AVCJ Awards 2021: Fundraise of the Year – Large Cap: KKR

With 290 LPs, KKR’s fourth pan-Asian fund boasts more investors than any other vehicle raised by the private equity firm globally. This is partly the result of a concerted effort to develop the family office and high net worth individual (HNWI) constituency – where a lot of relatively small checks can add up to a significant amount.

“Building out our private wealth business has been a key strategic priority for KKR globally, as this client base is underpenetrated, especially for alternatives products. We now have dedicated people in this area, including a head of private wealth in Asia who is building a team to cover private banking channels, ultra HNWIs, and single- and multi-family offices,” said Sarah Zhang, an Asia-based principal in the firm’s client and partner group.

“Of the Asian Fund IV investors who were not in Asian Fund III, 50% of them were private wealth clients.”

KKR’s global investor relations team numbers more than 100 people, and it is growing in depth as well as in size. The introduction or repurposing of talent to focus on HNWIs reflects a broader evolution in strategy. Where previously relationship managers were siloed by geography, now they are increasingly specific to client types or even product families, such as credit or real estate.

This greater bandwidth underpinned a three-pronged Asia fundraising effort across private equity, infrastructure, and real estate in the past 24 months, with aggregate commitments amounting to more than USD 20bn. Of this, USD 15bn went into the firm’s fourth regional private equity fund, which has become the largest vehicle of its kind ever raised.

Pandemic permutations

Launched in November 2019 and closed in March 2021, the Fund IV process largely coincided with COVID-19. However, it wasn’t unduly disrupted, something Zhang credits to concerted pre-marketing, which began in the summer of 2019 when deployment of Fund III reached 70%.

Soft launches in Southeast Asia, Japan, and China were followed by KKR’s global investor conference in June. Numerous Asian executives attended and then toured the US, giving LPs progress updates. The firm’s Asian investor conference took place in September with a lot of existing investors in attendance. Further meetings coincided with the AVCJ Forum in November.

“By the time of the formal launch, we had met a lot of investors in person on listening tours and pre-marketing meetings. We then held three group due diligence sessions in London, New York, and San Francisco, with a lot of LPs attending each one. Our country heads and macro team gave presentations and had one-on-one meetings said Zhang. “Many overseas investors got what they needed from these sessions, so when COVID hit, we were in a good position in terms of due diligence.”

Towards the end of February 2020, with international travel increasingly difficult, the IR team ceased in-person meetings. Public markets tanked soon after, leaving many LPs overexposed to alternatives on a relative basis. The release of revised private market valuations four to six weeks later redressed the balance, but investors were already working towards a planned mid-year first close for Fund IV. Awareness of the deadline may have been heightened by memories of investors being cut back in Fund III after coming in late.

“We did not experience any slowdown in fundraising, even in the early stages of the crisis,” said Zhang.

Tensions between China and the US posed another problem. KKR’s portfolio is diversified, with China accounting for approximately 30%, but some family offices in Europe and the US – that don’t necessarily have to maintain Asia allocations – stayed away. This did not prevent the firm reaching a first close of approximately USD 10bn in June.

Even though many LPs were able to conduct early due diligence in person, Zoom played an important role in the fundraise. Anyone writing a check of USD 100m or more would typically meet with Asia head Ming Lu plus the six country leads. They might also engage with the Capstone operations, capital markets, and product teams.

“On traditional in-person roadshows, the team was usually constrained by how long they can spend in a single location, and meetings would be crammed into a few days. The beauty of virtual is that you can schedule at the investors’ convenience. I give a lot of credit to our leadership team for prioritizing LP meetings. Even our senior-most leadership made themselves available around the clock,” said Zhang.

A broad footprint

Of the 85 investors in Fund IV that had previously not committed to KKR’s Asian private equity strategy, few came in purely based on virtual diligence. Yet the broader fundraising dynamics during COVID-19 – a flight to familiar names with established franchises in the region – have been beneficial.

The firm has one of the largest footprints in Asia with 75 investment professionals spread across eight offices. As of September 2021, it had backed 96 companies, deploying more than USD 23bn. Meanwhile, Fund III looked promising, marked at a 44.1% gross IRR and a 1.9x multiple in June 2021. There was a significant early exit, with Korea’s KCF Technologies generating a 6.5x return.

KKR’s investment thesis is rooted in the broad Asia consumption story and the rise of the region’s middle class. Zhang believes this broad thematic approach – and KKR’s willingness to contribute its own capital to the cause, with a balance sheet and employee commitment of USD 1.3bn – was a compelling proposition for LPs that may draw comfort from a pan-regional strategy.

At the same time, it is important to include narrative context and trace the sectoral threads that make up a portfolio that stretches from corporate carve-outs in Australia to growth-stage rounds in China. For example, KKR received a lot of questions about the increasingly prominent role of technology in its investments, not only as a value creation tool but also as a target sector.

“A lot of what we do in the technology sector is buyouts or control investments. We have defined rules as to what gets invested by the fund, and companies are typically profitable or on track to profitability," said Zhang.

"Under the standard mandate of the Asia PE fund, we usually shy away from backing companies that haven’t proven their ability to scale or become profitable. We do also have an opportunistic bucket that backs companies in the growth equity category.”

Pictured: Markus Elgoff of KKR (left) and Alvarez & Marsal’s Xuong Liu

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• Topics
• Fundraising
• Buyout
• GPs
• Asia
• KKR
• AVCJ Awards