KKR notes deal-fee vulnerabilities

Kohlberg Kravis Roberts’ fee generation abilities is back on the upswing after taking a dive in last year’s economic crisis.

The firm, which is preparing for a listing on the New York Stock Exchange, collected $331 million in fees in 2009, a total that increased from 2008 due largely to a rise in the amount of transaction and monitoring fees the firm received. Such portfolio-facing fees are often referred to as “deal fees”.

The 2009 total does not even approach the massive amount – $862 million – of such fees the firm collected in 2007, but is an increase from the $235 million garnered in 2008.

The 41 percent increase in fees collected last year compared to 2008 was “primarily due to a $50.5 million increase in transaction fees reflecting an increase in transaction fee generating private equity investments during the period”, the firm said in a regulatory filing, which also noted that monitoring fees increased $39.2 million. 

KKR objective in listing on the NYSE is to register 204.9 million shares valued at about $2.21 billion and representing 30 percent of the firm.

KKR, which already registered on the Amsterdam-based Euronext exchange last year, will allow its Guernsey shareholders to swap their holdings for units in the US-based firm. KKR’s principals with ownership stakes will continue to hold 70 percent of the firm.

The registration document includes extensive disclosure about the firm’s operations. KKR touts its ability to raise income through fee generation. For example, KKR was able to collect $72 million in fees “relating to the termination of monitoring fee contracts in connection with public equity offering of two of our portfolio companies”. That total was offset by other losses in fees, leaving monitoring fees with a total increase of $39.2 million.

Though the firm has experienced increases in fee activity, KKR also warned potential investors in the offering that its limited partners are asking for more sharing of transaction fees. “We have confronted and expect to continue to confront requests from a variety of investors and groups representing investors to increase the percentage of transaction fees we share with our investors. To the extent we accommodate such requests, it would result in a decrease in the amount of fee revenue we earn”, the firm said.

According to many private equity market sources, LPs are increasingly asking GPs to use 100 percent of deal fees to offset the management fee. In the past, GPs have generally given investors an up to 80 percent offset. A move to 100 percent sharing of deal fee with LPs would effectively mean deal fee income to KKR and its public shareholders could drop dramatically.

KKR agreed in one of its most recent funds – an annex to its European Fund II called E2 Investors – not to charge deal fees on any investment in which the annex fund participates.

Elsewhere in the filing, KKR disclosed that it may attempt to acquire another investment management firm.