KKR sent a brief letter on Monday to investors in its credit strategies that was a combination of things: A victory lap; an acknowledgement that some mistakes were made along the way (KKR is not infallible); and that even while there is talk of a recession “now is the time for credit.”
In the letter, KKR runs through its own history in credit. After the dot-com bubble and Enron’s accounting scandal, many companies became notorious failures, making it difficult for the good ones to raise capital on attractive terms.
At the time, KKR had only private equity funds and couldn’t offer companies what they really wanted (and what banks wouldn’t give them): a loan. KKR felt that it made sense to start offering financing, given its in-depth understanding of businesses.
During the summer of 2004, the firm hired Christopher Sheldon and a handful of other analysts from Wells Fargo to start KKR’s credit business. It was the first asset class outside of private equity the company pursued.
“We were bottom-up credit investors. But we had access and could tap into the global franchise, and it has one [profit and loss statement] across the firm, so there were a lot of incentives to connect the dots, to sort of sync up with them. You had the ability to look at companies and then to go call someone on the private-equity side and say, ‘Hey, do you know this management team?’” Sheldon, who is now a partner and the co-head of credit and markets at KKR, told Institutional Investor.
The group started with $755.5 million to lend and settled trades via fax. Since then, much has changed. “We have come a long way together,” Sheldon wrote in Monday's letter. KKR’s credit business now is one of the largest, with more than $230 billion in assets under management.
Even just 10 years ago, few investors carved out part of their portfolios for private credit. That asset class was a place to make a trade, not a well to continually return to. Now, it has become commonplace in portfolios and there’s no going back. Some large, sophisticated investors have even sliced up their private credit allocation into subcategories, Sheldon said.
KKR and other large private equity firms with credit arms have been the primary beneficiaries of that trend as institutions increasingly shorten the list of managers with which they work, choosing firms with broad offerings, Sheldon explained.
"I have my high-yield bond manager over here. I have my distressed manager over there. I have my specialty finance — but that specialty finance manager only does aircraft and I have another one that does consumer. And I don't want to just have one high-yield bond manager. I want four of them. So all of a sudden, they have 40 relationships. And that's very hard for a small public pension plan or a sovereign wealth investment team to manage,” Sheldon said.
The private credit market was about $1.5 trillion at the start of the year, up from $1 trillion in 2020, and is estimated to grow to $2.8 trillion by 2028.
“I think there's only a handful of us that can do it, and then our incentives are aligned to do it well,” Sheldon said about asset managers offering the many flavors of private credit. “I think we have our chess pieces on the board. I do think that there's a lot of younger strategies that are still in that earlier phase of growth.”
Among those is asset-based finance, which is lending that uses a company’s assets as collateral for a loan. While the economy is slowing, opportunities remain with uncorrelated investments such as aircraft financing, consumer loans, intellectual property, or residential mortgages.
Sheldon also said KKR’s global presence is a tailwind for originating loans and finding investors in the asset class in growing markets, especially Asia, where the majority of lending is still done by banks — far more than in Europe and North America.
