SEC Pursues KKR Sovereign Client Information

(March 27, 2011) — The Securities and Exchange Commission (SEC) has inquired about global alternative asset manager Kohlberg Kravis & Roberts’ (KKR) sovereign wealth fund clients, a 10-K filing by the company has revealed. 

“In January 2011, KKR received a request from the SEC for information regarding its investors and clients that are sovereign wealth funds and certain services provided by KKR. KKR is cooperating with the SEC’s investigation,” KKR said in the 10-K filing, filed earlier this month.

The inquiry follows the SEC’s probe into Blackstone Group LP, the world’s largest private-equity firm, as part of the US regulator’s investigation into whether financial firms made improper payments to secure investments from sovereign wealth funds. The probe centers on whether banks, hedge funds and private-equity firms paid placement agents to garner access to state-owned money, Bloomberg reported, with companies including Bank of America Corp., Morgan Stanley and Citigroup Inc. receiving letters of inquiry from the SEC.

While the SEC inquiry seeks information about foreign officials and agents, the US domestic issue surrounding placement agents has once again come to the forefront, with CalPERS releasing a report detailing the use of placement agents, or middlemen that connect money managers with pensions. Commissioned in the fall of 2009 to review the fees paid by its external managers to placement agents, the CalPERS review asserted that while at the giant pension, fund officials such as former chief executive Fred Buenrostro repeatedly “inserted himself in the investment process in a manner inconsistent with prior practice at CalPERS, pressing its investment staff to pursue particular investments without evident regard for their financial merits.”

Earlier this month, KKR said it endorses a set of guidelines on private equity best practices issued by the not-for-profit Institutional Limited Partners Association. “We are pleased to formally endorse the ILPA principles,” KKR’s Henry R. Kravis and George R. Roberts Co-CEOs and Co-Founders wrote in a statement. “We believe that the entire private equity industry – limited partners and general partners – will benefit from increased focus on the three basic tenets…For KKR, we believe the principle of alignment is at our very core, as evidenced by the fact that we have a meaningful amount of capital, more than $6 billion, from our executives and our balance sheet, at work in our private equity investments.” KKR further noted that while the firm’s existing and future funds will not adhere to each and every term outlined in the Principles, its endorsement reflects a general support for the efforts of ILPA and other industry supporters with the mission of improving the private equity industry for the long-term benefit of all of its participants. The Private Equity Principles outlined three guidelines for private equity funds: 1) aligning investment firms and investors’ interests, 2) governance and 3) transparency. They also included recommendations on issues such as carry clawback and financial reporting.