Kohlberg Kravis Roberts’ rapidly expanding public markets portfolio deployed approximately $200 million through its mezzanine segment this quarter, head of global capital and asset management, Scott Nuttall said during an earnings call on Friday.
The bulk of the firm’s mezzanine capital went to European markets, where many companies have struggled to obtain financing from traditional lenders.
“In mezzanine, we deployed over $200m of capital in the quarter across all of our accounts, versus $280 million in all of 2012,” Nuttall said. “A similar trend was seen in special situations, where we invested about $400 million in Q2 which compares to $950 million for all of last year. And in both cases, the majority of investment committee came out of Europe.”
“In Europe, the private equity pipeline is good, but I’d say that the credit and distressed pipeline is even better. And if you look at the capital deployment we’ve had in our mezzanine/special situations businesses in the first half, a lot of that has been from Europe as a result of us finding companies that need our firm’s capital, either from a rescue finance or credit standpoint.”
Although the firm’s private equity business has been quite busy in the US of late, the pipeline has been slower from a credit standpoint, he added: “Because of the strength of the secondary credit markets until recently, there has been less to do in terms of mezzanine and distressed. But we have been busy on the direct lending front, in the middle market area in particular.”
Overall, KKR invested approximately $1 billion of its carry-paying credit vehicles over the 12 month period ending 30 June, Nuttall said, a record total over any four month period.
Nuttall also spoke directly about William Sonneborn’s decision to step down as the head of KKR Asset Management. Sonneborn announced his decision earlier this week, though he will remain with the firm as a senior advisor starting in October. KKR Asset Management, a component of the firm’s public markets strategy, includes the mezzanine and distressed debt business.
“We’ve been starting to realign the businesses internally a bit at the firm,” Nuttall said. “We had both capital markets executives and credit executives both out sourcing credit opportunities. So, at the end of last year, what we decided to do is to move those groups closer together and create one face to the market so we could have a more coordinated approach to sourcing credit opportunities for our investors.”
“We began to do that at the end of last year, and we’ve been really pleased as a result.”
This has enabled the firm to source a greater overall volume of credit opportunities, approximately $1.45 billion through the first half compared to approximately $450 billion last year, Nuttall said. “We’ve seen a $1 billion increase in terms of originating credit opportunities by having these groups work more closely together and be more closely aligned.”
Putting Sonneborn’s successor Craig Farr in control of both credit and capital markets represents a continuation of this strategy, he added.
KKR’s public markets assets under management grew by $1.1 billion over the quarter, according to a news release. The firm attributes its growth in the segment to new capital raised in addition to an appreciation in net asset values for certain credit investment vehicles.