Timing is everything: KKR's first fund falls flat

The first closed-end fund from private-equity giant KKR & Co. LP failed to take off with investors, thanks to a challenging environment for fixed-income funds. The KKR Income Opportunities Fund (KIO), which invests in a mix of secured, unsecured and high-yield loans, raised just $305 million in its initial public offering last week. That's far below the billions other big-name companies raked in during the first half of the year for similar funds. Kristi Huller, a spokeswoman, declined to comment. The Pimco Dynamic Credit Fund (PCI), which was launched in January, and the DoubleLine Income Solutions Fund (DSL), which was launched in April, raised $3.3 billion and $2.3 billion, respectively, in their IPOs. More recently, the First Trust Intermediate Duration Preferred and Income Fund (FPF) raised $1.4 billion in May. The average closed-end fund raised $700 million in the first half of the year, according to Closed-End Fund Advisors Inc. Of course, those launches were before interest rates shot up to 2.52%, from 1.6%, in the span of two months, wreaking havoc on bond prices, which move inversely to interest rates. “It's been chaos in the closed-end-fund market,” said John Cole Scott, executive vice president of Closed-End Fund Advisors. “People have had a lot of pain.” The Barclays Aggregate Bond Index, the most popular benchmark of U.S. bonds, is down 2.3% year-to-date. The index has declined over a single calendar year only twice, most recently when it fell 0.8% in 1999. The average taxable closed-end fund was trading at a 2% premium before interest rates went bonkers. The average premium has flipped to a near 6% discount. All three of the bigger funds are trading at sizable discounts, too. Since closed-end funds have a fixed number of shares, the share price trades at a discount to net asset value when there's more selling than buying. The Pimco closed-end fund is trading at a 9% discount to NAV. The DoubleLine and First Trust closed-end funds are both trading at around 5% discounts. The good news is KKR's go-anywhere mandate means that the fund's portfolio managers have the ability to find value in any fixed-income market without being pigeonholed in a losing sector. “Long-term, it's a good strategy because it's flexible,” Mr. Scott said. “These markets require that.”