It could be argued that KKR is arriving late to the party as a real estate manager courting retail investors. Brookfield, Blackstone and Starwood Capital Group have all operated some form of traded or non-traded vehicles for non-institutional investors for several years now.
In setting up the KKR Real Estate Select Trust, however, KKR is taking a unique and bold approach. KREST was registered with the Securities and Exchange Commission under the Investment Company Act of 1940. Typical non-traded REITs apply for an exemption from registering by utilizing Section 3c5c of the Act.
By opting to register a vehicle under the 1940 Act, KKR automatically gets subjected to limitations around the fee structure and the use of leverage, both of which are beneficial to the investors. The fund also has no eligibility criteria in terms of minimum income or net worth that could preclude certain types of individual investors from participating in these vehicles. And while the majority of non-traded REITs have a monthly NAV, this vehicle would provide a daily valuation.
KKR is not the first manager to have such a registered vehicle. New York-based Clarion Partners registered Clarion Partners Real Estate Income Fund with the SEC under the same 1940 Act on December 31, 2018. CPREIF had an NAV of $10.45 and generated 4.43 percent year-to-date returns as of Wednesday.
But the New York-based private equity firm seems to be taking it to the next level. Indeed, KREST is a novel undertaking in other respects, particularly its proposed fee structure. The 1940 Act typically prohibits payment for any services in shares. PERE understands that KKR, however, was able to get an exemptive order from the SEC, thereby allowing the incentive and management fee to be paid in shares of the vehicle.
KKR is also pursuing a comparatively more diversified investment strategy for KREST. Alongside investing in stabilized real estate assets across the top 50 markets in the US, KREST would also seek deals in prime single-tenant buildings, as well as mezzanine and preferred equity deals. The fund could also invest in non-US markets, including Europe and Asia. Another person familiar with the matter told PERE the firm is targeting a higher distribution rate than its peers in the market due to the inclusion of “higher-yielding strategies” such as credit and prime single-tenant properties.
Innovation does come at a cost. By registering the fund under the 1940 Act, KKR is arguably forgoing privacy in exchange for greater access to a wider pool of retail capital. The firm will need to comply with more governance and transparency requirements. As PERE analyzed in an article published this week, there are other constraints too. But if the bets do pay off, and KREST is able to reach a sizeable scale, it could open up institutional private real estate to individual investors like never before.
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