KKR holds first close for real estate fund

The New York-based private equity firm has now raised half of the target capital for its debut property fund. The firm also has invested an additional $250 million for “new strategic initiatives” within real estate.

Kohlberg Kravis Roberts (KKR) is halfway toward its $1 billion equity-raising goal for its first real estate fund. The New York-based private equity firm disclosed in its second-quarter earnings results on Friday that it had raised $500 million in commitments for the vehicle, which officially launched in May.

Of that amount, KKR committed 40 percent, or $200 million, while $300 million came from an unnamed “strategic institutional fund investor.” The Teacher Retirement System of Texas, which formed a $3 billion strategic partnership with KKR in late 2011, has confirmed that it is the limited partner in the fund.

Scott Nuttall, the firm’s global head of capital and asset management, said during a call with analysts on Friday that those commitments comprised the first close of the vehicle. As of June 30, the firm had invested $162.4 million of the equity from the vehicle, with that capital currently marked at 1.2 times cost.

KKR first mentioned that it was forming a property vehicle during its first quarter earnings call in May. “It’s not going to be our typical long fundraise,” said Nuttall at the time. Indeed, the vehicle is expected to be populated with a limited number of investors, similar to an investment club, and it could include certain balance sheet investments.

During Friday’s earnings call, Nuttall also noted that KKR will be deploying an additional $250 million each to real estate, special situations and energy strategies. “We like the yield and overall return profile of these assets,” he said. “I think these are interesting places to deploy capital.”

The extra capital for real estate, however, will be designated for opportunities outside of the fund. “As we’re deploying that real estate capital, we might see some opportunities that won’t actually fit into that mandate,” KKR’s chief financial officer, Bill Janetschek, said. The additional allocation “is to make sure that we have the ability to put capital to work in things that we’re looking at and we find interesting. That’s why we’ve dedicated an additional $250 million to deploy in a strategy that might be away from traditional real estate funds.”

Nuttall preferred to call such opportunities “new strategic initiatives within the real estate business…These new strategic initiatives we’re talking about, think of those as potentially seeding platforms where we could raise third-party capital alongside, but it’s relatively early days.”

KKR first launched its real estate business in March 2011, with the hire of former Goldman Sachs Whitehall Funds co-chief operating officer Ralph Rosenberg. Since then, the firm has committed a total of nearly $800 million to its real estate business, including a $300 million allocation from KKR’s balance sheet and $300 million from KKR Financial Holdings. During that period, it has invested more than $650 million of total equity in 10 transactions, of which $290 million is being held on the company’s balance sheet, according to a May investor presentation.

Last week, the firm announced that it had tapped Martin Moore, the former chairman of Prudential Property Investment Managers (now M&G Real Estate), as a senior advisor on UK and European investments. The hire followed KKR’s first European real estate investment, with the acquisition of 430,000 square feet of retail warehouse space in the UK in June. “We see this as a global opportunity in real estate, so the moves that we’re making in London, I think you’ll continue to see more moves like that around the world as we continue to scale that platform,” said Nuttall.

For the second quarter, KKR reported economic net income of $144.4 million, down from $546.1 million during the same year-ago period. The firm’s assets under management grew to a record $83.5 billion as of June 30, up from $78.3 billion at the end of the previous quarter.