Friday Letter Fee wars

 Two and twenty? KKR is moving to 1 and 10 for its new infrastructure fund, reveals David Snow.

Kohlberg Kravis Roberts is known for many things, and below-market fees is not among these.

This perception may change with the advent of KKR’s massive new infrastructure fundraising, which sports a roughly 1 percent management fee and a 10 percent carry, according to sources who have seen the private placement memorandum.

The 1-and-10 fee structure was confirmed today by sister news service KKR is seeking to raise some $4 billion for its debut vehicle dedicated to infrastructure.

Most alternative investment limited partnerships charge 20 percent carried interest, although the management fee often hovers somewhere south of 2 percent depending on the size of the fund and the size of the limited partner. But 20 percent carry is sacred.

Never one to blindly follow convention, KKR may be betting that its dramatically different economic terms will set it apart from the many other infrastructure funds currently seeking capital. Infrastructure is among the handful of strategies for which institutional investors are setting aside scarce capital. The asset class is viewed as a hedge against inflation and a relatively safe way to put capital to work over the long term.

No investor is allocating to infrastructure because they hope to score Google-like returns. In fact, there is an ongoing debate as to whether infrastructure, properly pursued, should produce returns in line with private equity, with real estate or with fixed income. Whatever the expected returns are, they tend to be lower than that of private equity, but steadier.

KKR’s gambit will not be greeted warmly by other infrastructure fund managers, who have taken pains to paint themselves as improvers of operating businesses, not simply caretakers of toll roads. A 20 percent carried interest supports the notion that these GPs add real value. A 10 percent carry may not necessarily negate the value-add job description, but it does seem to recognise that returns are expected to be middling and steady, and that maybe – just maybe – some large institutions take a dim view of the GP collecting 20 percent of the upside year after steady year.

Will a fee war break out among infrastructure GPs in response to KKR’s move? Hard to say. Until now GPs desecrating the sanctity of 20 percent carry usually did so by increasing the term in their own favour.