Only the wealthiest and most sophisticated investors are allowed to put money into the high-stakes buyouts done by Kohlberg Kravis Roberts. But that may be changing.
K.K.R. is working with another firm to allow investors to commit a minimum of just $10,000 for exposure to its private equity funds, according to a filing with regulators on Thursday. The new investment product, subject to approval by the Securities and Exchange Commission, would be the first time K.K.R. has taken smaller investors into its core business of buyouts.
Private equity giants, which typically raise their funds from institutions and ultrawealthy individuals, are trying to gain access to so-called retail investors, who are seen as a vast new source of capital. A rival of K.K.R., the Carlyle Group, introduced a product last year that, in partnership with a third-party firm, allowed investors to commit as little as $50,000 to invest in Carlyle’s private equity funds.
Like Carlyle, K.K.R. has structured its product in a way that may help it navigate regulatory challenges.
A legal obstacle stems from the Investment Company Act of 1940, which has had the effect of limiting individual private equity investors to those who have at least $5 million in investments. Both Carlyle and K.K.R., however, are trying to appeal to “accredited†investors, whose net worth exceeds $1 million, not including their primary home â€" a low bar for the industry.
To get around the legal hurdles, they are relying on third-party firms to manage the investments. K.K.R. is working with an investment firm called Altegris Advisors, which aims to register a fund under the 1940 law.
The fund, which charges a 1.2 percent annual management fee, plans to invest at least 70 percent of its assets in private equity funds sponsored by K.K.R. Pending regulatory approval, it will offer shares at $10 each until it has raised $25 million for its initial closing. After that, shares will be available for purchase monthly.
Investors’ ability to sell their shares will be limited at first. After two years, the fund may hold tender offers for shares, according to the filing. After the third year, the fund plans to recommend repurchases on a quarterly basis. At that point, any investors who have held their shares for less than a year and want to sell will have to pay a 2 percent fee.
In addition, the fund may make shares available for secondary sales through a platform operated by Nasdaq Private Market, a marketplace for buying and selling shares of private companies, the filing said.
The S.E.C. did not immediately respond to a request for comment.
To some private equity experts, the industry’s effort to gather smaller checks seems worrisome. Josh Lerner, a professor at Harvard Business School, said that private equity firms had in the past shown greater discipline in staying away from retail investors.
“If we’re going to end up with an industry that is dominated by hot money flowing into the sectors that are the most overheated flavors of the moment,†Mr. Lerner said, “it probably doesn’t augur well for the kinds of returns private equity is going to deliver.â€
