Exit strategy: Good timing

Few industry participants would be surprised if – macroeconomic conditions permitting – KKR returned to the market at some point in 2020 and sought to sail past $10 billion with its fourth pan-Asian fund. This has been pushed to front of mind by a couple of recent early exits from Fund III.

Explicitly tying exits to future fundraising activity is tricky. Most GPs can offer compelling arguments for the timing of an exit – why they are taking 3x today rather than waiting for a potential 4x 18 months down the line – and KKR is no exception.

In the case of KCF Technologies, for example, expansion was much faster than anticipated as rising electric vehicle usage stimulated demand for lithium-ion batteries, which translated into more orders for component manufacturers. KKR had already pumped $180 million into the business and turned to the public markets for more. SK Group initially showed interest as a minority pre-IPO investor, but then decided to buy the whole thing. This led to a $1 billion trade sale.

The other exit is a $2.2 billion sale of Kokusai Electric, a semiconductor-focused thin film manufacturer based in Japan. Much like KCF, it was the smaller part of a larger deal. KKR took 100% of these assets and is working with financial and strategic partners on the larger portions. 

The notion of securing exits for the sake of smooth fundraise does not sit easily with some industry participants. They say that those who harvest now rather than waiting until the crop is highest risk a barrage of complaints from existing LPs that believe the GP is acting contrary to their interests, while prospective investors might see such activity as a cynical ploy and put their money elsewhere.

The reality is many LPs see it as an ingrained aspect of fund management. Indeed, some are hesitant about re-upping in managers when the previous fund has so far delivered zero returns because they could be doubling their exposure to an individual firm (although a fund-of-funds would have a very different take on this to an endowment or foundation). Placement agents routinely advise GP clients to hold off on fundraising if an exit is imminent but not yet certain. 

There are also numerous stories of fundraises that have been hindered by a lack of exits or helped by timely realizations. Pacific Equity Partners (PEP) launched its fifth fund in 2013 when the predecessor vehicle was unharvested, having taken a battering during the global financial crisis. The fundraising process, which took about two years, was characterized by a slow start and a fast finish. Once Fund IV began to deliver, LPs were much more willing to commit.

The Australian GP took about five months to achieve a first close of around A$2 billion ($1.4 billion) on its sixth flagship vehicle in May against a target of A$2.5 billion. PEP’s launch came after Fund V had made several realizations, through exits and dividend recaps.

Among the pan-regional players, Bain Capital started raising its fourth fund about six months after completing the sale of Korean specialist cosmetics supplier Carver Korea. The holding period was 14 months, yet the exit multiple is said to have been around 6x. Fund IV took five months to close at the hard cap of $4 billion – with employees contributing another $650 million – in December 2018.

Moreover, KKR’s last fundraising process was likely in part facilitated by the performance of the predecessor vehicle. The firm launched Fund III in November 2016 with a target of $7 billion and then set a hard cap of $8.5 billion after reaching a first close of nearly $6 billion within four months. Around that time, the IRR on Fund II was superior to Fund I and the multiple wasn’t far behind. 

Japan was hot, KKR had recently generated a partial exit from Panasonic Healthcare that implied the business had doubled in value in less than three years, and there was momentum behind the theory that big buyout was the best way to play Asia. The fund closed at $9.3 billion in March 2017. 

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• GPs
• LPs
• Exits
• Fundraising
• KKR
• Pacific Equity Partners
• Bain Capital Asia