KKR betting big on credit

The firm’s 2016 market outlook posits that private credit is a “huge opportunity” this year, as the alternative investment giant looks to build on its direct lending, ABL and special situations business lines.  

KKR, in its outlook for 2016, said that private credit is 2016’s huge opportunity.

“Recent gyrations in the financing markets are providing non-bank lenders a significant opportunity to leverage the market’s illiquidity premium to earn compelling risk-adjusted returns,” KKR’s Henry McVey, global head of macro and asset allocation wrote in his outlook for the year, published on Tuesday (12 January).

“In particular, private financing opportunities linked to real estate, infrastructure, corporate take-overs and equipment currently appear to be the best risk-adjusted opportunity in the market today,” wrote McVey.

Outlining his view further, McVey said the firm is increasing its direct and asset based lending (ABL) exposure and raising its position to “a sizeable ten percent versus a benchmark of zero”. The firm intends to capitalise on banks’ withdrawal from lending.

In support of the position, McVey argued that deal structures notably improved for lenders in the second half of 2015, in terms of covenants and call provisions.

KKR is already well on its way in terms of growing direct lending. Its second KKR Lending Partners fund closed on $1.34 billion in April, raising much more than the predecessor vehicle, which had $460 million in assets.

KKR also originates mid-market loans through its non-traded Capital Corporate Trust BDC, which it runs in partnership with CNL Financial. The vehicle has about $3.8 billion in assets.

ABL appears to be a new area for the firm. Ares Management and Apollo Global Management have also recently been growing their positions in the asset-based lending space.

In its private markets segment, the firm is maintaining an underweight to growth investing, while being overweight to distressed and special situations. Though the firm is lowering its overall weighting to distressed/special sits to 10 percent from 15 percent to make more room for direct and asset-based lending.

KKR is particularly keen on distressed and special situations opportunities in Europe and Asia at the moment. The firm is in the process of raising $3 billion for its second Special Situations Fund.

Henry Kravis, one of the firm’s founders, also talked a great deal about the growth of lending opportunities and other credit instruments on KKR’s third quarter earnings call in October.