(Corrects paragraph 7 to say 'KKR and its investment staff,'
not 'KKR investment staff'; also corrects the registering party
in paragraph 15 to 'an investment firm,' from 'KKR')
By Greg Roumeliotis
NEW YORK, June 1 KKR & Co LP said on
Sunday it had decided to terminate a hedge fund that invested in
stocks which the private equity firm had launched in 2011 after
poaching a team of proprietary traders from investment bank
Goldman Sachs Group Inc.
The move shows some of the challenges that alternative asset
managers still face in capitalizing on the retrenchment of banks
from some investment activities that regulators and lawmakers
cracked down on in the aftermath of the 2008 financial crisis.
In 2010, KKR co-founders Henry Kravis and George Roberts had
described the hiring of nine members of Goldman Sachs'
proprietary trading group, led by Bob Howard, as an ideal fit
with their objective of strengthening KKR's product offering.
The co-ordinated exodus of an entire team from Goldman Sachs
remains to this day one of the most striking examples of the
impact of the "Volcker rule," which limits the extent to which
banks can bet on some investments with their own capital.
Attributing the latest move to a lack of scale and a focus
on other hedge fund products, a KKR spokeswoman said the New
York-based firm had decided to close its KKR Equity Strategies
fund and return its capital to investors, confirming an earlier
report in the Wall Street Journal.
As a result, the former Goldman Sachs traders will be part
of about a dozen people to leave KKR, according to a person
familiar with the matter and not authorized to discuss such
details publicly. Howard will now serve as senior adviser to
KKR, the person added.
Launched in August 2011, the KKR Equity Strategies fund had
$510 million in assets as of the start of May, $337 million of
which came from external investors and the rest from KKR and its
investment staff. The fund had less than 20 external investors.
Since inception, KKR Equity Strategies has reported an
annualized return of around 5 percent, according to the source.
The fund's liquidation leaves KKR with two other hedge funds
that focus on credit investment and manage about $800 million in
total. Prisma, a fund-of-hedge funds manager that KKR acquired
in 2012, now has more than $10 billion in assets.
KKR also has a strategy of buying stakes in other hedge
funds managers. Its first such deal came in 2013 with its
acquisition of a 24.9 percent stake in Nephila, which makes
natural catastrophe and weather risk-related investments.
"We believe the move reflects two key thrusts. First,
management continues to migrate toward solutions, hedge fund
stakes and hedge seedings to drive distributions... Second, we
believe KES was not generating strong enough return on equity,
particularly given the pro forma size of the balance sheet,"
Citigroup Inc analyst William Katz wrote in a note on Sunday.
The move should not adversely impact KKR's fee-related
earnings and will free up some capital to get redeployed, Katz
KKR had $102.3 billion in assets under management as of the
end of March, $60.5 billion of which was in private funds such
as private equity and real estate, and about $30 billion in
The firm suffered another blow to its expansion plans in
February when it disclosed it would liquidate two funds
targeting individual, rather than institutional, investors.
An investment firm that has partnered with KKR has since
then registered a new fund with the U.S. Securities and Exchange
Commission that would allow accredited investors to invest as
little as $10,000 in KKR's core business of buying and selling
(Reporting by Greg Roumeliotis in New York; Editing by