Exclusive: KKR plots next mezz fund

The fund is changing its name to KKR Private Credit Opportunities Fund and will only charge fees on invested capital, a policy the firm is implementing on its second special situations fund.  

KKR is preparing to launch its second mezzanine fund, a successor to the KKR Mezzanine Partners Fund, which will be called the KKR Private Credit Opportunities Fund, according to sources familiar with the firm’s plans. This fund will only charge management fees on invested capital, as opposed to its predecessor, which charged fees on committed capital, PDI understands.

It’s not clear what the target for the new mezz fund is. The firm usually sets higher targets for successor funds and the first KKR Mezzanine Partners Fund raised $1 billion in 2011.

KKR declined to comment.

The firm is offering the same fee break on its second special situations fund, which KKR is currently raising with a target of $2.5 billion to $3.5 billon. The first special situations fund closed on $2 billion in early 2014. The firm’s direct lending funds have only ever charged fees on invested capital since inception. KKR closed its second direct lending fund at $1.34 billion in April.

The name change on the second mezz fund reflects the fact that this vehicle will have a broader strategy and invest in other instruments such as asset-based lending and specialty finance, PDI understands.

On both the special situations and mezz funds, opportunities could be harder to come by at this stage in the credit cycle so KKR could invest the capital slower than the previous funds and is offering the fee breaks to clients to be better aligned with LPs, sources familiar with the matter explained.

The first mezzanine fund ended its investment period in March, earlier than the planned July date because of Craig Farr’s departure, as PDI previously reported. The fund was already fully invested when it terminated its activity. Farr, previously the head of credit at KKR, resigned from his post in February, when New York-based Nat Zilkha and London-based Alan Burke took over as co-heads of credit.

Oaktree Capital Management, which is raising a $10 billion pool of capital for distressed investing, has also told investors it will only charge management fees on invested capital.

For KKR, the fee breaks might be a welcome change at a time when the firm has publicly drawn some scrutiny on fee related issues. Earlier this year, The Wall Street Journal reported that the Securities and Exchange Commission was examining the fact that KKR had over-charged investors on some undisclosed fees and expenses. By the time the articles came out, the firm had already refunded the fees to the investors, although the LPs hadn’t known about the SEC investigation until after they read the stories with some taking issue with the lack of disclosure.