KKR markets second direct lending fund

The firm also plans to bring new mezzanine and special situations funds to market in the near future, says Scott Nuttall. 

Kohlberg Kravis Roberts has launched a follow-up to its 2012 direct lending vehicle and will begin raising capital for a new mezzanine fund soon, KKR global capital and asset management chief Scott Nuttall told analysts during a first quarter earnings call on Thursday.

“Infrastructure II is vehicle that we’re actively out trying to raise, Direct Lending II is also a vehicle that we’re fundraising for,” Nuttall said, commenting on the firm’s plans for new funds. “Our mezzanine fund is nearly fully invested. So those three [funds] would be in the very near term or right now.”

Nuttall previously indicated that KKR was mulling the launch of both vehicles during a February earnings call, citing the amount of capital deployed by both strategies in 2013. As of 31 December, KKR’s direct lending vehicles had $194.5 million uncalled on $748.8 million in total commitments according to its year-end earnings report. The firm’s mezzanine fund had $464.1 million uncalled on $987 million committed.  

Earlier this year, KKR co-head of leveraged credit Erik Falk told Private Debt Investor that the volume of financing demanded by the market had exceeded the direct lending team’s expectations. Borrower demand, particularly in Europe, contributed to an accelerated investment pace. The team closed its debut direct lending fund on a little less than $500 million in 2012.

“When you move over to Europe, some of the activity is picking up when you look at core M&A,” Falk said. “The second thing that’s important is, in Europe there have been a lot of situations where banks have been lenders to companies but there hasn’t been that catalyst to refinance. The banks weren’t going to sell the loan to take a loss, the companies really liked the cheap financing they had – but now you’re coming up on the ultimate refinance need.”

Europe accounts for much of the firm’s investment activity in other credit-related vehicles as well. The firm closed its acquisition of European credit specialist Avoca during Q1, adding roughly $8.4 billion in assets under management and transforming the firm’s European credit platform into something that is “more consistent with the business we’ve created in the US,” Nuttall said.

“We think it’s a great time to be investing in Europe as the recovery continues,” he added. “On the alternative credit side we’ve also been busy, deploying approximately $1 billion of capital in the first quarter across all of our accounts. And if you look at special situations, for example, 40 percent of that capital was put to work in Europe.”

KKR’s debut special situations fund, which closed on $2 billion late last year, has been extremely active in Europe over the last year. On Thursday, Nuttall hinted that the firm may launch a second special situations fund in the near future.

“Then you’ve got other strategies, like special situations, where we’ve recently raised capital but, frankly, that capital is getting to work quite quickly. So we continue to see opportunities over time to get to a successor fund,” he said.  

Q1 Performance 

KKR’s Public Markets platform, which includes its mezzanine, direct lending and special situations funds, finished the quarter with $41.8 billion AUM compared to $33.1 billion at the close of 2013.

“The majority of our AUM growth in in the first quarter was due to the closing of the Avoca acquisition, which brought $8.4 billion online,” said chief financial officer Bill Janetschek during the earnings call.

The expansion of AUM corresponded with an increase in revenues from Public Market platform management fees. KKR collected roughly $72.4 million from management fees on the quarter, a significant increase over the $56.5 million collected in Q4 and the $46.4 million collected during Q1 2013. Incentive fee revenues fell from $36.7 million in Q4 to $17 million in Q1, according to the firm’s earnings.  

“This was offset by a decrease in incentive [fees], as the fourth quarter is more active for our public funds,” Janetschek said.

Even so, direct lending, mezzanine and special situations funds grossed respective returns of 4 percent, 6 percent and 11 percent during Q1, Janetschek said.