Private equity giant KKR is raising a fourth senior debt fund, as rate hikes encourage veteran direct lenders to bring fresh offerings to market.
A first close was held in mid-March, totaling about $334 million. A final close is expected to take place in the fourth quarter. KKR declined to comment.
Rising interest rates – reinforced this week by the Federal Reserve’s vow to continue battling inflation – are motivating LPs to explore asset classes that provide some measure of refuge. One of the beneficiaries appears to be private debt, and especially direct lending, owing to key characteristics like floating rates and structural protections.
A July white paper by Ares Management found that direct loans delivered much better returns than other credit investments (syndicated bank loans, high-yield bonds and investment-grade corporate bonds) in periods of rate increases and recessions. It concluded that “direct loans are set up to outperform in the current interest rate hiking cycle and related market volatility”.
This may explain multiple direct lending products – most of them aimed at PE-backed mid-market deals – now being in fundraising mode. Along with KKR’s Fund IV, they include vehicles sponsored by Angelo Gordon, Antares Capital, Fortress Investment Group, Golub Capital, HPS Investment Partners, Oaktree Capital, Riverside Capital Partners and Sixth Street.
Fund IV, part of a KKR series begun in 2011, will focus on the senior, first-lien and unitranche debt of PE-backed mid-market companies with EBITDA of $25 million or more, PCRA documents said. Its main emphasis will be larger companies with EBITDA of $50 million to $100 million-plus. The portfolio is expected to have a weighted average EBITDA of about $100 million.
Credit investments will be concentrated in the US (minimum 70 percent), with the balance in Europe and Australia. Sectors of interest will be those traditionally favoured by KKR, such as business services, consumer, healthcare, insurance and technology.
Fund IV will target a levered gross IRR of 11 percent to 14 percent and a net IRR of 9 percent to 12 percent, according to PCRA materials.
KKR Lending Partners III, closed in 2018 at $1.5 billion, was beating this target as of December, generating a 16.3 percent gross IRR and a 13.5 percent net IRR. The 2014-vintage Fund II was earning a 3.3 percent gross IRR and a 1.9 percent net IRR.
Direct lending is a strategy of the $178 billion KKR Credit vehicle, established by the firm in 2004. The private debt platform, which also features strategies like opportunistic credit and special situations, is co-headed by Daniel Pietrzak and Matthieu Boulanger.
Private credit fundraising in North America was robust in this year’s first half, Private Debt Investor reported, with inflows totaling $48.2 billion, off only slightly from 2021’s record pace. A crucial factor was fund sizes, which averaged $1.1 billion, up from $736 million last year and $376 million in 2020.
If KKR’s Fund IV reaches its goal, it will add to this trend. So too will the offerings of other sponsors, such as Antares Senior Loan Fund II, Fortress Lending Fund III and Sixth Street Lending Partners, which are seeking up to $5 billion, $2.5 billion and up to $5.5 billion, respectively, affiliate title Buyouts reported.