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KKR Sees Private Credit Opportunity Amidst BDC Pressure
12 Mar
Summary
- KKR's private credit fund faces near-term return pressure.
- Non-traded vehicles offer more opportunity, CFO states.
- Software sector exposure is a key concern for BDCs.
KKR's publicly traded private credit fund is currently facing pressure on its near-term returns. The company's Chief Financial Officer, Robert Lewin, indicated on Wednesday that KKR perceives greater opportunities within non-traded investment vehicles.
Business development companies (BDCs), which are private debt funds, have seen their public share prices decline. Simultaneously, redemption requests for their non-traded counterparts have increased. Investors are expressing concerns about credit markets and exposure to the software sector.
Lewin noted that approximately $17 billion of KKR's capital, specifically in direct lending, is held in the BDC format, with $14 billion situated in FSK. He acknowledged that FSK has encountered pressure on its returns in the near term, primarily due to some subordinated exposure.
Competitors such as Blue Owl and BlackRock have also experienced share sell-offs as redemption requests for their key funds surpassed the 5% threshold. Some firms, like Blackstone, have subsequently relaxed this limit to 7% or higher.
Concerns within the private credit market intensified last year following the collapses of auto parts supplier First Brands and subprime lender Tricolor. These jitters have extended to the software industry, as artificial intelligence poses a threat to the pricing power of software companies, which have attracted substantial private funding over the past two decades.
FSK's filings reveal over 16% exposure to software and related companies. In contrast, KKR's insurance business, Global Atlantic, has roughly 2.5% exposure to software, according to Lewin.
Lewin anticipates that AI will create significant winners and some underperformers within the business landscape, with certain companies potentially being disintermediated over time. He also stated that capital markets remain fairly robust globally, despite geopolitical and tariff volatility.
KKR projects first-quarter capital markets revenue to range between $200 million and $225 million, aligning with the revenue from the same period last year.
