KKR’s Pattner: Flexibility is key to ‘milestone’ fund

The New York manager is not tied to a specific allocation strategy for REPA III, and that is the way investors like it, the firm says.

KKR wrapped up its biggest real estate fund to date this week, closing Real Estate Partners Americas III on $4.3 billion.

The New York-based private equity titan has already committed $1 billion of equity to a variety of asset types, PERE understands. But when it comes to putting the remaining capital to work, the firm is keeping its options open, Justin Pattner, KKR’s head of Americas real estate equity, said. And that is how investors like it.

Pattner: KKR’s regional approach offers global exposure with flexibility on weighting.

Pattner said REPA III’s investors – public pensions, sovereign wealth funds, insurance companies, family offices and high net worth individuals from around the world – did not commit to the fund for a specific set of allocations, but rather for access to KKR’s ability to read market movements and execute accordingly.

“We have a robust portfolio management process where we’re constantly evaluating what we own and what’s happening in the markets and asset classes in which we own,” Pattner said. “We like to maintain flexibility around how we’re constructing that portfolio using a risk-based approach and we believe being nimble is important to the success of an opportunistic strategy in today’s market.

“We have themes that we’re focused on,” he added, “but we don’t have set allocations that we put down on a piece of paper and follow through the investment period.”

As such, all property types are on the table for REPA III as the firm aims to identify themes within which to invest. It has divided its current approach into two categories: secular growth and distressed. The former includes rental housing, both multifamily and single-family, and logistics – the largest position in 2018’s REPA II. The latter captures the sector’s most troubled assets, namely hospitality and office.

In both cases, the firm will look to acquire assets at an attractive basis. But a price discount alone is not enough to secure KKR’s investment, Pattner said, especially in the office sector which is rife with uncertainty amid the disruption caused by covid-19.

“We are selectively looking to invest in the office sector, particularly in markets where we see outsized population and white-collar job growth,” he said. “We are targeting buildings that can accommodate the demands of the companies that are returning to the workplace.”

Identifying real estate themes is not done in a silo, Pattner said, explaining that his team will “leverage the broader information set at KKR to understand both industry and demographic trends.” This means drawing on data from the firm’s corporate private equity and global macro teams to find growth.

Regional vs global

Launched in 2011, KKR’s real estate business has been on a tear as of late, building its assets under management to more than $33 billion and climbing to the number 11 spot in this year’s PERE 100 ranking.

With $8 billion of equity closed during the past 12 months for its three regional opportunistic strategies – Americas, Europe and Asia-Pacific – the firm is poised to climb higher still.

Pattner said KKR is keen to continue investing opportunistically on a region-by-region basis. Together, the three funds can achieve the same benefits of a consolidated global strategy, while still offering investors flexibility in how they weight their exposures by region.

“We have one leadership team that is in constant dialogue, so our investment decisions are informed by an active understanding of global capital flows and relative pricing across borders just like if this was one large commingled fund,” he said. “But, having dedicated regional funds inures to the benefit of our clients who prefer to make their own decisions about where and how much exposure they want to the United States, Europe or Asia-Pacific.”

Opportunistic investors have shown a slight preference for North American funds in 2021, according to PERE data. Through the first two quarters of the year, more than $10 billion was raised by opportunity funds in the region, accounting for more than 40 percent of the market. Multi-region funds accounted for $7.5 billion and European vehicles closed on $6.7 billion. Of the opportunity funds in market through the end of the second quarter, which cumulatively were targeting $89.7 billion, one third were global while the rest were region-specific.

KKR’s REPA III, which had a $3 billion target, is the largest North American opportunity fund closed thus far in 2021 as well as the second largest fund overall behind Oaktree’s Real Estate Opportunities Fund VIII at $4.7 billion. The only North America-focused fund in market that could surpass REPA III in size this year is Carlyle Realty Fund IX, which has already raised $7 billion against a $6 billion target.

“For a business that was formed 10 years ago, this fund is a real milestone,” Pattner said. “We’re looking forward to investing the fund and to seeing how the increasing scale of our business benefits us in terms of access to more information and enhanced deal flow.”