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KKR renegotiated terms with institutional backers to enable it to hand wealthy individuals a bigger cut of its private equity deals, in a sign of how a flood of new money is upending the sector’s traditional dynamics.
The US private capital group triggered concern among some of its investors by asking for the ability to dilute their equity in deals so that KKR’s new vehicles for wealthy individuals could have a bigger share, according to people familiar with the matter.
KKR renegotiated the terms as it and other top buyout groups look for ways to deploy the increasing amounts of cash they are raising from individuals.
Institutional investors such as university endowments and pension funds have historically been the sector’s prized customers, but the growth of individuals as a new source of capital for private equity groups risks undermining their standing and leading to worse investment terms.
The trend is likely to intensify as money from American retirees washes into the private capital sector, following an executive order from US President Donald Trump on Thursday that opened up the $9tn retirement market to alternative investments.
KKR had for about 15 years contractually agreed with investors in its closed-end private equity funds — the traditional type of buyout vehicle that has a limited lifespan — that other KKR-affiliated vehicles could take up to 7.5 per cent of the equity in any deal.
Such vehicles included those holding the capital of the firm’s own employees. The fund had first refusal for the rest.
But in 2023, KKR launched two evergreen private equity funds as part of its “K-Series”, aimed primarily at wealthy individuals. Unlike traditional buyout funds, these vehicles have no end date and offer investors the chance to commit and withdraw their money at regular intervals.
The perpetual vehicles are designed to mostly invest alongside KKR’s traditional funds in deals and were able to start doing so immediately by using the existing 7.5 per cent carve-out.
When it launched the K-Series funds, the vast amounts of money flowing into evergreen vehicles prompted KKR to return to the backers of a recently closed buyout fund — its European Fund VI — to ask for a bigger carve-out.
The firm has also been asking for higher caps in contracts when fundraising for more recent closed-end funds, such as its 14th North American flagship, the people said.
KKR had in some cases asked for about 20 per cent instead of the historic 7.5 per cent, intended specifically to accommodate the evergreen funds, they added.
As of last month, KKR’s evergreen private equity vehicles had raised almost $12bn. Unlike in closed-end funds, investors deposit their commitments in evergreen funds as cash, creating pressure for dealmakers to deploy it quickly to avoid a drag on returns.
A person familiar with KKR said the fact that agreements had been reached with investors, including on the renegotiated terms for European Fund VI, suggested most institutional investors were not unhappy.
They also said that while the closed-end private equity funds had historically had the “first bite” at 92.5 per cent of deal equity, they often did not take it all.
This was because the large size of KKR’s deals meant co-investors — the fund investors being given the option to invest directly in the portfolio company alongside the fund — or other private equity firms were often needed to meet the full equity ticket.
As interest rates rose, the firm had also been using more equity relative to debt in deals, the person said, meaning the capital available from the K-Series could prove an advantage in bidding processes. They added that in the past 12 months, the equity portions taken in deals by KKR’s closed-end flagship private equity funds were on a par with historical averages.
KKR declined to comment.
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