Exclusive-KKR To Launch Its Two First ESG Credit Funds

Private equity firm KKR & Co Inc is preparing to launch its first two credit funds dedicated to investing based on environmental, social and corporate governance (ESG) principles later this year, according to an internal memo seen by Reuters.

The funds, offered to institutional investors as well as high net-worth individuals, will be managed by KKR's sustainable credit team run by Terry Ing and William Needham, according to the memo.

They will seek to outperform blended high yield and leveraged loan index benchmarks by delivering high-single-digit returns on a net basis, a person familiar with the matter said, requesting anonymity because the fundraising details are confidential. The targeted sized of the two funds could not be learned.

KKR declined to comment.

ESG investing, which is gaining in popularity amid a push to address challenges such as climate change and social inequality, is becoming more prominent in capital markets.

Some companies are taking out "green" or "sustainable" loans and are issuing bonds that come with specific ESG commitments. Investors often reward the companies with a lower interest expense if they meet related targets.

The first fund, KKR Credit ESG Climate Opportunity Fund, will focus on climate change and invest globally in the publicly listed debt of companies that score highly on KKR's "proprietary ESG scorecard," according to the memo.

The second fund, KKR Credit ESG Accelerator Fund, will be a global sustainability-focused fund deploying a range of private debt investing strategies including direct lending, junior debt, asset-based finance and opportunistic credit, the memo said.

The funds will engage regularly with the issuers of the debt they invest in to ensure they are meeting their ESG commitments, the person familiar with the matter said. The funds will invest in the credit of oil and gas companies as long as they are committed to reducing their carbon emissions to zero on a net basis by 2050 or earlier and have credible decarbonization strategies, the source added.

KKR's global head of public affairs and co-head of its global impact strategy Ken Mehlman will work closely with the new funds, while the firm's Sustainable Expert Advisory Council chaired by Bob Eccles will provide regular guidance and oversight, according to the memo.

The credit funds are not the first ESG-dedicated investment product launched by KKR. The New York-based firm launched a $1.3 billion private equity fund in 2019, the KKR Global Impact Fund, dedicated to investing in companies that provide commercial solutions to environmental or social challenges. That fund was valued at 1.7 times its investors' money on a gross basis as of the end of March, according to a KKR regulatory filing.