Shaking up sponsors
A capital markets team that was set up 16 years ago by a private equity firm to handle its own deals has evolved to win acceptance and mandates from a slew of rivals. For continuing to shake up the industry and driving finance in a tough 2022, KKR Capital Markets is IFR’s Adviser for Financial Sponsors.
It may seem odd to pick the arm of a private equity firm as the best adviser for financial sponsors. It was set up to handle deals for the parent company and is always likely to have that business to keep it busy. But KKR Capital Markets is disrupting the financial sponsors landscape way beyond the offices of its parent in Manhattan.
It raised US$160bn in debt and equity financing last year, up from US$65bn in 2016, and more than half was for non-KKR companies, including the likes of Bain Capital, Permira, Silver Lake and Goldman Sachs.
While that shows KCM has won the confidence of some fierce rivals to execute deals for them, its approach is also validated by how it has unsettled bulge-bracket banks that value sponsors as some of their best clients. Further validation is that other big private equity firms have set up similar operations. All those trends have been underway for several years, but were more apparent during a tougher year for sponsors in 2022.
“When we really set out to build out that third-party business in earnest, there was a lot to overcome,” said Adam Smith, global co-head of credit and markets for KCM in New York. “We’ve been able to achieve that and we haven’t just achieved it on a one-off basis. We’ve achieved it on a very comprehensive and broad basis. Other sponsors engage us, mandate us and trust us, even if KKR is a competitor.”
2022 was a testing year across the industry after the boom of 2020 and 2021, however. Russia’s invasion of Ukraine and higher interest rates and inflation created a cautious mood. Sponsors put potential IPO exits and portfolio company sales on ice, and financing for purchases became more costly and scarce. Global fees from financial sponsors totalled US$13bn in 2022, down 38% from the record level of 2021, Refinitiv estimated.
The good news was that private equity firms still had an estimated US$3.4trn of dry powder, so they were not fully hibernating. But the challenging market conditions meant advisers often had to move quickly and use more innovative financing structures.
They were features of KCM’s roster of work in 2022, including on an US$800m refinancing deal for Charlesbank-owned Polyconcept, a US$590m LBO financing for Trilantic-owned Addison Group, and a €715m debt financing package for Norgine after it was bought by Goldman Sachs Asset Management.
KCM also handled some groundbreaking bigger deals for KKR (getting best execution and timing right is not always easy when it’s for the boss), such as a €3.9bn financing for Refresco after KKR bought the world’s biggest independent beverage bottler in February. That multicurrency, cross-border deal was pulled forward by about a month as markets were deteriorating, but got away well.
Perhaps most telling was that KCM continued to expand in 2022, when many banks were pulling in their horns. Its headcount increased to 74 people, up a net 20 (or 37%) from a year earlier and up from 40 people in 2016. It hired in debt capital markets, notably in Europe and Asia; built out a team in structured and real estate capital markets; and continued the expansion of its equity platform with 10 hires across public and private equities. It created a ratings advisory unit led by Craig Fitt, the former head of ratings advisory at UBS.
And in August KKR announced an alliance with Loop Capital Markets under which the Chicago-based investment bank will offer research and investment banking capabilities. Loop Capital, which boasts diversity and inclusion credentials, has worked on 15 KKR capital markets deals since 2011 so the two firms know each other well, and for KCM the deal should expand its ECM capabilities and make it a full-service underwriter for IPOs, a key ingredient of work for sponsor clients.
“On steroids”
KCM was launched in 2006 as a financing arm for KKR's portfolio of companies and it has evolved into a capital markets platform that also funds deals for rivals. Many of its staff joined from Goldman, Citigroup, UBS and the big banks.
Some 90%–95% of its revenues are from financial sponsors and having KKR behind it provides a lot of benefits, but also complications.
“We've been on this journey for 16 years as a firm … and we've been able to convert people that used to think of themselves as competitors of KKR to clients of KKR. People who used to go to banks for financing are now looking to KKR to provide financing,” said Smith. “Who better to finance sponsors than another sponsor?”
Cade Thompson, head of US DCM and co-head of the US credit solutions group, said after centralising KKR’s knowledge and power in KCM from the start, it ramped up the push to win third-party business from about 2015.
“We said, 'look, we've been working on behalf of KKR as one of the largest global sponsors that's out there, we think we're doing a pretty good job and we think all of this is very relevant and transferable to non-KKR sponsors',” Thompson said.
Unsurprisingly, rival firms took time to be convinced they could trust KCM. After all, they would regularly be in opposition to KKR on deals.
A person at another major private equity firm said he had increasingly worked with the KCM team in recent years. He said KCM had an impressive team across debt and equity capital markets and having worked on so many transactions for KKR it can offer a different perspective or insight on a deal.
“They've earned the trust slowly because it's not easy for someone at another PE firm to call KKR to be their banker. That's a strange bedfellow,” he said.
Thompson said KCM put compliance and firewalls “on steroids” to reassure clients. “If we betray that or we violate that then we're out of business,” he said.
KCM has more than 150 sponsor relationships and said it has significant repeat business. About 70% of global DCM proceeds were for third-party clients last year, and in the US more than 75% of proceeds were for non-KKR clients. 2022 was the first year more than 50% of proceeds in Europe came from third-party clients.
KCM is also aware where to fight. It does not provide M&A advice – that could raise too many conflict of interest risks, given KKR may be in the fight too.
Breakout
The firm regarded 2021 as a breakout year and that continued in 2022 despite the downdraft across the industry.
A core strength is it can offer a range of options: providing 100% of financing from KKR credit funds; a hybrid where KKR provides some credit and the rest is syndicated; and a 100% agency solution where KCM arranges, structures and distributes.
KKR brings a US$200bn credit fund business and adds another 200 people in credit investing who can be used. KCM can also use structures that have already been shown to work for KKR.
Refresco was a standout deal in 2022 and typified the need to move quickly. So too a deal in March for CyrusOne, a US data centre operator bought by KKR and GIP for US$15bn. KCM structured a hybrid US$11.5bn financing package that combined real estate financing, structured financing and leveraged financing and executed the deal within five weeks. In November, KCM developed and executed an innovative securitisation package for US fibre-optic network provider MetroNet, a firm KKR has a minority stake in.
The financing package for Norgine in May used a unitranche facility, while the refinancing deal for Polyconcept used support from KKR funds when it needed to be accelerated as markets deteriorated.
KCM’s rise is part of a shifting landscape, and other private equity firms now have capital markets teams, including Apollo, Blackstone and TPG Capital. Meanwhile Goldman Sachs and other banks have big credit funds that are involved in their deals.
One banker at another firm said there was “a fascinating competitive dynamic” that had ruffled big banks, which often had deep and long-lasting relationships with private equity clients. “All of a sudden that relationship is very different,” he said.
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