KKR targets Japan and Europe as next steps for private wealth business

Japan has attracted the attention of the world’s largest private equity managers with its fast-growing high-net-worth individual population.

Blackstone, Carlyle and Partners Group are all known to be targeting the North Asian country to offer wealth solutions and evergreen funds. KKR – the second-largest private equity firm globally, according to the 2024 PEI 300 ranking – is now catching up with its peers.

“As a firm, we’re very excited about Japan,” managing director and chief investment strategist for global wealth Paula Campbell Roberts told Private Equity International.

“When you look at Japan, you have a country that’s exiting from deflation, you have rates that are still pretty low and you have these opportunities around corporate carve-outs. That’s an investment area that we’re focused on and that gets attributed to all of the different vehicles, including evergreens.”

According to Capgemini’s World Wealth Report 2022, Japan was the second-largest market by HNWI population – after the US – in 2021, with 2.6 million HNWIs. The report’s 2024 edition notes that Japan’s HNWI wealth increased by 6.5 percent over the past year, higher than APAC’s own growth rate of 4.8 percent.

High life expectancy and healthy saving habits in Japan are strong tailwinds for private wealth businesses, said managing director and head of global wealth solutions Markus Egloff. “We’ve spent a lot of time [in] Australia, we’ve done quite a bit in Japan, and definitely we’ll focus much more on Japan as it’s a very sizable opportunity.”

Egloff, who joined KKR in 2021 from UBS, was based in Singapore and has recently relocated to London to boost the firm’s wealth segment in Europe. One similarity between Asia and Europe, he said, is the fragmentation in terms of culture and regulation.

“Every market has its specifications. There’s clearly an effort of the regulator there to provide a European-wide framework for alternatives. At the same time, we see many of the European countries still prefer their own structures. It’s an interesting market which we are very committed in.”

Evergreen appetite

KKR launched K-PRIME, the private equity arm of the firm’s K-Series investment strategy for wealth investors, in May 2023. The full range of private wealth products raised $2.8 billion within the last quarter and 60 percent of which were driven by K-PRIME, according to the firm’s Q2 2024 earnings results.

Speaking on the Q2 earnings call, CFO Rob Lewin noted that the K-Series has gained “real momentum”.

“We are still in the earliest of days of what we view to be a really long-term strategic focus. As a reminder, we now have vehicles across our four key investment verticals: private equity, infrastructure, real estate, as well as credit, representing over $11 billion of AUM, and that’s up from approximately $3 billion just a year ago,” he said.

Head of investor relations Craig Larson added KKR is expecting increased inflows via the wealth platforms in the coming months, calling it a “long-term secular opportunity” among individual investors.

Medium-sized institutions in particular, such as family offices, are demonstrating an increasing appetite for alternatives. Such investors, said Egloff, are going to play a significant role in the future of evergreen instruments. “If you don’t have $50 million to $100 million to deploy in private equity, it’s very hard to be diversified in private equity through vintages.

“If you’re only about 70 percent deployed, the IRR is not really what you get as a multiple at the end of the year. Whereas an evergreen vehicle is already fully deployed at the beginning of the investment phase to achieve your target allocation. If you’re a mid-size family office or a mid-size institution, it is useful in getting you close to your target allocation without over-committing.”

Egloff added that the K-Series commits investors’ money in a direct manner, allowing wealth investors to access individual deals alongside KKR’s closed-end funds, rather than in a fund of funds structure.

According to Campbell-Roberts, one selling point is diversification, whether through a geographical or sectoral focus. “We are hearing institutions are taking a liking to evergreen vehicles… because of the simplicity, ie, a lack of capital calls and simpler tax reporting and the potential to achieve higher compounded returns,” she said. “The performance potential that you can achieve actually could exceed that you would get just from a pure drawdown fund, because you’re invested day one.”

Partner education

Education continues to be a hurdle for alternatives managers hoping to expand their investor base to HNWIs. Managers have come out with various ways of engaging with wealth advisers, distributors and end-investors to ensure they understand the risks and benefits of private investments.

KKR released its education toolkit Alternatives Unlocked in early 2024, which includes a series of videos and papers that illustrate how PE investments create value over time.

“Two key priorities for us are to work closely with our wealth management partners to help demystify private markets for investors who are new to the space, and to ensure from a suitability perspective that we have true investor alignment,” said Campbell-Roberts. “We win when we are able to help individual investors find solutions to the challenges they’re facing, which is why we’ve overinvested in the education and alignment piece of the puzzle.”

Apart from assessing whether the asset class and fund structure are the right fit for investors, it is also key to ensure all investors are not treating the evergreen fund with a trading mindset. “We have to all work together on that education piece and make sure that the wealth investor is offered the same experience as an institutional investor,” said Egloff.

Given its quarterly redeemable mechanism, the performance and valuation of evergreen funds must be updated with the same frequency. For KKR, the wealth products measure performance by using part with discounted cashflow and part with traded comparables, according to Egloff.

“Our evergreen is a direct investment in deals, via investment in a vehicle, and not a fund of funds. We’re getting our valuation out within 20 business days, roughly. If you have a fund of funds, it takes you two to three quarters until all your underlying funds have reported with a quarter’s lag,” he said.

Evergreen vehicles are still in the early stages of proliferation. “We will really only see in next three to five years how have we all lived up to what we promised or how have we managed it – that’s the part which makes me nervous,” said Egloff.