KKR Credit Opportunities Portfolio
D
KKR Credit Advisors LLC
09/21/23
$21.54
Continuously Offered
Core
San Francisco, California
Accredited and Non-Accredited
$504,448,049
DST
Private Credit
February, 2022
Monthly
None
1.30%
Permanent Capital
KKR Credit Advisors LLC
Deloitte & Touche LLP
Dechert LLP
Strategy
The Fund's investment objective is to achieve attractive risk-adjusted returns and generate high current income. To achieve this, the Fund employs two primary credit strategies: Opportunistic Credit and Private Credit.
The Opportunistic Credit Strategy aims to provide an attractive risk-adjusted return through a diversified portfolio of fixed income securities and financial instruments. The approach is conviction-based, allowing the Adviser to toggle between various asset classes, including high yield bonds, first- and second-lien secured bank loans, structured credit (e.g., CLO mezzanine debt), and thematic approaches based on credit market conditions. Key themes within this strategy include investing in higher-yielding assets resulting from market dislocations, event-driven positions with near-term catalysts, proprietary sourcing through private equity relationships, stressed credits, structured products, and credit investments offering an illiquidity premium.
On the other hand, the Private Credit Strategy's main objective is to deliver attractive returns primarily through contractual interest or coupon payments, with a focus on principal protection and diversification. This strategy involves making investments in directly originated and negotiated financing instruments in underserved or mispriced asset classes due to the withdrawal of global financial institutions from the financing market. Areas of focus within the Private Credit Strategy include asset-based finance, investing in hard or financial assets directly, or through origination and servicing platforms, junior debt investments in defensive sectors, and direct lending to upper-middle-market companies, where the Adviser aims to be the sole or lead lender to influence deal structure and terms.
Under normal circumstances, the Fund allocates 70-80% of its Managed Assets to the Opportunistic Credit Strategy and 20-30% to the Private Credit Strategy. However, the allocation may vary from these guidelines at the discretion of the Fund. The Investment Committee regularly reviews and establishes the allocation percentage between the two strategies based on factors such as macroeconomic and market outlooks, risk and return assessments, and other considerations.
The Fund's investments primarily consist of senior and subordinated corporate debt and debt-related instruments, including bonds, secured bank loans, convertible securities, structured products (e.g., CLOs), convertible debt securities, repurchase agreements, and municipal securities. The Fund has the flexibility to invest in debt and debt-related instruments from issuers in the United States and other countries, including emerging market countries. Furthermore, the Fund can invest without limit in below investment grade debt and debt-related instruments.
Style
| Value | Core | Growth | |
| Large | |||
| Mid | |||
| Small |
Fit Check
The KKR Credit Opportunities Portfolio is suitable for accredited and non-accredited investors.
The KKR Credit Opportunities Portfolio is suitable for investors with a long-term investment horizon and a moderate to high risk tolerance. The fund's primary focus on generating current income through interest payments and other income-generating assets, while seeking long-term capital appreciation as a secondary objective, makes it an attractive choice for those looking to balance income generation and potential growth.
Portfolio Snapshot
As of July 31, 2023
Capital
Geography
Asset
Top Industries
Score Breakdown
BULLS SAY
Diversification: The Fund is diversified across asset types in private and public credit allowing investors access to opportunities normally reserved for institutional investors.
Experienced Managers: KKR Credit Opportunities Portfolio is managed by senior PMs with an average of 24 years of investment experience.
KKR Brand: KKR is a well-known global platform, providing access to consistent deal flow, plus brand recognition and scale gives the firm an advantage over its peers.
BEARS SAY
High Fees: The Fund presents a challenging and expensive fee structure for investors across all share classes with annual fund expenses exceeding 5%.
Alignment: The Fund makes little attempt at creating alignment between the managers and the investors due to a lack of skin in the game and no performance fee. Two of the managers are also responsible for a competing fund.
High-risk focus: The Fund’s high-yield, distressed approach to credit can lead to elevated volatility and weak performance in a challenging market backdrop.
Fees
|
Fees & Expenses |
Class I |
Class D |
Class T |
Class U |
|
Minimum initial investment |
$1,000,000 |
$10,000 |
$10,000 |
$10,000 |
|
Availability |
Brokerage and transaction accounts |
Brokerage and transaction accounts |
Wrap accounts and through participating broker-dealers and RIA’s |
Wrap accounts and through participating broker-dealers and RIA’s |
|
None |
None |
2.00% |
None |
|
|
None |
None |
1.00% |
None |
|
|
1.87% |
1.87% |
1.87% |
1.87% |
|
|
None |
0.25% |
0.75% |
0.75% |
|
|
3.34% |
3.34% |
3.34% |
3.34% |
|
|
Total Annual Fund Expenses |
5.21% |
5.46% |
5.96% |
5.96% |
To help you compare the cost of investing in this offering with other offerings, the Fund has provided an example of the projected dollar amount of total expenses that would be incurred over various periods with respect to a hypothetical investment for each class of common stock.
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In calculating the projections above, we made a few assumptions:
(1) A hypothetical 5.0% annual return, as required by regulation of the SEC and applicable to all registered investment companies. The assumed return is not a prediction of, and does not represent, the projected or actual performance of the Fund. Performance will vary and may result in a return greater or less than 5.0%
(2) Annual operating expenses and offering expenses remain at the levels set forth in the Price Tag table above.They should not be considered a representation of future expenses. Actual expenses may be greater or less than those shown.
(3) Net return after payment of fees and expenses is distributed to shareholders and reinvested at NAV.
Managers
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Industry Experience 24 years.
Career highlights Prior to joining KKR, Mr. Sheldon was a vice president and senior investment analyst with Wells Fargo’s high yield securities group. Previously, Mr. Sheldon worked at Young & Rubicam Advertising and SFM Media Corporation in their media-planning departments
Education B.A. from Denison University
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Industry Experience 22 years.
Career highlights Mr. Lane is a member of the Adviser’s U.S. Leveraged Investment Committee, as well as a member of the Adviser’s Portfolio Management Committee. Prior to joining KKR, Mr. Lane worked as an associate in the investment banking/technology, media and telecom group at J.P. Morgan Chase.
Education A.B. with honors in History from Harvard University.
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Industry Experience 25 years.
Career highlights Prior to joining KKR, Mr. Reed was a Director at Bear Stearns & Co. in its institutional fixed income department. Previously, he was an analyst at BNY Capital Markets in the syndicated loan, private placement and high yield groups, and also worked in the Asset Strategies Group and The Office of Management & Budget of New York City.
Education B.A. in Business Administration and Psychology from the University of South Carolina and a Global Professional M.B.A. from the Fordham University School of Business Administration.
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Industry Experience 26 years.
Career highlights Prior to joining KKR, Mr. Pietrzak was a managing director and the co-head of Deutsche Bank’s structured finance business across the Americas and Europe. Previously, Mr. Pietrzak held various roles in the credit businesses of Societe Generale and CIBC World Markets. Mr. Pietrzak started his career at Price Waterhouse in New York and is a CPA.
Education M.B.A. in Finance from The Wharton School of the University of Pennsylvania and a B.S. in Accounting from Lehigh University.
Full Review
LOW
The KKR Credit Opportunities Fund's portfolio managers do not have any of their own personal capital at risk in the Fund. While this lack of personal investment raises concerns about the alignment between the managers' interests and those of the investors, this is a common aspect for these types of funds/vehicles being offered in the marketplace today. Having a personal stake in the fund is crucial for ensuring that the managers share the same degree of risk and reward as other investors. In this case, the absence of personal investments by all four portfolio managers creates a misalignment between their interests and those of the fund's investors.
These annual fund expenses are relatively high and can significantly impact the fund's performance and reduce long-term returns for investors. The expense ratios across all share classes exceed 5%, which is a substantial burden for investors. This high expense ratio could negatively affect the alignment between the managers and investors, as it erodes the potential returns investors could earn.
One notable aspect of the KKR Credit Opportunities Fund is that it does not charge a performance fee. While this eliminates the risk of excessive performance fees that could counteract alignment incentives, it also removes the direct incentive for portfolio managers to outperform. In funds that charge performance fees, portfolio managers are motivated to deliver superior results to earn higher compensation, aligning their interests more closely with those of investors. However, in this case, the absence of a performance fee means that there is no direct financial incentive for the portfolio managers to strive for outperformance.
BELOW AVERAGE
The fund's performance history underscores the volatility inherent in high-yield assets. In its brief history since inception, the fund experienced significant swings. It delivered impressive returns in 2020 through 2021, coinciding with a favorable corporate bond market. However, in 2022, the fund's performance deteriorated, exposing its vulnerability to market fluctuations. This volatility is characteristic of high-yield assets and underscores the importance of risk management and diversification within a portfolio containing such securities.
The overall strategy has been in existence since February 2020, while Class D shares were made available two years later in February 2022. The strategy has experienced a high level of volatility since inception, with double-digit negative returns in 2022 as the broader market for risk assets was very volatile. Year-to-date 2023, the fund has delivered solid double-digit returns, somewhat offsetting the weak 2022 calendar year. Since inception for Class D shares (February 2022), the Fund delivered a -2.15% return, which is notably different from older share classes.
Delving into portfolio metrics, the KKR Credit Opportunities Portfolio holds a relatively large number of holdings, with a total of 370. However, what stands out is its portfolio turnover rate, which stands at a relatively low 25.01% year-over-year. In a high-yield credit strategy, higher portfolio turnover is typically expected to seize evolving market opportunities more efficiently. The fund's turnover rate suggests a more conservative approach.
The fund's struggles with negative net returns can be attributed to its asset class selection, particularly within the high-yield space. This asset class has been challenged by underperformance in recent years, with high-yield corporate bonds facing headwinds. Despite targeting higher yields, the fund has faced difficulties in generating positive returns, which raises questions about its investment strategies.
In conclusion, the KKR Credit Opportunities Portfolio has confronted challenges in delivering competitive returns, primarily due to its low portfolio turnover and asset class selection within the high-yield space. While acknowledging the challenging market conditions, investors should carefully assess their investment objectives and risk tolerance when considering this fund. Additionally, monitoring the fund's portfolio turnover and its ability to adapt to evolving market dynamics will be crucial in assessing its potential for future improvement.
HIGH
One notable aspect of the KKR Credit Opportunities Portfolio that mitigates market risk is its defensive portfolio allocation strategy. Approximately 95% of the portfolio is invested in below investment-grade securities, which can amplify underperformance during periods of economic stress. Furthermore, 60% of the portfolio is allocated to senior secured assets, which offers a level of protection, as senior secured positions typically have a higher recovery rate in case of default.
The current market environment presents unique opportunities for private lenders, and the KKR Credit Opportunities Portfolio appears well-positioned to capitalize on them. As banks tighten their lending standards, private lenders with the ability to provide flexibility and swift execution are in high demand. Opportunistic credit managers, armed with adaptable capital, are finding an enticing opportunity to bridge significant liquidity gaps. This favorable environment has emerged due to higher interest rates and tighter lending conditions, creating a conducive backdrop for alternative lenders like the KKR Credit Opportunities Portfolio to thrive.
It's important to acknowledge that the KKR Credit Opportunities Portfolio carries a higher degree of market risk due to its substantial allocation to high-yield assets. This includes high-yield bonds, leveraged loans, and senior bank loans. High-yield assets are inherently riskier than investment-grade securities, primarily due to their lower credit quality. Investors in this fund should be prepared for heightened volatility and the potential for greater price fluctuations compared to more conservative fixed-income investments.
AVERAGE
One of the defining features of the KKR Credit Opportunities Portfolio is its significant exposure to private credit strategies. This is particularly relevant in the current financial landscape, where there is a robust demand for direct loans to middle-market borrowers. The fund allocates between 20% to 30% of its portfolio to private credit, including senior secured corporate loans and asset-based finance. While private credit can offer attractive risk-adjusted returns, it also comes with unique business risks, such as credit risk associated with non-public companies and the potential for less liquidity compared to public securities.
To execute its investment strategy successfully, the KKR Credit Opportunities Portfolio capitalizes on the higher yield potential offered by direct lending, high yield bonds, and senior bank loans compared to traditional fixed-income markets. This pursuit of higher yield is a double-edged sword. While it can potentially lead to enhanced returns, it also exposes the portfolio to greater risks, including credit risk and market risk. The fund's ability to balance the quest for higher yield with prudent risk management will be crucial in determining its long-term success.
The fund's performance over the last year has been suboptimal, reflecting a challenging environment for high-yield assets. However, it's important to note that the KKR Credit Opportunities Portfolio's performance closely mirrored industry benchmarks within the high yield segment. This suggests that while the fund has faced challenges, it has not significantly underperformed its peers in the same asset class.
One of the key mitigating factors in assessing business risk is KKR's decades of experience in investing in private credit. With nearly $200 billion in assets under management (AUM), KKR showcases an impressive track record and a robust platform for private credit investments. This experience and financial strength serve as a reassuring factor for investors, as it indicates the firm's ability to navigate various market conditions and withstand economic downturns.
Regarding debt risk, the strategy exhibits a conservative approach to managing debt, which is a positive aspect for prospective investors concerned about debt risk. The fund's current leverage ratio stands at 26.2%, well within the target range of 25-30%. This conservative leverage strategy suggests a deliberate and prudent approach to utilizing borrowed capital to enhance returns while managing associated risks. It indicates that the portfolio managers are exercising caution to maintain a balance between capital efficiency and financial stability, which can provide a sense of security to investors.
Furthermore, the fund's borrowing activities, initiated on August 23, 2021, through a credit facility with JPMorgan Chase Bank, demonstrate a thoughtful and measured approach. The fund initially borrowed $200 million, with the flexibility to increase the borrowing amount up to $500 million. Subsequently, the fund judiciously expanded the facility to $250 million on November 4, 2021, and further increased it to $300 million on April 6, 2022. The fact that these expansions were done incrementally indicates a cautious approach to managing debt, aligning with the fund's conservative leverage strategy.
AVERAGE
Investors considering the KKR Credit Opportunities Portfolio should pay close attention to the fund's liquidity risk. Liquidity risk is a critical factor when assessing any investment, as it can influence an investor's ability to buy or sell shares as needed.
Unlike typical credit funds that often offer repurchase opportunities for up to 5% of outstanding shares, KKR offers a more favorable liquidity feature with quarterly repurchase offers for 10% of the Fund's outstanding shares at Net Asset Value (NAV). This higher repurchase percentage suggests that KKR aims to provide investors with increased opportunities to sell their shares back to the fund, enhancing liquidity.
ABOVE AVERAGE
Transparency is a crucial factor for investors evaluating the KKR Credit Opportunities Portfolio. This fund provides a wealth of information to prospective investors, ensuring they have access to essential documents such as the prospectus, Overview Deck, annual reports, and semi-annual reports. This accessibility to a comprehensive set of materials empowers investors with the knowledge needed to make informed investment decisions. Additionally, the fund maintains good disclosure practices, offering transparency through its platforms and an investor portal, which provides access to key performance metrics. This reporting transparency enhances investor trust and facilitates a thorough evaluation of the fund's performance.
Peer Group
 |
 |
 |
|
|---|---|---|---|
| Vehicle name | KKR Credit Opportunities Portfolio | Apollo Debt Solutions BDC | Carlyle Tactical Private Credit Fund |
| Minimum investment | $10,000 | $2,500 | $10,000 |
| Holding period | Permanent capital | Permanent capital | Permanent capital |
| Annual management fee | 1.3% | 1.25% | 1.9% |
| Distribution and Servicing Fee | 0.25% | 0.85% | 0.50% |
| Sales Load | None | 3.5% | 3.00% |
| Inception Date | February 2022 | January 2022 | June 2018 |
| 1-Year Net Returns | 12.26% | 12.85% | 6.28% |
| Net Returns Since Inception (Annualized) | -2.15% | 14.93% | 20.66% |
| Annualized Distribution Rate | 8.6% | 8.15% | 9.7% |
| NOYACK® Score |
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