KKR eyes new LP relationships amid tough fundraising conditions

KKR is connecting with a new set of investors as traditional capital sources pull back from private equity fundraising due to overallocation.

“There’s no doubt some US pension plans are getting their bearings right now and are trying to figure out where the market is going to go,” co-CEO Scott Nuttall said in a third-quarter 2022 earnings call.

The firm is nonetheless having “very productive conversations” with these LPs, typically about non-PE strategies, such as “anything that has got an inflation-protection element or yield,” he said. “Think credit, infrastructure, real estate.”

“We’re having a lot a good dialogue on those fronts,” he added, “even with some of those [LPs] that are still getting their bearings and may be more active in the early part of next year than at the end of this year.”

In addition, KKR is cultivating an altogether new group of institutional partners, Nuttall said. “We’re spending a lot of time with institutions we’ve never spent time with before.”

They include insurance companies, which “are trying to figure out how to navigate the rate environment,” he said. They also include sovereign wealth funds, which along with family offices and high-net-worth investors “have a different dynamic entirely.” With each, he said, KKR is discussing “the markets and the macro” and making introductions to “what we’re doing.”

Overallocated LPs have been a major factor in a recent slowdown in PE fundraising. As the phenomenon is mostly centered in the US institutional community, GPs have pivoted toward alternative capital sources. In some cases, this has meant tapping into largely untapped retail channels. In others, it has meant paying more attention to overseas investors.

Blackstone, for example, is benefiting from the scope and diversity of its global LP base, chairman and CEO Steve Schwarzman said in a third-quarter earnings call.

“Starting from our first fund in 1987, we have had a very significant component of non-US investors,” he said. This foreign source of capital provides a “terrific balance” at a moment when US pension plans are cash-strapped.

For KKR, taking the time to build fresh institutional relationships could be paying off. In the third quarter, the firm secured $13 billion, bringing the total since January to $65 billion, “already our second-best year of fundraising ever,” head of investor relations Craig Larson said. “And we still have a quarter to go.”

The feat is notable, he said, considering “this was against a much more challenging fundraising backdrop than the past few years and without many of our largest flagships in the market.”

KKR is perhaps also well-positioned because it has relatively few PE funds on offer. Earlier this year, it closed a 13th flagship buyout vehicle at $19 billion, with much of KKR North America Fund XIII‘s capital committed prior to the onset of tougher fundraising conditions.

The firm is now zeroing in on strategies particularly relevant to increasing market dislocation. Among them is private credit, for which “we are seeing dramatically more interesting risk-reward than we saw even a couple of months ago,” Nuttall said.

Assets managed by KKR totaled $496 billion at the end of September, up 8 percent year over year.