Are New KKR Funds Competitive?

Chidem Kurdas

Private equity manager KKR says it will use its experience and industry relationships to make strong investment choices for the two new funds the company announced this summer.

Though widely described as mutual funds for the retail market, only one of the products – KKR Alternative High Yield – is strictly speaking a mutual fund, meaning it is open-ended, allowing redemption at any time.

The other, KKR Alternative Corporate Opportunity, is a closed-end fund, so that shares can be sold only at certain announced periods at the discretion of KKR. In other words, it is relatively illiquid. No doubt this makes sense for the strategy of investing in distressed debt and event-driven situations, which typically require longer commitment and opportunistic timing. Daily liquidity would increase the risk to the investment program.

The minimum initial investment required to buy KKR Alternative Corporate Opportunity is $25,000. The annual net expense is 1.80%, pretty steep by mutual fund standards. But then the strategy is not widely available. (The net expense includes a $1.25 management fee that the fund pays to the master vehicle that does the investing, plus other costs.)

KKR says it will take advantage of opportunities created by the European debt crisis and related changes to European economies. There aren’t many investment vehicles that can do that for individual investors and KKR arguably has a competitive advantage. If one wants the strategy, the 1.80% expense is probably worth it.

KKR Alternative High Yield is another matter. Yes, the shares have daily liquidity, but these are really long-term investments. Both funds charge a penalty of 2% for early withdrawal—defined as a month for High Yield and a year for Corporate Opportunity.

The high-yield mutual fund comes in three share classes. The one with the lowest expense is KKR class, at 1.06%. But it requires a minimum investment of $5 million. A share class with a 1.16% expense has a $100,000 minimum.

The share class that is truly for the masses, with a $2500 minimum, has a 1.31% expense. For comparison, you can get high-yield mutual funds, managed by teams that have credit expertise, at less than 1%.  So the KKR product is roughly one-third more expensive.

And buying junk bonds is not exactly a novel investment program—we’re talking about a market that is possibly forming a bubble.  KKR Alternative High Yield looks too costly for what it offers.

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2 Responses to “Are New KKR Funds Competitive?”

  1. Industry Watches Arden Experiment « HedgeFundSmarts Says:

    […] Top News and Analysis about Non-Traditional Investing « Are New KKR Funds Competitive? […]

  2. Apollo Adds to Public Lineup « HedgeFundSmarts Says:

    […] offering will be. The fund will invest in corporate loans and junk bonds, competing with similar new funds from KKR and […]

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