Private equity firm KKR & Co has started talks with investors for a third Asia fund, targeting a record $7 billion with a formal launch expected by year-end, people familiar with the plans said.
KKR’s fundraising plan would pit it against rival U.S. buyout firm TPG Capital Management which is launching a new Asia fund in the coming months with a target of more than $4 billion, sources familiar with the plans previously told Reuters.
The ramp-up in fundraising by private equity firms for Asia-focused investments comes as long term investors such as pension funds, sovereign wealth funds and insurance firms seek to boost returns in an environment of ultra-low or even negative interest rates.
The investors are also looking to boost their exposure to fast-growing Asian countries such as China, India and Indonesia due to their massive populations of increasingly affluent consumers and because they are churning out businesses with the potential to become global corporations.
KKR set a record for Asia private equity fundraising with its $6 billion Asian Fund II in 2013, of which it has already deployed or committed about two-thirds, added the sources, which included investors and advisers to KKR who couldn’t be named because details on the new fund have not been made public.
KKR declined to comment on its new fund.
Against the backdrop of low returns from traditional asset classes such as bonds, KKR’s Asian Fund II posted an internal rate of return (IRR) of 26.4 percent through December 2015, according to data from the California Public Employees’ Retirement System (CalPERS), which invested in the fund.
Returns above 20 percent are considered good for private equity funds.
But returns could face pressure as private equity firms are increasingly finding it difficult to profitably deploy the huge sums at their disposal because sellers of businesses in Asia are asking higher prices, buyout funds have warned.
Asia-focused buyout funds have raised $9.4 billion so far this year, according to data provider Preqin. Some of the largest capital raisings in the past year include a $3.6 billion fund by Hong Kong-based private equity firm PAG, $2.7 billion by Hony Capital and $3 billion from Bain Capital.
KKR’s planned fundraising comes amid a recent reshuffle of senior executives in Asia.
The firm last week named Ming Lu as the sole head of its Asia private equity business, after David Liu and Julian Wolhardt decided to leave the firm to form their own investment firm. Liu had been co-head of private equity with Lu previously.
Liu and Wolhardt were instrumental in several of KKR’s China deals, including investments in China Modern Dairy Holdings , pork producer COFCO Meat, chicken meat company Fujian Sunner Development Co, leasing firm Far East Horizon , appliance maker Qingdao Haier and investment bank China International Capital Corp, said the sources.
KKR last week also announced appointments in China and South Korea, and unveiled a new head for Southeast Asia.
China has been the recipient of nearly $3 billion of KKR’s $10 billion committed or deployed to the Asian region since 2005, the company has said.