By Hedge Fund Insight staff
KKR is in the process of acquiring European credit manager Avoca. During the Fourth Quarter 2013 Earnings Conference Call Scott Nuttall, the Global Head of Capital & Asset Management at KKR & Co LP, talked enthusiastically about the business prospects of Avoca within the KKR framework.
Nuttall said that Avoca has $8.4 billion or so of credit assets in Europe. Prior to closing the Avoca transaction, KKR already manage $3 billion or so of credit assets. So pro forma, the combination will probably be somewhere between $11 billion and $12 billion in terms of assets under management focused on European credit.
In response to an analyst’s question Scott Nuttall addressed how the fees of Avoca compared to those of the existing businesses of KKR. “If you look at the average fee rate for Avoca given its focus predominantly on liquid credit CLO’s, plus some hedge fund assets, their fee rate on a blended basis has been increasing over the course of last couple of years. But relative to the embedded fee rate across the whole of KKR, it’s going to be lower on average because CLO’s tend to be a 50 basis point kind of business. And in terms of margins, it’s going to be reasonably consistent with the business we have today.
Scott Nuttall of KKR
“We continue to see a very exciting opportunity in European credit over the course of the next several years, ” he said . “We’ve increased our headcount pro forma for the Avoca deal from 11 to the better part of 80 people focused on the European opportunity set, in addition to leveraging our private markets colleagues. So we’re excited about the opportunity.
“On fund-raising there are a couple of points. One, you have the legacy Avoca businesses around European leveraged loans, the CLO format (and separate account format potential), and commingled fund format, and so we will continue to see growth in those businesses. Avoca also has a Europe focused credit long/short hedge fund which will also be a focus for fundraising from here on, and we see opportunities to scale what they’re doing before making them part of the KKR infrastructure.
“Another exciting opportunity that we see is to marry the more liquid Avoca capabilities with our illiquid capabilities in Europe. Today our team in Europe is focused on special sits and mezzanine and starting to focus on direct lending, and by adding Avoca to the platform in Europe, we are able to have a footprint that looks like our footprint in the US where we have liquid and illiquid teams sitting side-by-side and teams working on both.
“Avoca is currently tracking 1300 European credits in its database, and we’re already starting to capture some synergy and idea sharing and approaching companies together that may be in need of help. A liquid opportunity company that gets into a little bit of trouble can turn into an illiquid special situation investment opportunity [KKR has a deep special sits capability]. Now we’re able to create that bridge where we couldn’t before.
“What that means in terms of fund-raising is that there’s an opportunity for us to raise private credit funds focused on Europe, special sits, mezzanine, direct lending, and we’re seeing potential opportunities across all those funds. And parenthetically, I would say institutional investors are quite interested in the opportunity set as they see how much incremental return we are able to get to do private lending in Europe as the banks are pulling back. So the Avoca transaction for us is highly strategic and gives us a bigger footprint and more capabilities at a time where we think there is going to be a very interesting period for investment the next several years there.
“But if you look even at the deployment we have, the gross deployment we had in our originated credit strategies last year was $4.2 billion, up 2.5 times from the prior year. And that is frankly without Europe yet firing on all cylinders, I think Avoca will take those numbers up meaningfully, so we’re excited about it, ” he concluded.
The above text has been lightly edited from the transcript of KKR’s the Fourth Quarter 2013 Earnings Conference Call. You can read the original transcript in its entirety on the KKR website (here).