10/28/2009

Goals Held in Check at KKR, First Reserve

Kohlberg Kravis Roberts and First Reserve won't raise as much as recently projected for their debut infrastructure funds.

KKR, which initially set out in mid-2008 to collect $10 billion for its KKR Global Infrastructure Investors and trimmed the vehicle's target to $4 billion by early this year, has reduced its target again. Now the firm is telling investors that it hopes to draw $2 billion to $3 billion.

First Reserve, meanwhile, just started formal marketing efforts for its First Reserve Energy Infrastructure Fund with a $1.5 billion goal - well below the $2 billion to $3 billion that industry players were forecasting when word of the effort got out in April.

Like a range of funds, both vehicles are the victims of abysmal capital-raising conditions that have persisted for more than a year across the private equity industry. It doesn't help that their sponsors are first-time players in the infrastructure sector, at a time when investors are favoring experienced operators.

The first-time stigma is probably more of a hindrance for KKR, as its vehicle represents an effort to diversify away from the firm's core focus on buyouts by taking aim at financing of infrastructure projects.

First Reserve's offering, on the other hand, aims to capitalize on the firm's existing expertise as an energy-buyout shop by capturing a mix of infrastructure deals that it finds through its main series of funds - but that don't fit into those vehicles' mandates. The most recent of the Greenwich, Conn., firm's buyout funds, First Reserve Fund 12, held its final close with $9 billion in April.

However, some potential limited partners are still nervous about conflicts of interest that could arise due to an ability on the part of First Reserve's infrastructure and buyout entities to hold separate interests in the same projects. There have also been some questions about how First Reserve will decide which deals get diverted to the infrastructure fund. The firm has responded by indicating that, generally, investments with anticipated rates of return of less than 20% and annual revenues equal to 5-8% of asset value would be slotted for the vehicle.

As for KKR, fund-raising difficulties have clearly hindered its offering for some time. In addition to the previous drop in its equity target, the New York firm was trumpeting a lower-than-usual fee structure for its vehicle earlier this year - reinforcing a perception among outsiders that its marketing drive was in need of a boost. Credit Suisse is serving as placement agent for the KKR vehicle.

KKR's initiative was also wounded when the newly hired executive leading the firm's infrastructure effort, George Bilicic, returned to previous employer Lazard in October 2008. Longtime KKR staffer Marc Lipschultz is now running the program.

KKR and First Reserve are both running their funds through infrastructure teams set up last year, with KKR drawing on new and existing personnel and First Reserve mainly bringing in new hires. First Reserve's group is led by Mark Florian, who joined from Goldman Sachs.

Just nine infrastructure funds have held final closes so far this year, collecting $6.2 billion, according to Preqin. At this point last year, the total was 27 funds adding up to $20.3 billion. There are also 62 vehicles seeking a combined $60 billion that, like KKR, have yet to reach a first close.

With KKR's latest pullback, Alinda Capital, Goldman, Macquarie and RREEF Alternative are the only infrastructure-fund managers shopping vehicles with equity targets above $4 billion. On the bright side, investors expect demand for such vehicles to perk up before it does for other private equity products - given that few limited partners are over-allocated to the sector.

Both the KKR and First Reserve funds will invest in North America and Europe.