KKR Financial Holdings LLC

We have a rigorous, ongoing investment process. KKR Financial Holdings LLC (KFN) has a bias toward large-cap companies, and investments that are senior in the capital structure.

KFN reviews current and potential investments focusing on five major factors: credit standards, management quality, valuation, relative asset class valuation, and its views on macroeconomic conditions. Building on these factors, KFN is guided by the following key principles:

Credit Philosophy: This is part of its ongoing analysis of each investment opportunity — it includes anticipating credit performance by analyzing the competitive environment and industry dynamics.

Fundamental Investing vs. Momentum: KFN is driven by company and investment fundamentals, rather than “momentum” driven investments.

Multi-Asset Class Strategy: KFN invests in multiple classes of assets that allow it to rotate sectors as industry and economic factors dictate to generate the highest risk-adjusted returns possible under its operating and tax model.

Investment Targets: Consistent with the above principles, KFN targets its investments to companies that meet the following requirements:

  • Operate with a differentiated business model and competitive advantage
  • Proven, ethical management team
  • Demonstrated ability to generate free cash flow, competitive returns, and sustainable margins
  • Ability to withstand various economic environments
  • Favorable long-term industry trends
  • Sufficient liquidity

Investment Process
KFN has a deliberate, collaborative, and highly disciplined investment process. It is recurring and ongoing. It involves both debt (KKR Asset Management) and private equity professionals and industry teams working together to create a portfolio that is designed to provide shareholders with competitive returns.

Risk Management
All of KFN’s investments require a comprehensive written investment committee memorandum that includes a complete financial model with stress cases, industry review, relative value, management profile, investment strengths, weaknesses, and covenant review. All investments also require unanimous approval by the investment committee and quarterly written reviews for presentation to the investment committee.

Daily third-party marks are received for over 95 percent of the bank loan and high yield positions.

Financing
KFN applies moderate leverage using attractive, flexible, low-cost, financing tools to enhance the returns to its shareholders. KFN has a bias toward long-term, non-recourse financing.

KFN leverages its portfolio through funding vehicles that afford KFN control and flexibility such as collateralized loan obligations (CLOs). The amount of leverage will vary depending on KFN’s ability to obtain credit facilities and the lenders' and rating agencies’ estimate of the stability of the portfolio investments' cash flow. KFN manages total leverage to ensure that capital is always available to take advantage of opportunistic investments and to meet liquidity needs.

Senior collateral loan obligation notes and a secured revolving credit facility are in place and used for existing portfolio leverage. KFN also uses unsecured debt including convertible notes and trust preferred securities.