KKR will return about $350 million in gross carry to LPs in its second Asia private equity fund after underperformance triggered a clawback provision, CFO Rob Lewin said in an earnings call on Friday. The reversal is expected to shave $0.18 off after-tax distributable earnings and incentive income per share in Q4, dragging down performance for the quarter.
“We’ll be taking charge in Q4 and reversing compensation paid out when that carry was collected,” Lewin said in a rare admission for a fund often regarded as “a blue-chip manager”. While the clawback will be booked this quarter, KKR’s balance sheet had already netted out the impact in accrued unrealised performance income “for some time”, he said.
“The result is that we expect net realised performance of incoming Q4 to be lower than it otherwise would have been,” he added.
KKR Asian Fund II—a $6-billion vehicle closed in 2013—has stopped deploying for eight years, Lewin said. The fund has made $6.7 billion in realisations, with about $1.28 billion in remaining costs and $774 million in fair value as of the third quarter, per an earnings release.
The underperformance came after KKR-owned Marelli—one of the world’s largest auto parts suppliers—filed for Chapter 11 bankruptcy protection in the US in June. The Japanese giant was formed in 2019 after another Japanese car parts maker, Calsonic Kansei—a portfolio of KKR’s second Asia fund—acquired the then-Magneti Marelli for about $7.1 billion.
KKR initially purchased Calsonic in 2016 at up to $4.5 billion from its second fund. It wrote off nearly $2 billion with an additional injection of $650 million, The Financial Times reported.
Marelli, however, most recently said it had secured a $1.1-billion debtor-in-possession financing commitment from its lenders, who are expected to take ownership upon emergence from Chapter 11, pending a 45-day overbid process.
Isolated incident
KKR, however, highlighted that the clawback was a one-time event as its Asia private equity is faring well, with almost half of its realised carried interest in Q3 coming from its private equity business in the region.
Some of KKR’s recent exits this year include a $1.4-billion sale of JB Chemicals & Pharmaceuticals, a partial divestment in HD Hyundai Marine Solution, and a $2.55-billion sale of the Japanese supermarket chain Seiyu. DealStreetAsia also reported KKR offloaded its 22% stake in Indonesia’s Sari Roti.
Lewin highlighted that KKR’s third and fourth Asia funds have both been performing in the top quartile, with the former already returning all of its capital, he said, stressing that the charge was merely to address an event that took place a decade back. “Our performance in Asia private equity more broadly has been a real bright spot.”
The firm’s recent monetisations as well as the return of carried interest from its second Asia fund will likely impact fundraising for KKR Asian Fund V—the next installment in its regional series, registered in Luxembourg earlier this year.
Still, investor appetite for Asia remains strong. “Investor demand for all things Asia continues to increase at a market pace, especially over the course of this year,” a KKR executive said. “We’ve seen interest in Europe and Asia increase, but I’d say with a particular focus on Asia—and that’s across all asset classes,” according to Scott Nuttall, co-CEO.
The firm noted that investor perceptions have evolved. “For a while, some investors would conflate China with Asia,” the executive added. “The education process has proceeded quite nicely, and there’s now a broad understanding of opportunities in Japan, India, Korea, Southeast Asia, and Australia.”
KKR expects Asia to outpace other regions in growth, citing demographic tailwinds and capital market development. “A lot of these markets remind us of the US and Europe 20-40 years ago,” Nuttal said. “We feel well positioned, very optimistic, and we’re leaning into it.”
In its infrastructure business, KKR has secured $3 billion in commitments for its third pan-Asia infrastructure fund as of Q3.
