MODULE 3: PUBLIC-PRIVATE EQUITY 3.4 Capital Group KKR public-private equity fund

This video introduces Capital Group KKR U.S. Equity+, an interval fund offered by Capital Group that combines public and private equity into a single integrated solution.

Mike Pollgreen

Equity investment director at Capital Group

3MINVIDEO

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Mike Pollgreen, Equity investment director at Capital Group

 

Welcome. In this video, we’ll introduce you to our public-private equity fund, Capital Group KKR U.S. Equity+.  Let’s start with a high-level overview. 

 

U.S. Equity+ aims to provide broad access to high-conviction, actively managed public and private equity in one integrated solution. 

 

Its objective is to provide long-term capital appreciation, and it may be appropriate for some investors who can give up some liquidity in return for potentially higher returns. As you can tell from the fund’s name, the majority of the assets will be invested in U.S. companies with at least 80% under normal circumstances. The fund’s benchmark will be the S&P 500.

 

While public equities held in the fund are expected to be invested in the U.S., we’ll maintain flexibility for non-U.S. investments in private equity to better capture the dynamic flow of private investments and the strength of KKR’s global private equity platform.

 

Now, let’s get into how this strategy is being offered to clients. Capital Group KKR U.S. Equity+ is an interval fund, it allows for daily purchases and quarterly repurchase offers of 5% of the fund’s outstanding shares. If more than 5% of the outstanding shares are tendered for repurchase, the redemption proceeds will generally be distributed proportionally to redeeming investors. This means shareholders may not be able to liquidate their entire requested repurchase amount during a particular repurchase offer window.  

 

The fund has no investor eligibility requirements, a minimum investment of $1,000 and will produce a 1099 tax document, just like mutual funds do. As a blend of investments, we’re aiming for approximately 60% of the fund’s assets to be invested in public equities and 40% in private equity under normal market conditions.

 

Within public equities, we’ll employ Capital Group’s bottom-up active management and multi-manager approach to invest in U.S. large cap companies that we believe could outpace the index. The fund’s private equity allocation will consist of a well-diversified portfolio of companies sourced by KKR primarily across its buyout and growth strategies.

 

Together, the distinct components of this fund aim to deliver a thoughtful, holistic, and complementary approach for a more complete and modern equity exposure across public and private assets. We’re excited about the potential this fund has to broaden access to private markets, and we hope you are, too. 

 

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Capital Group and KKR have formed an exclusive partnership to offer a new interval fund: Capital Group KKR U.S. Equity+. This fund combines investments in both public and private equity into one integrated solution, with a 60% target for public equities and a 40% target for private equity. 

 

Q: How does public equity fit into this fund? 

 

We view this solution as one that could fit into a traditional equity allocation. In order to have more complete exposure to equity markets, it may be important to consider both public and private markets. The public equity sleeve is an important source of active diversification for the fund. It will use the same multi-manager, bottom-up approach as other funds from Capital Group with which you may be familiar, but will pursue a unique strategy that does not mirror any of our other current offerings. 

 

Q: How will private equity be accessed in the fund?

 

The fund will gain most of its private equity exposure by investing in K-PEC, an evergreen private equity vehicle from KKR. The private equity sleeve will also include co-investments sourced by KKR alongside KKR vehicles. 

 

Q: Does the fund have an accredited investor requirement?

 

No. As a registered investment company under the Investment Company Act of 1940, the interval fund may be offered more broadly to investors irrespective of individual qualification or sophistication thresholds. There is a $1,000 investment minimum, but no accredited investor requirement.

 

Q: Why does the fund use KKR for its private equity exposure?

 

KKR is a well-known and respected firm with a multi-decade track record. K-PEC has priority access to deals and acquires portfolio companies alongside KKR’s flagship institutional private equity funds. This vehicle allows access to those deals in an evergreen format that offers some limited liquidity. Additionally, allocating to K-PEC provides diversified exposure across KKR’s global private equity platform.

Meet the architects of Capital Group KKR U.S. Equity+ and learn what considerations went into the creation of this fund. Hear their perspectives on how this fund has the potential to broaden access to private equity, and what they believe the future of equity markets may hold. 

Holly Framsted

Head of global product strategy and development at Capital Group

Jessica Spaly

Equity portfolio manager at Capital Group

Alisa Wood

Partner and co-CEO of K-PEC, at KKR

11MINVIDEO

[upbeat music]

 

Holly Framsted, Head of product group at Capital Group

 

Holly: Hello, I'm Holly Framsted, global Head of Product at Capital Group. In this segment, we're going to talk about our new solution, which combines public and private equity into one blended fund that can unlock access to a broader spectrum of equity opportunity than previously available to individual investors.

 

I'm pleased to be joined by Jessica Spaly, the Principal Investment Officer of Capital Group, KKR US Equity Plus and Alisa Wood, a partner at KKR and co-Chief executive of KKR private equity conglomerate.

 

Together, alongside our firms and teams, we formed this partnership to bring KKR’s deep private equity capabilities and Capital Group’s public equity platform together, with a shared commitment to a rigorous client-centric investment process.

 

Welcome. 

 

Speaker - Alisa Wood, Partner and Co-CEO of KKR Private Equity Conglomerate (K-PEC)

 

Alisa: Thank you. 

 

Speaker - Jessica Spaly, Principal investment officer at Capital Group

 

Jessica: Thank you.

 

Holly: In recent years, evergreen vehicles have shifted the landscape providing broader access to individuals across private markets. With this evolution in mind, can you talk about what it means for managers and investors alike?

 

Alisa: Sure. I think most folks understand what it means to invest in public equities, right?  You buy shares and publicly traded businesses that are typically traded on an exchange. In the private space, it’s very different, right? These are companies that are, could be at all different sizes, can be at all different parts of their life cycle, but are not readily accessible to the vast majority of the public. But they could still be great opportunities to make an investment. And when you make an investment in those businesses, you're typically gaining control, right? So, when you get that control, what do you do with it? So, you try to influence management teams, make sure you have top-tier talent. You're trying to make sure that the profitability of the business and you're investing behind the growth of the business is best in class and you can do that in a whole number of different ways. Investing in the private space really comes down to making sure you're finding a good company but you're doing those things you're pulling those levers to make it great, right? It's a growth story, it's a profitability story, and at the end of the day, that's what creates that long-term- capital appreciation and that illiquidity premium that you typically get when you're investing in the private space.

 

Holly: Jessica, how does that compare or differ from how we think at Capital Group about public equity investing?

 

Jessica: So, when  we invest in public companies, as Elisa said, we don't have control. We are buying a share of a company. So, we need to feel confident not only in the business, the industry, but we need to really believe in the existing management team and their existing execution path. That's a little different than what KKR is able to do in private equity, which is they can make changes to those things. They can actually control how they decide the company should execute in its industry. We need to really invest in the whole picture we have to really pick and choose where we see alignment in all of the factors that make an investment attractive.

 

Holly: So, we're finding greatness and you're building or delivering greatness. [laugh] 

 

Let's talk a bit about why our two organizations came together, because the partnership is such a critical element of this relationship and ultimately, the fund. Why did we think about partnering in this space and the importance for our clients?

 

Jessica: Well, these are two asset classes that have really delivered, you know, great returns to investors over the long term, but they're really very, very different skill sets you know, we have built over many decades, the ability to deliver excess returns in public investing. We don't pretend that we could go and build what KKR has done over their decades of experience. It's really quite different, you know, what the core elements of those investing processes are. There's a lot of synergy and a lot of overlap and things we think about, but there's a lot of differences as well, and the details of how you deliver that value. So, via partnership, we think that's the best opportunity to bring clients, the best of both worlds, you know, demonstrated long-term track record of both firms in those respective asset classes.

 

Holly: Can you share a little bit about your role in designing this fund, the Capital Group, KKR U.S. Equity+?

 

Jessica: Yeah, absolutely. We spent, you know, many months designing what we felt would deliver excess returns we hope to shareholders with an appropriate amount of consideration given to risk and liquidity. For this particular, you know, investor base, we thought about three different sleeves within the fund, to deliver that profile. So, we have a public sleeve, which is very similar to, you know, our existing public equity funds. That's going to be a core U.S. equity sleeve that we hope can, you know, deliver excess returns over the S&P 500.  And then 40% of the fund is invested in private equity in two different sleeves. The majority of that will be in K-PEC. We think that's a really attractive vehicle that shareholders in the fund will access private equity. But we also have up to 10% in a co-invest sleeve where we will more directly be making decisions on what investments that KKR is making that we will invest directly into the fund. And what that allows us to do is really have a cohesive approach. One of the ways we can have a cohesive approach to managing this fund and thinking about things like sector exposure, geographic exposure within the co-investment sleeve, that's a nice lever to be able to manage this as one holistic vehicle for shareholders.

 

Holly: Excellent. Alisa, can you talk a little bit about K-PEC, what it is and why you think it's a great way to access KKR's private equity?

 

Alisa: So, what we tried to create when we formed K-PEC was a one stop shop into everything we do in private equity, right? So, acting as if you were a large pension plan or you were a large endowment and you were accessing all we do. Now, when we buy good companies that we make great, we buy them at all different sizes. We buy small companies, mid-size companies, large companies, we buy businesses in all over the world. We also invest in different companies’ lifecycles, right? More mature companies, earlier stage companies, not venture, not true early stage, but earlier in the life of the growth of a business. And at all of those points of a company's lifecycle, you can create value, right? Top-tiering management, product extensions profitability, growth, bottom line growth in just how the company operates. That same toolkit is applied regardless of what the business is. Now, we are also think that and how we can think about the world and what we invest in, right? And that is all coming through in K-PEC in that single access point. So, when you think about the benefits of it, it's great diversification. You're not choosing just a single part of the private equity landscape that we're investing in, but you're taking a piece of all of it and you're in together and out together with the largest institutional investors. And I think that is very important. So, in the simplest form, you get the same deal at the same time as our institutional partners. And, and it's really that similar type of approach. 

 

Holly: That institutional experience is so important as we think about extending access into the wealth marketplace. Jessica, can you share a little bit about that co-invest sleeve and how you're thinking about tailoring that to complement what you're building on the public equity side?

 

Jessica: The co-invest sleeve really just gives us a lever to make sure that the portfolio overall has balance, and it's not the only lever. Obviously, within the public side, you know, we have levers as well, you know, similar to how we manage all of our funds and looking at risk and overall exposure. We may find from a bottoms up standpoint, investors across both public and private equity are really excited about a particular industry. But we may decide that the overall exposure at the fund is at a level where we don't want to take more risk and more exposure in that industry. And so we can use that co-invest to manage that, to make sure that the overall risk and exposure at a level we feel is appropriate for shareholders.

 

Holly: With public private solutions, now, more investors can consider private markets as part of the core of their portfolio. What is the future for equity, both public and private as an asset class in a diversified portfolio?

 

Alisa: I think there's a blending, right? Because I think companies are living, breathing, you know, beings, right? Where at different points in their life cycle, they need different type of capital. And as an investor, what you want to do, and I think we all focus on this, is how do you compound in a long-dated nature, right? And in order to do that, you bring both the public and private side to helping grow a business. That's how you get outsized returns if you do it the right way. In just focusing on a siloed approach to, in investing in both private and public equity, I don't think you, you have the holistic view of a company. And I also don't think you have a holistic view of the market. So, this is a very complementary type of pairing or marriage of the two. I do believe this is where the world is going, and to be able to do it in a single place and to not have to do it in different parts of your portfolio is important. Now, we say this a lot and it's, I think, the key in all of this: it's the who and the how, not the what that makes the something good or something great, right? And making sure that you have skill sets and resources and people who are best in class on both sides of that, both on the public side and the private side, I think that's what makes this pairing so differentiated and so unique is the fact that we are bringing those resources.

 

Holly: I think this marrying is so helpful in thinking about equities as a continuum.

 

Alisa: This will be for the first time allowing a much broader group of investors to be able to have access to a lot of that secret sauce, but to do it in a very, I think complementary way to what they're used to or are already investing in and that's exciting.

 

Jessica: Yeah, we think this is a great way for investors to access potentially higher returns that private equity can deliver, but the combination of public and private together also allows us to manage risk and exposure in a holistic way that we think is additive for the broader group of investors.

 

Holly: Thank you both so much. It has been so wonderful to hear your perspectives, and I really hope our viewers feel the same. 

 

Alisa and Jessica: Thank you.

 

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Checkpoint

Now that you have completed this lesson, you should be able to confidently:

 

  • Understand how this interval fund represents a differing investment strategy compared to other Capital Group offerings. 
  • Explain to your clients how the fund primarily accesses private equity through a co-investment structure.
  • Recall that this fund is suitable for a broad range of clients, including those without accredited investor status.

Takeaways

Equity Public-Private+ Fund from Capital Group and KKR

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For financial professionals only. Not for use with the public.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the interval fund prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
For Public-Private+ Funds: Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ are interval funds that currently provides liquidity to shareholders through quarterly repurchase offers of up to 10% of its outstanding shares. Capital Group KKR U.S. Equity+ is an interval fund that currently provides liquidity to shareholders through quarterly repurchase offers of 5% of its outstanding shares. To the extent a higher percent of outstanding shares are tendered for repurchase, the redemption proceeds are generally distributed proportionately to redeeming investors (“proration”). Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window. In addition, anticipating proration, some shareholders may request more shares to be repurchased than they actually wish, increasing the likelihood of proration. Shares are not listed on any stock exchange, and we do not expect a secondary market in the shares to develop. Due to these restrictions, investors should consider their investment in the fund to be subject to illiquidity risk.

- Investment strategies are not guaranteed to meet their objectives and are subject to loss. Investing in the fund is not suitable for all investors. Investors should consult their investment professional before making an investment decision and evaluate their ability to invest for the long term. Because of the nature of the fund's investments, the results of the fund's operations may be volatile. Accordingly, investors should understand that past performance is not indicative of future results.

- Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.

- Illiquid assets are more difficult to sell and may become impossible to sell in volatile market conditions. Reduced liquidity may have an adverse impact on the market price of such holdings, and the fund may be unable to sell such holdings when necessary to meet its liquidity needs or to try to limit losses, or may be forced to sell at a loss. Illiquid assets are also generally difficult to value because they rarely have readily available market quotations. Such securities require fair value pricing, which is based on subjective judgments and may differ materially from the value that would be realized if the security were to be sold. Situations involving uncertainties as to valuation of assets held by the fund could have an adverse effect on the returns of the fund.

- The fund is a non-diversified fund that has the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund were invested in a larger number of issuers.

 

For Public-Private Credit+ Funds:

- Bond investments may be worth more or less than the original cost when redeemed. High‐yield, lower‐rated, securities involve greater risk than higher‐rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

- The funds may invest in structured products, which generally entail risks associated with derivative instruments and bear risks of the underlying investments, index or reference obligation. These securities include asset-based finance securities, mortgage-related assets and other asset-backed instruments, which may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market's perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations.

- While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.

- The fund invests in private, illiquid credit securities, consisting primarily of loans and asset-backed finance securities. The fund may invest in or originate senior loans, which hold the most senior position in a business's capital structure. Some senior loans lack an active trading market and are subject to resale restrictions, leading to potential illiquidity. The fund may need to sell other investments or borrow to meet obligations. The funds may also invest in mezzanine debt, which is generally unsecured and subordinated, carrying higher credit and liquidity risk than investment-grade corporate obligations. Default rates for mezzanine debt have historically been higher than for investment-grade securities. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy.

 

For Public-Private Equity+ Funds:

- The fund also intends to concentrate in the financial services group of industries, and to invest at least 80% of its assets in securities issued by companies based in the United States.

- K-PEC and co-investment risks: The fund's investments in KKR Private Equity Conglomerate LLC (“K-PEC”) and co-investments alongside K-PEC or one or more other KKR vehicles that pursue private equity strategies entail additional risks. Private equity investments are typically illiquid, speculative, and difficult to value, often requiring multi-year holding periods with returns generally realized only upon sale or refinancing of a portfolio company. These investments depend on access to financing, and market disruptions or increased competition may limit opportunities and affect performance. The fund's significant investment in K-PEC creates concentration risk and a decline in K-PEC's value could materially impact the fund's returns. Co‑investment opportunities are competitive and limited and there is no assurance the fund will receive allocations or comparable terms and will generally have less information than for public companies. Through its investments in K-PEC or other KKR Vehicles and co-investments, the fund may have exposure to portfolio companies with limited operating histories, evolving markets, unproven technologies, and inexperienced management, which may require significant capital and create heightened vulnerability to downturns. Most holdings are illiquid, subject to resale restrictions and may require consents or be sold at a discount. Costs associated with investments in private equity are generally greater than those of investments in other asset classes. In addition to bearing their portion of the fund's fees and expenses, shareholders in the fund will indirectly bear a portion of the asset-based fees, incentive fees and other expenses incurred by the fund as an investor in K-PEC or other KKR Vehicles and in co-investments. Incentive fees are paid to KKR when the fund's investments in K-PEC or other KKR Vehicles and/or co-investments deliver returns in excess of a specified hurdle; when paid, these fees reduce the net realized returns of such investments.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
Capital Group and Kohlberg Kravis Roberts & Co. L.P. (“KKR”) are not affiliated. The two firms maintain an exclusive partnership to deliver public-private investment solutions to investors. KKR serves as the sub-adviser of Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ with respect to the management of each fund's private credit assets. KKR is not a sponsor, promoter, investment adviser, sub-adviser, underwriter or affiliate of Capital Group KKR U.S. Equity+.
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