Introduction to private credit and public-private solutions

3.1 Introduction to our Public-Private+ Funds

Introduction to our Public-Private+ Funds

 

Capital Group has partnered with KKR to offer two fixed income public-private solutions. Watch this video to learn more about this investment opportunity.

 

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David Bradin

Fixed income investment director at Capital Group

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Holly Framsted

Head of global product strategy and development at Capital Group

7MINVIDEO

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A look behind Capital Group KKR Public-Private+ Funds

 

Learn more about the details and design of these new products

 

Guiding principles

Capital Group has partnered with KKR to help unlock private markets while addressing some of the risks and impediments that have kept these options out-of-reach for non-institutional investors. Here’s what we considered when building these funds:

 

Selecting the right partner

KKR shares Capital Group’s commitment to deep fundamental research and, with 50 years’ experience in private markets, KKR has a demonstrated history that is comparable to Capital Group’s experience in public markets.

 

Expanding access

How could investors, who have historically had limited options with respect to private credit, access private credit investments?

The table situates Capital Group and KKR's public-private+ solutions relative to other Capital Group and KKR offerings. Public-private solutions sit in between KKR's less liquid private credit products and Capital Group's more traditional public products.

This was the new opportunity space we sought to carve out: fixed income products with an allocation to private credit that sit between traditional bond mutual funds and alternative investments. They needed to be more accessible than direct private investments, offering a holistic picture of credit market opportunities with simplicity. These funds were designed to complement existing fixed income assets within a client’s overall portfolio. 

 

Liquidity and scale 

We built a blended approach that aims to delivers private market access with liquidity designed to be broadly appealing to investors.

 

Simplifying the investment experience  

The funds were designed with lower investment minimums compared to traditional alternative investments, a compelling level of fees, tax paperwork that’s generally limited to a Form 1099, and quarterly repurchase offers of up to 10% of the fund’s outstanding shares.

 

Design considerations

In our effort to deliver enhanced and diversified sources of yield versus public fixed income markets alone, we asked:

 

What investment vehicle would be most appropriate?

We believe interval funds as an investment vehicle enable us to responsibly allocate investments to less liquid assets. Their structure allows us to design fixed income strategies using private credit, despite the lesser liquidity of the underlying assets.

 

What should the public portion of the funds look like?

We wanted to retain the characteristics of traditional fixed income strategies, so that these products can fit within a traditional fixed income allocation. This means that the risk profile could not be too different from traditional fixed income, which entailed including a healthy portion of traditional fixed income assets.

 

Fund management

A hallmark of our Public-Private+ Funds is their integrated investment process, which brings together investment knowledge, investor access, portfolio management and oversight capabilities. 

 

Public and private credit allocations are actively managed in both funds by Capital Group and KKR.

The diagram illustrates how the public and private debt strategies included in public-private solutions combine and may have their relative allocations adjusted based on Capital Group and KKR's active management. On left it shows a column titled public debt strategy underneath are stacked investment grade, high yield/EMD and securitized. On the right is a column titled private debt strategy and underneath are stacked assed based finance and direct lending. Between is a pie chart with public debt strategy comprising approximately 60% and private debt strategy comprising approximately 40%.

Source: Capital Group and KKR

Portfolios are carefully constructed and monitored to help ensure investments align with the pursuit of each fund’s investment objectives. 

 

Finalizing the design

The Capital Group KKR Core Plus+ fund blends public fixed income and private credit to pursue potentially higher income than a traditional core plus strategy. The fund’s investment objective is to provide a high level of current income and seek maximum total return, consistent with preservation of capital. It was designed to be an enhancement to a core-plus bond allocation to pursue higher income.

 

The Capital Group KKR Multi-Sector+ fund pursues a multi-lever approach seeking high income. The fund’s investment objective is to provide a high level of current income. It was designed as an option for a higher income-seeking credit allocation.

 

For both funds, research was done to consider the potential impacts to liquidity under various market scenarios.

 

Design process outcomes

We believe the holistic approach with which these funds were conceived and created can offer your clients:

 

  • Potential for higher returns through strategic private credit exposure. 
    We believe even a modest allocation to semi-liquid credit could help enhance the return profile of a traditional public stock and bond portfolio.
  • The balance of liquidity with risk, catering to long-term investor horizons. 
    Investors with a long time horizon can benefit from the illiquidity premium by holding illiquid credit assets as strategic positions.
  • Private market access while helping mitigate illiquidity challenges.
    We believe an interval fund is a prudent way for investors to access this blend of public and private investments. While still less liquid than traditional assets, our public-private+ funds offer a satisfactory degree of liquidity for many investors. This helps open the private credit market to investors who are comfortable with semi-liquidity.

Perspectives: A skilled partner for private market success

 

In this video, learn why Capital Group chose KKR as our partner for offering these products, and why we can be an effective partner for you and your clients investing in public-private solutions.

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John Queen

Fixed income portfolio manager at Capital Group

6MINVIDEO

End of lesson

This lesson discussed the basics of Capital Group and KKR's fixed income Public-Private+ Funds. Don’t forget to review lesson takeaways here.

 

The next lesson will provide more materials on both, as well as some tips for investing in public-private solutions more generally.

NEXT LESSON

Investing in public-private solutions

3.1 Introduction to our Public-Private+ Funds
3.2 Assessing manager and client-product fit

Takeaway

Fixed income Public-Private+ Funds from Capital Group and KKR

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For financial professionals only. Not for use with the public.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the interval fund prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Consider the following risks for the Capital Group KKR fund(s) discussed in this material: The fund is an interval fund that provides liquidity to shareholders through quarterly repurchase offers for up to 10% of its outstanding shares under normal circumstances. To the extent more than 10% of outstanding shares are tendered for repurchase, the redemption proceeds are generally distributed proportionately to redeeming investors (“proration”). Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window. In addition, anticipating proration, some shareholders may request more shares to be repurchased than they actually wish, increasing the likelihood of proration. Shares are not listed on any stock exchange, and we do not expect a secondary market in the shares to develop. Due to these restrictions, investors should consider their investment in the fund to be subject to illiquidity risk.

Investment strategies are not guaranteed to meet their objectives and are subject to loss. Investing in the fund is not suitable for all investors. Investors should consult their investment professional before making an investment decision and evaluate their ability to invest for the long term. Because of the nature of the fund's investments, the results of the fund's operations may be volatile. Accordingly, investors should understand that past performance is not indicative of future results.

Bond investments may be worth more or less than the original cost when redeemed. High‐yield, lower‐rated, securities involve greater risk than higher‐rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. The fund may invest in structured products, which generally entail risks associated with derivative instruments and bear risks of the underlying investments, index or reference obligation. These securities include asset-based finance securities, mortgage-related assets and other asset-backed instruments, which may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market's perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds. For example, the fund may purchase and write call and put options on futures, giving the holder the right to assume a long (call) or short (put) position in a futures contract at a specified price. There is no assurance of a liquid market for any futures or futures options contract at any time. Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.

The fund invests in private, illiquid credit securities, consisting primarily of loans and asset-backed finance securities. The fund may invest in or originate senior loans, which hold the most senior position in a business's capital structure. Some senior loans lack an active trading market and are subject to resale restrictions, leading to potential illiquidity. The fund may need to sell other investments or borrow to meet obligations. The fund may also invest in mezzanine debt, which is generally unsecured and subordinated, carrying higher credit and liquidity risk than investment-grade corporate obligations. Default rates for mezzanine debt have historically been higher than for investment-grade securities. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy.

Illiquid assets are more difficult to sell and may become impossible to sell in volatile market conditions. Reduced liquidity may have an adverse impact on the market price of such holdings, and the fund may be unable to sell such holdings when necessary to meet its liquidity needs or to try to limit losses, or may be forced to sell at a loss. Illiquid assets are also generally difficult to value because they rarely have readily available market conditions. Such securities require fair value pricing, which is based on subjective judgments and may differ materially from the value that would be realized if the security were to be sold.

The fund is a non-diversified fund that has the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund were invested in a larger number of issuers. The fund intends to declare daily dividends from net investment income and distribute the accrued dividends, which may fluctuate, to investors each month. Generally, dividends begin accruing on the day payment for shares is received by the fund. In the event the fund's distribution of net investment income exceeds its income and capital gains paid by the fund's underlying investments for tax purposes, a portion of such distribution may be classified as return of capital. The fund's current intention not to use borrowings other than for temporary and/or extraordinary purposes may result in a lower yield than it could otherwise achieve by using such strategies and may make it more difficult for the fund to achieve its investment objective, than if the fund used leverage on an ongoing basis. There can be no assurance that a change in market conditions or other factors will not result in a change in the fund distribution rate at a future time.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
KKR Credit Advisors (US) LLC serves as the sub-adviser with respect to the management of the fund's private credit assets. Capital Group (the "Adviser") and KKR are not affiliated. The two firms maintain an exclusive partnership to manage and deliver public-private investment solutions to investors.
Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.
Capital Client Group, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.