KKR Opens Funds Aimed at Private Investors

KKR—the private equity group immortalized as the Barbarian at the Gate—is launching two investment funds to be distributed to individuals by Charles Schwab, the US brokerage. It is the latest sign of the pressure on private equity firms to become more like traditional asset management firms.

KKR Opens Funds Aimed at Private Investors
Source: KKR.com

The move comes as buyout firms are finding it harder to identify reasonably priced companies to take private and are raising smaller funds than they did at the peak five years ago.

Shareholders are also pushing publicly listed buyout groups such as KKR to seek recurring revenues by expanding funds under management and increasing fee income.

One lawyer who heads the private equity practice at a leading New York law firm said: "The game is now to grow assets under management, rather than to grow carried interest," referring to the 20 percent cut of profits that private equity companies take when they sell portfolio companies. He added: "It's all about fees and asset size now."

KKR's move is the most dramatic example of how once-exclusive buyout firms are launching more mainstream investment products and turning to retail investors with limited savings to supplement their traditional sources of funding.

Some institutional investors have become disenchanted with the performance of buyout funds since the global financial crisis, in part because of the long lock up periods.

The transformation of KKR has reached the point that its billionaire co-founder George Roberts will man a KKR booth at a Charles Schwab sales event in Chicago next week.

KKR, which was dubbed Barbarian at the Gate for its part in the audacious $25 billion leveraged buyout of JR Nabisco in 1988, is launching a high yield credit fund and a distressed opportunities fund. The minimum investment for the high-yield fund will be $2,500—rather than tens of millions of dollars required to invest in KKR funds in the past. The distressed fund has a minimum requirement of $25,000.

The second fund will have access to many of the same deals as KKR's special situations fund.

Meanwhile, many private equity firms are also turning to investors with more limited means for their traditional buyout funds. They are using private banks to distribute their private equity funds to individuals who can afford a mininimum investment of $1 million. Carlyle has been using the Goldman Sachs private banks, KKR has been using JPMorgan and Providence Equity Partners as been using Morgan Stanley to market funds to wealthy individuals, supplementing the distribution of products to large pension funds and sovereign wealth funds.

Recently, McKinsey produced a study about the growth of the alternative investment industry, noting that these companies are "rapidly moving into the mainstream retail market and are expected to account for one-quarter of retail revenues by 2015."