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Ascendant
the fall off
Last week, Buyouts Insider reported that KKR was turning away LPs eager to invest in an oversubscribed Ascendant Fund.
The fund had a $4.6B hard cap which it hit recently, after crossing $4.1B in June.
Ascendant is not a typical KKR buyout fund; in fact, it’s KKR’s first middle market buyout fund ever…
For context:
The last KKR flagship buyout fund was KKR North American Fund XIV, a $19B vehicle
Their current flagship buyout fund that launched in June is reportedly targeting $20B
So why is one of America’s most famous PE firms raising a middle market fund?
Let’s do the diligence
back to basics
The last time KKR raised a buyout fund close to this small was in 1996, when they closed on a $6B vehicle.
KKR’s influence transcends the realm of private equity, now boasting $550B+ AUM. The firm is an institutional asset manager by any standard.
The business model for a manager of that size involves relying on management fees rather than optimizing performance. ie 2% of 500B is 10B a year in cash. Obviously an oversimplified example, but it shows how AUM growth warps incentives
Middle market private equity, on the other hand, is known for its stellar performance when done right
Top performers across private equity are almost exclusively MM shops:
Monomoy Capital Partners: Fund IV generated 46% IRR as of Q1 2024. Ranked by Pitchbook as the top buyout shop with a 90.1 performance score ($5B AUM)
Clarion Investors: recognized as performing near the very top of a prominent list of global private equity firms generating the best returns between 2010 and 2019 ($2B AUM)
Hudson Ferry Capital Partners: on its third vintage fund, ranked third on Pitchbook’s buyout fund families with a score of 75.8 ($300M AUM)
monomoy and clarion
The dialogue around middle market managers has never been this positive. LPs are taking notice and MM PE fundraising is on track for its best year yet.
Pitchbook’s Q1 2024 US Middle Market Report notes that
In Q1 this year, middle-market fundraising accounted for 55.8% of the total number of US buyout funds closed, an increase from 43.7% last year
90% of middle market funds achieved a step-up (highest rate ever)
While this is great for managers playing in that field, it still does not explain why KKR is hustling backwards
kkr
The answer to why KKR is moving downstream: growth.
The firm is approaching a limit on flagship buyout fund size, as the current $20B fund being raised is practically the same as the $19B one raised a few years ago.
KKR already has a wide range of other asset products, from growth equity to real estate to private credit.
A solid growth opportunity lies in taking market share from MM PE managers.
Along the same vein, targeting high net worth individuals (rather than pensions and endowments) and then retail investors will be the culmination of this course:
Blackstone is leading the way. Earlier this year, the firm raised $1.3B in its first PE fund for high net worth families. Targeted qualified purchasers ($5M+ in investable assets)
Bill Ackman recently attempted to take Pershing Square USA public, which would have given him access to retail capital. It didn’t work
The business of investing at the megafund level is dependent on the amount of capital a firm can raise.
After exhausting the most lucrative source of capital, going downstream allows for continued growth.
Institutional investors → family offices → accredited investors → retail investors
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