How KKR finds the world's best investment opportunities

Every great investment house stands by three things: integrity, experience, and process. All these elements are put together to create a formula by which the best investors live. KKR's credit division has been around since 2004, and as partner Jeremiah Lane revealed to me, the way they seek out top investment ideas is as precise as they come.

The criteria for finding a great company's credit is simple but rare to find:

• Companies with durable cash flows
• Does it have any in-built downside protection?
• Is there a risk the company won't be able to honour its payments?

That process must count for something. Since the KKR Credit Income Fund was launched in Australia, it's paid out a cumulative distribution of more than 13%. And despite the torrid year that was 2022, the fund has still got a positive total return to report.

In this Expert Insights video, we're tackling the process and the opportunities within the credit market for 2023. You'll get to hear first-hand how one of the world's most influential money managers separates the great deals from the good ones.

Note: This series of videos was taped on Wednesday, February 8th 2023.

EDITED TRANSCRIPT

LW: What role will credit have in a diversified portfolio this year?

Lane: When we think about what opportunity has been available in credit in the last five years, we've seen both individuals and funds allocate away from credit just because the returns that were available were so paltry and when we look at the opportunity going forward, we think there is just much, much more return that's going to be available on a more sustainable basis for investors. 

We see this as a time when investors are going to be increasing their exposure to credit. Both individuals and institutions will be increasing their exposure to credit and trying to rebuild some of that recurring income that historically played a big part of portfolios and it just diminished as part of portfolios in the 2010s because there was so little income available.

LW: What is one credit asset tipped for a big year?

Lane: We think that bank loans are more attractive than high yield bonds. When we think about what's happened in the rates market over the past two to three months, you've seen a big rally in the 10-year as market participants have gained conviction that The Fed was going to quickly stop raising rates and also would start cutting rates. 

While the market has gained that conviction, spreads in high yield market have also come tighter, and so that combination to me feels somewhat overdone. I think that there's a scenario where if we continue to get strong economic data like we did last week with the jobs report, that market participants are going to have to capitulate on the speed with which they think The Fed is ending the rate hikes. And so, that's a risk for the high yield market.

LW: What is your process for separating the great investment ideas from the good ones?

Lane: One of the things that we've developed since we started KKR Credit in 2004 is just a very structured investment process. So, we run a morning meeting every day where one of the analysts will report out the economic news of the day. One of our traders will report out trading environment that they're seeing in the morning. And, then individual analysts will highlight relevant news for all of the companies in their portfolios. 

In addition to that, then my co-head of research, Terry Ing, and I will run a prioritisation meeting, so we sit down with all of the analysts once a week and go through how they want to allocate their time for the coming week, what businesses they're doing due diligence on, and what opportunities they're chasing down.