- KKR announced North American fund close Monday
- High priced environment, uncertain political environment poses challenges
- “We don’t have 100 percent visibility” into how tax policies could change, Navab says
High prices and an uncertain political environment could pose challenges for Kohlberg Kravis Roberts & Co as it sets to work deploying its new $13.9 billion North American buyout fund, its largest since its $17.6 billion 2006 flagship offering.
The firm announced the final close of KKR Americas Fund XII on March 6.
“The reality is it’s a very highly valued equity market right now, so there are no bargains. You have to be quite selective in terms of where you invest and where you lean into,” Head of Americas Private Equity Alex Navab told Buyouts in an interview.
Purchase-price multiples for North American buyout deals hovered around 10x EBITDA in 2016, according to consultant TorreyCove Capital Partners’ annual private equity outlook. While Navab sees opportunities in areas like specialty retail and healthcare — KKR was reportedly among the bidders for USI Insurance Services — “we have to think about it very carefully,” he said.
The challenges associated with a high-priced environment for leveraged-buyout assets is coupled with the tumultuous early days of President Donald Trump’s administration. The political environment has yielded conflicting, occasionally confusing, policy proposals that could profoundly change the way PE firms and their portfolio companies operate.
“Today, we don’t have 100 percent visibility in terms of what reforms or policies are going to look like,” Navab said, adding that it’s tough to gauge timing, or the likelihood of success, for some of Trump’s policy proposals. “We’re going to have to sort of live with some uncertainty and lack of clarity in things that could be fairly dynamic.”
For example, congressional Republicans and the White House have yet to coalesce around a plan to repeal and replace the Affordable Care Act, popularly known as Obamacare. The success or failure of such a plan would likely change the investment outlook for a variety of healthcare and insurance assets.
Furthermore, House Speaker Paul Ryan’s ambitions for comprehensive tax reform could change the way carried interest is taxed, or portfolio-company interest payments are deducted. In retail, proposals for a border adjustment tax — which could increase supply-chain costs — could change the long-term outlook for certain retailers and their respective employees.
“There’s uncertainty on what exactly that looks like,” Navab said of the proposed border adjustment tax. “It could also have some big impacts on certain industries. Retail’s a good example. They could be hit pretty hard if all else stays the same.”
KKR’s newest fund provides the firm with a large pool of capital, no matter the dislocations created by policymakers. Citing Preqin data, the firm said KKR Americas XII Fund is the largest active Americas-focused PE fund.
KKR pledged $1.4 billion in capital to invest alongside its investors in Fund XII, representing roughly 10 percent of the fund. As a percentage of capital, KKR’s commitment to Fund XII is among the largest it’s made to its active investment vehicles, according to SEC filings.
Some 90 percent of the $12.5 billion KKR raised from limited partners came from existing investors. High-net worth individuals, endowments and foundations represented the bulk of the new LP relationships established with Fund XII, the firm told Buyouts in an email.
“The high performing funds, we’ve seen — not just ourselves — have been able to raise large dollar [funds] reasonably quickly,” Navab said in the interview. “Thankfully, we find ourselves in that category.”
KKR’s previous North America fund was netting a 1.44x and 18 percent IRR as of June 30, Oregon Public Employees’ Retirement Fund documents show. As of year-end, that fund was fully deployed and grossing 24 percent IRR and 1.5x multiple, the firm said in a statement.
KKR was founded in 1976 by cousins Henry Kravis and George Roberts, along with Jerome Kohlberg. The firm’s private markets portfolio, which includes its private equity holdings, had $73.8 billion under management at year end.
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Photo of Alex Navab courtesy of KKR.