Capital Markets Adviser: KKR Capital Markets

IFR Awards 2023
8 min read
Steve Slater

Balancing act

Trickier times required more sophisticated advice for issuers looking to tap the market. Increasingly those needing to do more bespoke deals are turning to KKR’s capital markets advisory business for expertise. For carrying out such mandates in 2023's stormier waters, KKR Capital Markets is IFR’s Capital Markets Adviser of the Year.

Volatile financial markets and unpredictable funding conditions deterred much capital markets activity in 2023 and those who braved the rough seas often needed different options from what had worked for the previous decade.

Private equity giant KKR opted against a public block sale for US mobile technology firm AppLovin and placed US$700m in a pair of discreet equity sales, for example, while heating and ventilation firm Apex Service Partners and audiobook publisher RBMedia turned to private credit to help finance a continuation fund and the sale of the business, respectively.

It may be little surprise that KKR Capital Markets worked on the first of those deals for its parent, but it was also on the other two. Each deal showcased KCM’s ability to come up with flexible solutions and tap private credit and syndicated markets simultaneously, while also leveraging its own balance sheet, which few other capital markets advisers could match.

That increased as private credit rose in importance when dislocated syndicated markets and a reluctance of banks to commit to large-scale LBO financings saw KCM look for alternatives throughout the year.

“Continued disruption and uncertainty in the markets created complexity to finance transactions, and there was a growing use of private credit to facilitate M&A,” said Adam Smith, global co-head of credit and markets for KCM.

“This was a year … that meant being flexible in how you approached transactions and not anchoring yourself around any traditional way of doing things.”

In regard to the RBMedia deal, where KCM provided financing to HIG Capital after it bought the business in July, Smith said: “We were able to put all those pieces together to facilitate a very valuable exit transaction, and the combination of both traditional bank syndicated underwriting with private credit as an alternative really facilitated and optimised that execution.”

In addition to the Apex and RBMedia deals, KCM also helped to distribute private credit deals for the likes of Circor, Accuris and Groundworks.

Owner mentality

KCM was launched in 2006 as a financing arm for KKR's portfolio of companies and it has evolved into a capital markets platform which also funds deals for rivals. There are obvious pros and cons to that: its parent was the biggest sponsor fee payer across Wall Street in 2023 and KCM knows better than anyone what a private equity owner wants; but it needs to convince outside companies to choose it from a competitive field.

Third-party business has grown to about half of KCM’s business and although it slipped below that mark during 2023's downturn, there were a raft of standout deals for KKR portfolio companies and outside sponsors and corporates, many using the firm’s growing suite of products.

“We have constructed this business to be able to transact on behalf of KKR and our third-party sponsor partners in good markets, bad markets and in-between markets,” said Cade Thompson, head of US DCM and co-head of the US credit solutions group.

“When we work with our third-party sponsor set we bring that same mentality – as if they are a part of the KKR suite of companies. We think that experience is a very tangible and different experience than working with a traditional intermediary,” Thompson said.

Take the US$2.8bn of financing in October for Apex, owned by Alpine Investments. Alpine wanted to keep the asset for longer and so moved to a continuation fund structure and used a mix of financing that involved a US$150m revolving credit facility, US$1.9bn first-lien term loan, a US$450m delayed draw term loan as well as putting US$300m of preferred equity in the mix.

Other standout deals for third parties included transactions for Norwegian online learning platform Kahoot, UK property website Zoopla, cloud business provider Cegid and industrials maintenance firm Rubix.

Deals for KKR-owned companies included those for Simon & Schuster, Upfield and Optiv.

Often such deals involved KCM stepping in to take advantage of market windows to refinance or extend the tenor of debt for KKR portfolio companies with near-term maturities. Such was the case in April with a US$4.2bn first-lien term loan for Internet Brands, and for Heartland Dental in May to extend US$1.3bn of loans to 2028 from 2025, followed by a US$350m add-on loan in August and US$165m of add-on senior secured notes a month later.

There was a complex US$3.4bn refinancing package for US veterinary practice PetVet Care Centers which involved private placements and syndicated loans across its capital structure.

“This was a really good example of the key trends in the market. We really saw the convergence between the private credit and the syndicated markets,” said Amanda Taitz, a principal at KCM.

That also showed how deals for the parent can showcase KCM’s ability: the deal for Apex used a similar structure and components to PetVet.

“Oftentimes in these types of scenarios, given the power and the breadth of our portfolio and our platform, we're able to turn around and provide multiple examples where we've just done this on behalf of KKR private equity and it's validation as to why we're recommending it to someone else,” Thompson said.

KCM’s work for its parent accounted for about 60% of its business last year, up from around half in the previous two years, but that was no great surprise given the market environment. KKR paid US$787m in advisory fees to all firms in 2023, more than any other private equity firm, according to LSEG data.

In November, KKR reported its fees from capital markets deals in the first nine months of 2023 were US$353m, down 23% from the year before, and well down from the US$840m in the full-year boom of 2021.

Its finance chief Rob Lewin told analysts the KCM team had done “a great job” in protecting revenue in a tough market.

“We are doing more things today as a firm than we did in 2021. And I think we’ve got an opportunity to take greater share with the third-party component of our capital markets franchise,” Lewin said.

He said in a normalised environment quarterly revenue of US$200m was achievable.

“But to us, that’s not the top end. We’re building out a platform that we think over time can have real growth off that number. It’s a part of our business that we feel really good about,” Lewin said. “The experience of the past 21 months relative to what it could have been or what it would have been in past cycles ... really speaks to what our team has built over the past 10-plus years.”

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