acting as a joint bookrunner on a US$350m secondary stock offering of Rockwood Holdings, a speciality chemicals concern that KKR purchased in 2000 and took public in 2005.

Credit Suisse, Goldman Sachs and UBS have also been enlisted to help line up investors, and pricing of the 10m-share offering is expected for November 15. The line-up would suggest that KKR’s role is ancillary, with the leads doing most of the work and getting the bulk of economics. KKR’s take from the Rockwood secondary is likely to be small – the gross spread is understood to be 4.25%, or about US$14.5m, with KKR taking just US$1.5m.

But KKR’s move to expand into capital markets comes at a particularly difficult time. Investment banks and private equity have long had a symbiotic relationship in advising, funding and sourcing M&A transactions, a business that is slowing amid a souring credit environment.

In July, when KKR submitted documents for its own US$1.25bn IPO, the firm said that capital markets activities “represent an opportunity to efficiently increase our available investment capital, capture certain financing fees otherwise paid to third parties and earn incremental margins on committed capital”. The firm said it was building its capital markets business in the US, Europe and Asia.

KKR hired Craig Farr, the former co-head of US ECM at Citigroup, in summer 2006 to help co-ordinate investor relations for its permanent financing vehicle, KKR Financial. And the role of KKR Capital Markets, as the group is known, has clearly expanded.

In addition to monetisations of its own portfolio positions, the group can also help syndicate out a portion of the equity commitments on buyouts to its LPs and mutual funds.

Farr, who is well-versed in convertible bond origination, has also more recently been integral in structuring investments in Sun Microsystems and Harman International in the form of convertible bonds that gave it seats on the boards of public companies.