KKR's diversified-manager goal not yet within reach

Firm focuses instead on building up asset management

Mar 21, 2010 @ 12:01 am

By Arleen Jacobius

Kohlberg Kravis Roberts & Co. is on its way to becoming a fully diversified money manager, but it looks like it will be a long trip.

It has been two years since the $54 billion firm announced that it would pursue broad-based asset management, covering everything from real estate, infrastructure and mezzanine debt to public equities and public debt.

But KKR executives are in no hurry; they don't expect to have the full complement of strategies in place anytime soon, if at all.

Instead, the private-equity firm is building its $13.4 billion asset management division, KKR Asset Management, with below-investment-grade credit for institutional investors, including both liquid-fixed-income and alternative-investment strategies, which it started offering to retail investors in a publicly traded vehicle in 2004.

KKR has run into a few speed bumps on its journey. Its infrastructure fund has been on the fundraising road for two years, despite cutting fees in half and its target by one-third. Meanwhile, the head of the infrastructure business left after just six months on the job.

The firm's U.S. initial public offering was also delayed due to the economic meltdown.

KKR is “leveraging what we've learned in private equity and using it to create performance across other business lines,” said William C. Sonneborn, a partner and head of KKR Asset Management.

The firm is directing more resources to its asset management business.

This year, Nathaniel Zilkha, a principal at KKR, moved from its North American private-equity group to be co-head of KKR Asset Management's global special- situations strategy, which includes structured finance, distressed debt, debtor-in-possession and rescue financing. His counterpart is Jamie Weinstein, who was promoted to co-head of global special situations, from portfolio manager.

Last year, general partner Frederick M. Goltz was named to lead KKR Asset Management's mezzanine business. He was co-head of the private-equity energy business.

Also last year, Lee D. Stern left the Blackstone Group LP's GSO Capital Partners to join the KKR asset management unit as director of mezzanine.

KKR Asset Management also promoted portfolio managers Erik A. Falk and Chris A. Sheldon to head its leveraged-credit strategy, including leveraged loans and high-yield bonds.

The firm's business model has been to build “a non-siloed, integrated firm,” said Mr. Sonneborn, who joined KKR 18 months ago from TCW, where he was president and chief operating officer of TCW Group Inc. and chief executive of TCW Funds Inc.

KKR Asset Management's below-investment-grade-debt business mixes liquid and illiquid private-equity-type investment strategies. Its liquid-fixed-income strategies include bank loans, leveraged loans and high-yield securities, while the illiquid-alternative-credit strategies cover mezzanine, distressed and rescue investments, Mr. Sonneborn said.

Since signing its first institutional client in July 2008, KKR Asset Management has been gaining institutional assets, which now account for almost one-third of the unit's total. KKR Asset Management has $4.3 billion in separate accounts for institutional investors, including $800 million raised in the fourth quarter for what it calls capital solutions opportunities, which provides all the debt needed from term loans to mezzanine capital for companies that need refinancing.

A big chunk of KKR Asset Management's institutional business is $2.8 billion managed for a longtime KKR investor, the Oregon Investment Council, which manages the $51.5 billion Oregon Public Employees Retirement Fund. The account is Oregon's only non-private-equity investment with KKR, council spokesman James Sinks wrote in an e-mail.

Some separate account investors, such as Oregon, are funding the separate accounts through their fixed-income allocations, while others include KKR Asset Management separate accounts in their private-equity portfolios, Mr. Sonneborn said. He declined to say how many institutional investors have separate accounts, or identify them.

Last year, KKR Asset Management started raising a $1 billion to $3 billion mezzanine fund, according to Securities and Exchange Commission filings. Mr. Sonneborn declined to talk about fundraising.

He said that KKR's going public isn't the reason that the firm is adding investment capabilities. Expanding investment offerings helps develop a relationship with Wall Street because there are a wide variety of strategies and transactions with companies, Mr. Sonneborn said.

KKR isn't the first private-equity firm to expand its investment management capabilities. The Blackstone Group LP and The Carlyle Group are becoming more broad-based firms.

Arleen Jacobius is a reporter at sister publication Pensions & Investments.

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