Inside KKR's 'Investment Bank'

When KKR & Co. first forged into the capital markets business in 2007, there were doubts across Wall Street that it would be a significant contender compared to the big banks.

Banks have long made windfalls through the tried-and-true business of taking fees for raising money in stock and bond markets for clients. It’s become of one of the most pivotal functions in what investment banks exist to do. 

KKR’s entrance initially was a play to bring back some of that activity to themselves for their own portfolio companies. Increasingly, KKR has been doing it for other companies as well. But there are other investment-banking businesses that KKR doesn’t operate in, such as sales, trading and merger advice. 

“While the quarter did benefit from a few sizable fee events, as well as timing, around 100 different transactions contributed to the outcome this quarter,” KKR’s finance chief, Rob Lewin, told analysts in a conference call. 

In the most recent quarter, the business was a standout. It brought in a quarterly record of $424 million. For comparison’s sake, it’s still a long way from the likes of JPMorgan, which took in more than $1 billion of debt underwriting fees alone in the three months through September. But KKR’s overall fee pool for its capital markets unit came pretty close to what Citigroup took in at its debt business. 

Capital markets was a big driver for KKR’s fee-related earnings, which were a record in the third quarter and helped drive the stock to a record high. Alex Blostein, an analyst at Goldman Sachs who covers KKR’s stock, believes that the last three months of the year can bring in more for capital markets than KKR’s own executives have projected. If Blostein is right, the unit will come a stone’s throw away from bringing in $1 billion for the full year.

(In 2019 and 2020, KKR took in roughly half that sum or less for the full year in capital markets.) 

KKR said about half of the transaction fees came from infrastructure, and about half were focused on debt products. Traditional private equity played a bit role too. You could say that KKR is becoming a bigger rival to the banking industry, but as Bloomberg reported earlier this year, there are cases in which KKR has even been a key ally to the banks vying to play financing roles on deals — particularly ones that are being overseen by KKR itself.

‘Not a Surprise’

The capital markets business can also be volatile, and KKR struck a note of caution.

“We don’t think $400-plus million is the new quarterly run rate for our capital markets business, but this quarter really illustrates the degree to which our model is built to capture very significant economics,” Lewin said. “We have built this part of our business very deliberately, and being able to achieve these types of outcomes is not a surprise.”

Still, you can see the progress in certain parts of the so-called league tables as well. KKR this year has jumped 10 spots higher in rankings for US leveraged loans, according to data compiled by Bloomberg. That makes it No. 15 in the overall standings, putting it higher than many regional banks and even some large multinational ones, including Mizuho Financial and HSBC. It still has a long way to go to catch up to the likes of big US lenders such as JPMorgan and Bank of America, the No. 1 and No. 2 in that business this year.

It’s just another way these giant alternative asset managers are playing the role that traditional banks once did. And another way that the capital markets are evolving around private assets.