Key Benefits and Risks of the Fund
The key benefits of investing in the Fund include:
Attractive Target Distribution: the Fund aims to deliver distribution yield of 4% - 6% per annum (net of fees and expenses incurred by the Fund, but before tax), paid quarterly once the Fund has deployed the Offer Proceeds in the KKR Funds (which is expected to occur by March 2020). The Target Distribution is only a target and may not be achieved.
Attractive Target Return: The investment strategies of the KKR Funds aim to protect capital and generate strong risk adjusted returns through the market cycle, with the Fund seeking to deliver a medium-term average total return of 6% - 8% per annum (net of fees and expenses incurred by the Fund, but before tax). The distribution yield over a given period may be lower than the total return in this period to the extent that the total return includes unrealised gains.
Diversified exposure: Low expected correlation of the Fund’s assets to Australian and global equities means that the return profile of the Fund should not move in line with the return profile of Australian and global equity markets. This means that investors should be less exposed to a downturn in global equity markets
Alignment of interests with Unitholders: The Fund will aim to directly or indirectly invest in the KKR Managed Funds and the investment strategies they pursue on a pari-passu basis with KKR's institutional investors and KKR's own capital through its balance sheet commitments and employee investments.
KKR product access: access to global credit investment opportunities sourced through proprietary KKR channels. The Fund assets will be invested into KKR Managed Funds, which are generally only open to institutional investors such as pension funds and sovereign wealth funds.
Highly experienced KKR Credit team: the KKR Credit team has comprehensive credit investing expertise, with approximately 120 KKR Credit investment professionals in locations spanning eight countries who are dedicated to sourcing, assessing and managing credit investments on a global basis.
All investments are subject to risk which means you may lose all or a portion of the amount you invest or you may otherwise achieve distributions and returns that are lower than the Target Distribution and Target Total Return. Before making an investment decision, it is important to understand the risks that can affect the value of your investment. You should carefully review the key risk summary in Section 1 of the PDS, together with the other risks described in Section 8 of the PDS.
Key risks in relation to the Investment Strategy include:
- Allocation risk: the Trust’s Investment Strategy relies on the Manager’s flexible mandate to allocate funds to underlying credit strategies, including through investing and reinvesting the assets of the Trust in the KKR Managed Funds. Any delay in the Manager allocating funds to investments or across the KKR Managed Funds will delay the Trust’s ability to achieve the Target Total Return and Target Distribution (which are not guaranteed).
- Illiquid and long term investments: the KKR Managed Funds will invest in illiquid and long-term investments and the KKR Managed Funds may be legally, contractually or otherwise prohibited from selling certain investments for a period of time or may be restricted from disposing of them. Illiquidity may also result from the absence of an established market for certain investments. The realisable value of a highly illiquid investment at any given time may be less than its intrinsic value. In addition, certain types of investments made by the KKR Managed Funds may require a substantial length of time to liquidate. As a result, a KKR Managed Fund may be unable to realise its investment objectives by sale or other disposition at attractive prices or may otherwise be unable to complete any exit strategy. The KKR Managed Funds may also only provide periodic redemption opportunities or prohibit redemption opportunities prior to the end of the fund term and, as a result, the Trust’s interest in the KKR Managed Funds may also be illiquid. Illiquidity (in all the forms described above) may have an adverse effect on how the market values Units and therefore the price at which Units trade on ASX).
Key risks in relation to conflicts of interest include:
- Potential conflicts of interests of the Responsible Entity and the Manager and its affiliates: The Manager and its affiliates (including affiliates managing certain of the KKR Managed Funds) are part of KKR’s global investment management firm, which includes amongst others, its private markets and capital markets businesses and KKR Credit. KKR has, and may in the future, acquire interests in other businesses. As a result of this broad range of KKR activities, the Manager and its affiliates, personnel and associates may have multiple advisory, transactional, financial and other interests and relationships that conflict with the interests of the Trust and the KKR Managed Funds in which it invests, and/or that generate fees and other compensation and economic benefits for KKR. KKR also makes substantial investments for its own account, which may have an adverse impact on the Trust and the KKR Managed Funds in which it invests, for example by reducing the amount of an investment opportunity that is allocated to a KKR Managed Fund or acquiring a stake in another investment manager that competes with a KKR Managed Fund for investment opportunities. KKR has established policies and procedures for mitigating and managing possible conflicts of interest as they relate to its global business. Section 13.5 of the PDS provides details in relation to how the Trust will manage these conflicts of interest as they relate to its activities.
- Entities within the “Perpetual Group” (comprising Perpetual and its subsidiaries, including the Responsible Entity) may also act in various capacities (such as responsible entity, trustee and custodian) for other funds or accounts, which may conflict with the role the Responsible Entity plays with respect to the Trust. The Perpetual Group has implemented policies and procedures to seek to identify and manage conflicts in a fair and equitable manner as described in Section 13.5 of the PDS.
Key risks in relation to an investment in the Trust include:
- Market and economic risks: a change in general economic and market conditions, including the availability of credit, factors affecting interest rates, currency exchange rates, economic uncertainty, changes in laws, trade barriers and national and international political circumstances may affect the level and volatility of securities’ prices and the liquidity of the investments in the KKR Managed Funds, as well as the credit quality of the underlying borrowers and the ability of the KKR Managed Funds and their managers to source investment opportunities. These developments could impair the Trust’s profitability or result in losses.
- Currency risk: the functional currency of the Trust is the Australian dollar. The functional currencies of the KKR Managed Funds in which the Trust invests are currencies other than the Australian dollar, and the KKR Managed Funds themselves may invest in assets denominated in a variety of currencies other than Australian dollars. Although it is intended that the Trust hedge against foreign exchange movement risk, it may from time to time not be able to do so. For example, where a derivative hedge is not cost effective or not available. For unhedged investments of the Trust or a KKR Managed Fund, there is potential for adverse movements in exchange rates to reduce their value relative to the functional currency of the Trust or the KKR Managed Fund, each of which may adversely impact the value of the Trust.
- Pricing risk: Units may subsequently trade on the ASX at, above or below the Subscription Price or NAV per Unit.
- Liquidity risk relating to Units in the Trust: the Trust does not offer a redemption facility so Investors will need to sell their Units on the ASX if they wish to withdraw their investment. The ability of Unitholders to sell their Units on the ASX will depend on the turnover or liquidity of the Units at the time of sale. Therefore, Unitholders may not be able to sell their Units at the time, in the volumes or at the price they desire.
- Operational risk: there is a risk that inadequacies with systems and procedures or the people operating them could lead to a problem with the Trust’s operation and result in a decrease in the value of Units or otherwise disadvantage the Trust. These systems and procedures include, but are not limited to, those that identify and manage conflicts of interest. Operational risk is principally addressed through the Responsible Entity’s risk management framework, which includes internal controls to mitigate the risk that relevant systems and procedures are not followed.
Key risks in relation to debt investments in which the KKR Managed Funds invest include:
- High yield investments risk: the KKR Managed Funds from time to time may hold debt securities and other credit investments that may be classified as “higher-yielding” (and, therefore, higher-risk) investments. In most cases, such debt will be rated below “investment grade”. Borrowers of this type are considered to be at greater risk of not making their interest payments or principal repayments.
- Credit risk: in relation to any debt security or instrument invested in by a KKR Managed Fund (whether high yield or not), a failure by the borrower to repay the principal, make interest payments or fulfil other financial obligations in full and/or on time may cause the KKR Managed Fund and therefore the Trust to suffer loss which may impact on the financial performance of the Trust including its ability to achieve the Target Distribution.
- Interest rate risk: certain KKR Managed Funds’ investments will expose them and the Trust to interest rate risks, meaning that changes in prevailing market interest rates could negatively affect the value of such investments. Factors that may affect market interest rates include, but are not limited to, inflation, slow or stagnant economic growth or recession, unemployment, money supply, governmental monetary policies, international disorder and instability in relevant financial markets. In a changing interest rate environment, neither the KKR Managed Funds nor the Trust may be able to manage this risk effectively.
- Bankruptcy risk: investments of the KKR Managed Funds in companies or other borrowers involved in bankruptcy, restructuring or insolvency proceedings involve a number of significant risks. Bankruptcy, insolvency or other court proceedings may result in the approval of actions which may be contrary to the interests of the KKR Managed Funds and the Trust. The duration of a bankruptcy, restructuring or insolvency proceeding may also give rise to substantial costs for the KKR Managed Funds.
If you are uncertain as to whether an investment in the Trust is suitable for you, please contact your stockbroker, financial adviser, accountant, lawyer or other professional adviser.