Buyout Giant KKR Plans $1B Fund For Mezzanine Debt

Kohlberg Kravis Roberts & Co. is more than halfway to its $1 billion target on a fund dedicated to mezzanine investing, according to a regulatory filing.

Although the New York buyout giant has long had a debt-investing strategy—it has, for example, a publicly traded subsidiary, KKR Financial Holdings LLC, founded in 2004, that invests primarily in corporate debt through a collateralized loan obligation structure—the new fund, KKR Mezzanine Partners I LP, appears to be the firm’s first foray using a vehicle devoted exclusively to mezzanine finance.

The fund has raised $575 million, according to the filing. A spokeswoman declined to comment on the fund. Firms typically decline to comment on fundraising, citing regulatory limitations on marketing and publicity.

Mezzanine finance can be attractive to investors in a growing economy, because the subordinated debt typically pays higher returns than senior loans due to its lower position in the capital structure. Investors can rely on economic growth to reduce the risk of default.

But in today’s interest rate environment, with historically low rates causing money to rush into markets that offer the prospect of higher yield, mezzanine finance has been under pressure. Data from Standard & Poor’s Leveraged Commentary and Data show mezz to have been all but squeezed out of the market in the first quarter, because of the easy availability of less expensive senior debt instruments.

Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.