KKR's first closed-end fund falls flat

The first closed-end fund from private-equity giant KKR & Co. LP has failed to take off with investors. 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 two weeks ago. That is far below the billions other big-name companies raked in for similar funds during the first half of the year. 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. 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, according to Closed-End Fund Advisors Inc. Kristi Huller, a KKR spokeswoman, declined to comment. Of course, the more successful 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 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 rates started climbing. 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.”