NEW YORK (Reuters) - Buyout mega-firms continue to pour into the debt markets.
New York buyout firm KKR & Co. LP (KKR.N) is redoubling its efforts in the credit business. Erik Falk, co-head of leveraged credit operations at KKR Asset Management, said the firm is planning a major senior lending initiative for 2012, following the close in October of a $1 billion mezzanine fund, its first such pool.
Meantime, CVC Capital Partners CVC.UL announced a deal this month with asset manager Resource America Inc REXI.O to form a $7.5 billion-asset credit business by combining two of their existing lending operations. That follows news in December that Apollo Global Management LLC (APO.N) planned to buy credit investor Stone Tower Capital LLC, while in November The Carlyle Group acquired leveraged lender Churchill Financial Group LLC from Stamford, Conn.-based buyout firm Olympus Partners.
KKR would not discuss fundraising plans or the exact form that a senior lending facility would take, but Falk said the firm wants to expand KKR Asset Management to take advantage of opportunities in the upper middle market.
KKR, which manages some $15 billion through KAM, including the publicly traded lending partnership KKR Financial Holdings LLC KFN.N, plans to take an integrated approach to diligence and deal-making as it expands in leveraged credit.
“Ultimately we’re cash flow lenders,” Falk said. The firm targets the higher end of the mid-market, focusing on companies with $25 million or more of EBITDA. The firm also approaches the market opportunistically.
“In August and September, many of the best actionable credit opportunities in the U.S. were in distressed and stressed debt. By the end of October, there were relatively few interesting opportunities in the U.S. in distressed and stressed debt, but there were very interesting opportunities in directly originated mezzanine and direct senior loans in the U.S. and Europe,” Falk said. “Being able to navigate around and take advantage of the volatility is critical.”
Opportunities in the credit markets have grown for multi-strategy money managers because other lenders that were active in leveraged deals before the financial crisis have retreated from the space, either because of strategy shifts or regulatory pressure.
Commercial banks, for instance, face new capital constraints in the wake of the crisis and limits from the international Basel III regulations and the Dodd-Frank financial reform law in the United States. Investment banks, which invested in leveraged loans through their proprietary trading desks, are likewise limited by Dodd-Frank and the Volcker Rule. And hedge funds, which invested opportunistically when the loan market was hot, have retrenched as a result of investor pushback against “mandate drift.”
KKR has had years of experience in lending strategies. The firm launched KKR Asset Management in 2004 to invest in secured credit, bank loans and high yield securities and alternative assets such as mezzanine financing, distressed investing and structured finance, according to the firm’s Website.
Likewise, CVC established CVC Cordatus Group in 2006 to focus on sub-investment grade debt in Europe. In the deal announced at the first of the year, the firm said it would combine that business with Resource America’s Apidos Capital Management to form CVC Credit Partners, which will manage $7.5 billion of credit assets across 21 vehicles in the United States and Europe.
Marc Boughton, a managing partner, will lead CVC Credit Partners, the firm said in its announcement. Gretchen Bergstresser and Jonathan Bowers will be senior portfolio managers and Chris Allen will be group COO. Jonathan Cohen, CEO of Resource America, will be chairman. Resource America will retain a 33 percent interest in the combined operation.