KKR planning direct lending expansion

The asset manager reported 40 percent year-on-year growth in Q2 economic net income to $840 million or 88 cents per share. The results were driven by strong performance across strategies including realised carry from private equity exits.

Kohlberg Kravis Roberts & Co is finalising fundraising for newer direct lending strategies as well as other hedge fund products, Scott Nuttall, head of global capital and asset management, has said.

Speaking during the firm’s second quarter results call last week, he outlined two other areas of focus for KKR: Americas private equity and liquid alternatives. 

The firm’s $9 billion Americas private equity fund was now 60 percent invested and the fundraising environment was strong, he said, adding that KKR will also explore ways to do more in the liquid alternatives sector which is anticipated to be a growth area over the coming years. 

The firm reported record economic net interest of $137 million for its public markets segment in the quarter ending 30 June, compared with $105.6 million for the same period last year. 

Most of the increase was attributed to performance fees and record quarterly investment income, the firm said. Carry funds, including the firm’s direct lending, mezzanine, and special sits strategies, produced $31 million in realised investment income from gains in liquid credit and special situations. The firm also reported $59 million of net interest and dividends, a 14 percent quarter-on-quarter increase. 

As well as announcing it would expand its growing credit platform, KKR wound down some on-balance sheet credit assets in favour of higher yielding alternatives. The firm monetised roughly $1.4 billion of balance sheet investments over the year to date (23 July), a total roughly matched by year to date investments which included $210 million in seed investment capital for the firm’s new real estate credit team. 

Of the $1.4 billion realised, $237 million came from called collateralised loan obligations (CLOs), while another $188 million was from the credit portfolio. KKR announced during its Q1 earnings call in April that it would redeem two underperforming CLOs

Explaining the switch from credit investments, Nuttall said KKR was swivelling the balance sheet into higher yielding investments. “It has been somewhat deliberate because we have seen valuations in credit move up. And so we have seen the returns from this point forward go down and we saw opportunities to redeploy at a higher return level. [It’s] hard to say where we are going to go from here, but it has been a deliberate move to bring down credit to redeploy into other areas,” he said.

Assets under management (AUM) grew to $102 billion at the end of June, up from $99 billion three months earlier. Fee-paying AUM totalled $84 billion and, for the first time, KKR broke down what it terms “shadow AUM” — capital raised for strategies but not yet invested and therefore not earning fees. 

Acknowledging that more vehicles now only pay fees on invested, rather than committed, capital, it reported $9.8 billion of shadow AUM, up from $5.7 billion at the end of March. 

Its second special situations fund accounted for $1 billon of the increase, while the second direct lending fund contributed $246 million and another £339 million was attributed to Direct Lending Europe.

Total distributable earnings were $491 million in the second quarter with the firm announcing a dividend of 42 cents per share.