Private equity firm Kohlberg Kravis Roberts & Co on Monday moved a step closer to merging with its Euronext-listed fund after receiving approval from the board of the fund to combine businesses.

Combining with KKR Private Equity Investors LP (KPE) is a roundabout way for KKR to gain a European listing, and is a step toward it following rival Blackstone Group in becoming a New York Stock Exchange-listed company.

KKR, one of the world's most powerful private equity firms, also gave more details on the planned combination with KPE, including a proposed equity-incentive plan.

It provided an update on its profit outlook, saying earnings for the second quarter were expected to be between $345 million and $370 million. The most recent comparison are figures it released in May, which showed a loss for 2008 of $1.2 billion.

Fee-related earnings for the three months were expected to be between $45 million and $55 million, it said.

It also said assets under management for the end of June were expected to be $50.8 billion, a 7 percent rise from the $47.3 billion it disclosed in May.

KKR, co-founded by buyout king Henry Kravis, has investments in numerous household names such as Toys R Us Inc , mattress maker Sealy Corp and asset manager Legg Mason Inc .

The economic meltdown hit the valuations of private equity firms' portfolios, their ability to raise money from the large pension funds that invest in their funds, and their ability to do leveraged deals.

However, KPE's net asset value is expected to be $3 billion for the end of June; a 14 percent rise from the $2.6 billion reported for the end of March, the firms said.

On a per unit basis, KPE's net asset value is expected to be between $14.55 and $14.75 per unit, a 13-15 percent rise from the $12.82 reported for the end of March.

The figures are down from the same period a year earlier, however, when KPE's net asset value was $4.6 billion, or $22.25 per unit.

Valuations have been helped by a rebound in the equity markets over the last few months. Private equity firms have to value their portfolio companies as if they were selling them today; rather than years in the future. In its first-quarter figures, KKR wrote up its investments in companies including discount chain Dollar General and hospital company HCA.

KPE has investments in six KKR private equity funds.

NYSE LISTING PLANS

KKR launched plans to list on the NYSE via a traditional initial public offering in July 2007, a month after Blackstone went public and just before the markets started to tumble.

It later proposed a more complex method of going public, by combining with KPE, delisting the fund from Amsterdam and listing in New York. In June, it formally withdrew the proposed New York IPO plan, but kept the door open for such a move, saying it had the ability to seek a listing in the future.

This was re-iterated in Monday's press release, which said KPE and KKR would have the ability to require that the other use its reasonable best efforts to cause KPE's interests in the combined business to be listed and traded in the U.S.

After six months KKR would have the ability to seek a listing of the combined business in the U.S., and after 12 months, KPE would have that right, they said.

The deal agreed on Monday is a revised deal to the original terms KKR proposed. Under the deal agreed Monday, KPE will own 30 percent of the combined business, which would keep the Euronext listing. The original plan called for a delisting of the fund and would have seen KPE own 21 percent of the company.

INCENTIVE PLAN

The combined company would also have an equity-incentive plan under which 15 percent of the fully diluted interests of the business may be issued, the pair said in an annex to Monday's statement. That was consistent with other publicly traded U.S. alternative asset managers, they said.

Any grants made under that plan after the combination would dilute KPE and KKR principals' interests in the combined business. However, no grants would be made to senior members of KKR until either one year after the combination, or the business was listed in New York, they said.

The companies stressed that KKR's executives were not selling equity under the deal with KPE.

KKR on Monday said the board of KPE had unanimously approved the deal, although it still required the consent of KPE unitholders. Those owning 44 percent of KPE's outstanding shares have agreed to the deal. Provided that consent is obtained, the deal is expected to occur on October 1.

KKR co-founders Henry Kravis and George Roberts said in a statement that the combined business would be well positioned to take advantage of exciting opportunities in asset management and financial services.

The original deal gave an implied value for KPE shareholders of $16 to $19.20 per share, according to a KKR presentation at the time. It is unclear what the implied value is under the new deal.

Shares in KPE closed on Friday at $5.38. Shares in KKR's listed rival, Blackstone, have fallen significantly since their June 2007 IPO at $31, and closed on Friday at $10.39.

Citi is advising KPE, Lazard is advising the independent directors, and Goldman Sachs and Morgan Stanley are advising KKR.

(Editing by Chris Lewis and Muralikumar Anantharaman)

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