KKR better off sticking to its knitting

By Paul Mackintosh - 17/02/14

It’s been a mixed few weeks for KKR & Co. Flush with Asia success after the recent sale of South Korea's Oriental Brewery by KKR & Co back to Anheuser-Busch InBev, for US$5.8 billion, KKR recorded strong 4Q 2013 earnings, with fee-related earnings up quarterly to $120.1 million, and $412.3 million for the full year, versus $86.0 million and $319.8 million for the same periods in 2012. AUM, meanwhile, rose 25% year-on-year to $94.3 billion, and KKR issued a dividend of $1.40 per unit –  “Our highest annual distribution as a public company," as Henry R. Kravis and George R. Roberts, co-chairmen and co-CEOs of KKR, remarked.

KKR also recorded some wins in fundraising. Not only did it close its latest home-ground buyout vehicle, the North America Fund XI L.P. at $9.0 billion of commitments, it also closed two more new specialist vehicles: the Real Estate Partners Americas L.P. at $1.5 billion of commitments, and the Special Situations Fund L.P., a debt fund, at $2 billion.

So with all the good stuff going on, where’s the bad news? Well, KKR also decided to shutter two pilot vehicles designed to bring individual retail investors into the fold. The Alternative High Yield Fund mutual fund, launched November 2012, closed in the face of too much competition from other competing mutual funds, according to Bloomberg, despite its supposed differentiation through KKR’s experience of the debt markets and alternatives. Meanwhile, the closed-end Alternative Corporate Opportunities Fund is also being shut down after just over one year in existence, during which time it apparently returned 14% over 2013, again according to Bloomberg.

KKR does claim to have other offerings for individual investors, including private equity vehicles, still under development. And the – not exactly glittering – precedent of 3i Group in the UK does show that there are opportunities to build a major private equity franchise off a public shareholder investor base. But the types of fund offered obviously were not persuasive enough to divert the attention of investors, especially with the option of investing into KKR’s own shares to get the best of its direct investment expertise.

KKR may have listed as a public company, and moved into other investment styles as well as pure buyout, but its attempts to move away from the essential private equity business model do not seem to have borne that much fruit. And considering its latest results, maybe it is better off sticking to its knitting after all, especially when the thread seems to be made of pure gold.