KKR grows LP base

The firm has expanded its LP base from 275 to 400 in an effort to expand beyond its private equity roots, which includes real estate.

Kohlberg Kravis Roberts is focused on building out its LP base, which has grown from about 275 investors two years ago to around 400, the firm said during its year-end 2011 earnings call Thursday. The firm has been expanding beyond its private equity roots, adding a dedicated real estate investment arm headed by Ralph Rosenberg early last year.  

Adding new investors into the mix is a priority, as well as “cross-selling” existing LPs into more than one KKR fund. Currently, KKR LPs on average have exposure to about 1.6 KKR products, said Scott Nuttall, head of KKR’s global capital and asset management group.

“As we’ve added to our product base, we’ve just started to make a dent in that figure,” Nuttall said. To build up the LP base, KKR has grown its marketing team from just four people who marketed funds for the firm in 2008, to 40 today, Nuttall said. 

New LPs are essential as KKR continues to grow beyond its traditional private equity foundation. The firm last year added a real estate investment team, which will raise a separate fund in the future but which is now investing $300 million from KKR’s balance sheet and working with other KKR business lines like special situations and the capital markets division on deals.

“There’s about $1 trillion of [commercial mortgage-backed securities] coming due between now and the end of 2014, and about half of that doesn’t have a home,” Nuttall said. “There’s a variety of different, interesting opportunities in the US, Europe and Asia.”

Part of the opportunity has to do with more subordinated levels of debt in capital structures of real estate investments, he said. Senior financing is available in the market, but there is a dearth of junior credit like mezzanine debt, Nuttall said. “There’s a significant need at the bottom half of the capital stack,” he added.

While successfully raising capital in a constrained fundraising environment, KKR reported declines in carried interest from its funds. Economic net income in the private equity business was $285.5 million for the fourth quarter and about $751 million for the full year, down from $714.6 million and $2.1 billion for the same time periods in 2010. 

The earnings declines came from decreases in the private equity funds’ carried interest, the firm said in the earnings statement. However, fee-related earnings were up, the firm reported. 

The declines reflected in part the volatility and the uncertainty that shook markets last fall as the European sovereign debt crisis roiled the Eurozone and affected economies around the world. Already, the firm said valuations on its funds were up from the lows in the latter half of last year. Over the last two years, the firm's private equity business was up about 36 percent, the firm said.