KKR raises $1.5 billion for first Asia-Pacific credit fund

HONG KONG (BLOOMBERG) - KKR & Co raised US$1.1 billion (S$1.5 billion) for its first credit fund focused on investments in the Asia-Pacific region, betting volatility will spark opportunities and deliver returns as high as in the mid-teens.

KKR, which globally manages US$184 billion in credits, has already earmarked a third to half of the fund, with three-quarters placed in Australia and South-east Asia, Mr Brian Dillard, head of Asia credit at the New York-based company, said in an interview. The firm and its employees contributed more than US$100 million to the fund, which is targeting low- to mid-teen returns, he said.

"During times of uncertainty and volatility, traditional capital pulls back and that is an opportunity for alternative capital," said Mr Dillard. With concerns over geopolitics, inflation and a potential US recession eroding sentiment, "we're seeing the opportunity set accelerate", he said.

KKR's fund raising spanned 20 months and more than half of the dollars raised came from Asia, with the remainder spread among other regions. Asset managers and private investment groups were among the biggest investors, with smaller contributions from public pension funds and family offices.

Ahead of raising its first fund, KKR has made 14 credit investments totalling US$2.4 billion in the Asia-Pacific since 2019. It has provided acquisition financing as well as capital for companies and financial sponsors in the environmental services, real estate, education, infrastructure and healthcare sectors.

The close of the fund comes as many private equity firms are suffering delays to finalising pools of capital with US pension funds and endowments reluctant to invest in China. US dollar-denominated funds that invest in the world's second-largest economy raised US$1.4 billion in the first quarter, the lowest amount for the same period since 2018 and a third consecutive quarter of declines, according to research firm Preqin.

The fund as of now has zero exposure to Chinese property developers, but has invested in businesses that have some links to the sector or have been lending against assets that are sources of liquidity for cash-strapped developers, Mr Dillard said. That included investing in the subordinated credit of a carpark operator that looks to acquire more such assets as liquidity-strapped real estate developers divest.

The Asia credit effort has been boosted by KKR's US$50 billion platform in the region that spans from private equity to real estate to infrastructure. About three-quarters of the opportunities are internally driven, and vast majority of the remaining situations are where the credit team accesses resources from KKR's Asian or global teams before making the investment.

The global market turmoil and rising interest rates mean KKR will stick to a conservative playbook on capital structures in loans, funding healthy and strong businesses and safeguarding its downside protection, Mr Dillard said.

Australia and South-east Asia "tend to be where we see the most opportunity" because of demand from financial sponsors and corporates, he said. The fund has also completed a few credit deals in India, China and South Korea in the past 12 months. China and India exposure are each expected to be about 5 per cent to 15 per cent, Mr Dillard said.

"It's tough to paint Asia with a broad brush," he said. "We have reopenings in South Asia and Australia, while closings have occurred in North Asia," he added.

While Asia is the world's largest credit market, and growing faster than the US and Europe, it is dominated by relatively risk-averse banks, Mr Dillard said. The region contributes to two-thirds of global growth but accounts for only 8 per cent of private credit capital. The amount of cash available for credit investments in Asia is only a quarter of the level of Europe, while it reached 150 per cent for private equity in Asia, he said.

Globally, the private equity powerhouse established its credit platform in 2004 and made its first private credit investment in the following year.