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| KKR Co-President Joseph Bae, left, and Shinhan Chairman Cho Yong-byoung / Korea Times file |
Kohlberg Kravis Roberts & Co. (KKR) is facing growing concerns over the management of its $50 million real estate and infrastructure fund raised in collaboration with Shinhan Financial Group, as on-site due diligence has become practically impossible amid the COVID-19 pandemic, according to industry sources, Thursday.
KKR and Shinhan signed a memorandum of understanding in September 2018, under which the two would explore new opportunities in global alternative investments. They also agreed to raise two tailor-made funds collectively worth $200 million.
Shinhan's bank, brokerage and life insurer units jointly raised $150 million to use the money for investments in a private equity fund (PEF) in which KKR had shown its expertise.
This was part of Shinhan's efforts to learn from KKR's experience and knowledge in global investments, because the latter had agreed to give the former wider access to details of its management, in contrast with most asset management firms operating funds independently.
"By raising the customized fund with KKR, we have been able to seize a good opportunity to enhance profitability of our group's alternative investments," Shinhan Chairman Cho Yong-byoung said. "In order to improve our group's capability in global alternative investments to be world-best, we will strengthen our partnership with global asset management companies such as KKR."
Earlier reports noted their plan to raise another $50 million fund was facing setbacks, but Shinhan dismissed the rumor, saying the money was also given to KKR during the first half of this year for its investments in real estate and infrastructure.
But industry officials still doubt whether the global asset management company could manage the fund as planned, citing alternative investments in real estate have lost steam amid the pandemic.
According to analysts, global real estate investments have become sluggish this year as it's been difficult to conduct on-site due diligence because of worldwide travel restrictions.
"The U.S. and the global real estate markets are highly likely to enter into an adjustment period," SK Securities analyst Koo Kyung-hoi said. "This results from declining rental income, deflation and instability in the real estate finance market."
The Korea Times asked KKR about the matter, but its response was that it had "no comment on the specifics of fund operations."
KKR has already suffered significant losses, as the pandemic dealt a blow to the global asset market. According to the Wall Street Journal, the company turned suffered a $1.28 billion net loss in the first quarter. The amount of assets under management dropped 5.2 percent to $207 billion from the previous quarter.
In the face of the huge deficit, KKR also requested discounts of at least 15 percent from its accountants, law firms, intelligence companies and consultants, including EY and Simpson Thacher & Bartlett, according to the Financial Times.
Another concern is Shinhan and KKR may not be able to strengthen their ties further.
When they formed their partnership in 2018, they had reportedly sought to create a fund worth up to 5 trillion won ($4.1 billion). Amid fears over Shinhan's financial soundness and volatility in the global financial market, however, they eventually downsized the amount to $200 million.
Although Shinhan and KKR are expected to raise funds worth $300 million within this year, this plan is unlikely to be fulfilled, considering the market consensus among domestic securities firms showed Shinhan's second-quarter earnings will decrease 17.7 percent to 881.3 billion won from 1.7 trillion won last year.
