Private equity firms generally own companies they invest in — they don’t act as their bankers. That is standard high finance 101. But in an interesting twist, at least according to Fortune, that is not the case with payment processing company First Data Corp. and Kohlberg Kravis Roberts & Co.
First Data, which KKR bought seven years ago, recently raised $3.5 billion in equity. As lead investor, KKR provided $1.2 billion in the round. Hardly earth-shattering given KKR’s ties to its portfolio company.
But herein lies the rub: The funding, as claimed by Fortune, was “technically” raised by KKR Capital Markets, a KKR broker-dealer affiliate. First Data paid KKR Capital Markets a reported $40.6 million for its efforts. KKR, as alleged by Fortune, is not sharing the proceeds with its limited partner co-investors “who indirectly own most of First Data, and thus have the most riding on its balance sheet.”
For the record, KKR is not denying this arrangement. “The company is raising capital (in the form of a private placement of equity), so it is normal for the company to pay an issuance fee to the broker-dealer raising that new capital,” says a KKR spokesperson, as cited by Fortune.
Further, the commission fee isn’t that unusual. “It works out to around 2% of capital committed by third-parties — no commission was paid on new capital from KKR and its LP co-investors — which arguably is lower than the going rate for private placements,” according to Fortune.
But traditional investment banks don’t have “dueling fiduciary duties,” unlike KKR. To prove its point, the publication says that although the $40.6 million price tag might be good for KKR shareholders, it might not be the best for KKR’s LPs.