KKR’s Goal to Expand to Ordinary Investors, Roberts Says

KKR & Co. is seeking to appeal to individual investors and their advisers searching for yield as the private-equity firm diversifies beyond wealthy and institutional funders.

Most of KKR’s money traditionally has come from large pension funds and investors around the world while individuals haven’t had access to the company’s alternative investments, George Roberts, who runs the New York-based firm with cousin Henry Kravis, said yesterday at a conference in Chicago held by the brokerage firm Charles Schwab Corp.

“That’s really what our long-term goal is,” Roberts said to an audience of investment advisers. “To be able to meet the demands and needs that you have.”

KKR, like larger rival Blackstone Group LP, has sought new ways to make money as buyout funds have decreased in size and deal-making has subsided after a boom in the prior decade. The New York-based firm is starting two debt funds for ordinary investors and making them available through Schwab. Private-equity firms traditionally have gathered assets from wealthy families and institutions such as pensions and endowments.

“For people who have a quest for some kind of return on their capital, you have to look at these alternatives,” Roberts said.

Individual investors and their advisers should consider moving more money toward “the spicy credit” such as high-yield debt and distressed companies, which KKR’s two new funds invest in, said Scott Nuttall, the firm’s global head of capital and asset management. Nuttall and Roberts discussed the fund industry, capital markets and tax policy with Charles R. Schwab, chairman and founder of the San Francisco-based brokerage firm bearing his name.

Tax Questions

Uncertainty over whether federal tax rates on income, capital gains and dividends will change is keeping investors from investing in riskier assets such as stocks, Roberts said. U.S. stocks fell yesterday amid concern over the budget debate in Washington, sending the Dow Jones Industrial Average to its lowest level since June.

If Congress doesn’t act by the end of 2012, $607 billion in automatic spending cuts and tax increases are scheduled to take effect starting in January. Taxes on ordinary income, capital gains, dividends and estates will increase, pushing the top tax rate to 39.6 percent from 35 percent.

Lowering the corporate tax rate and simplifying the Internal Revenue Code would help the economy, Roberts said. “It would be good to look at everything in the tax code,” to make it simpler and fairer, he said.

Some lawmakers have pushed to alter the way profits received by private-equity managers, known as carried interest, are taxed. Currently, carried interest is considered a capital gain. Long-term capital gains are taxed at a top rate of 15 percent, lower than levies on ordinary income such as wages.

Investment Cutbacks

KKR, whose 1989 takeover of RJR Nabisco catapulted it into the top ranks of the private-equity industry, is trying to wrap up capital raising for its North America XI Fund, gathering about $6.2 billion since 2011 of a targeted $8 billion, according to the firm’s Oct. 26 quarterly earnings statement.

Investors such as public pension funds and wealthy families have cut allocations to private equity since the 2008 financial crisis.

A study released Oct. 18 by the Wharton Global Family Alliance, a unit of the University of Pennsylvania’s Wharton School, found that so-called single-family offices cut their average outlay for private equity funds to 9 percent in 2011 from 11 percent two years prior because of declining returns, lock-up periods and high fees. The firms, which generally manage the financial affairs of one family with at least $100 million, shifted capital instead toward direct investments in private companies and real estate.

New Funds

The two funds that KKR will offer through Schwab invest in high-yield debt and distressed companies. The Alternative High Yield Fund, which opened to investors this week, has a $2,500 minimum investment and is structured as a mutual fund. The Alternative Corporate Opportunities Fund is a closed-end fund with a minimum investment of $25,000 that will start accepting money in January. That’s compared with the millions of dollars and 10-year lock-up periods usually required from wealthy investors in private-equity funds.

KKR has invested in total more than $125 million of the firm’s cash into the two funds, according to Kristi Huller, a spokeswoman for the firm.

Roberts and Nuttall spoke at this week’s Impact Conference, which has at least 4,600 people registered, including more than 1,600 investment advisers.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE