KKR Real Estate Credit Business Grows to $43 Billion

KKR's real estate credit business has expanded significantly over the past decade, growing from an initial $400 million investment to $43.2 billion in assets under management (AUM). This growth highlights the firm's strategic focus on both equity and debt in the commercial real estate sector, driven by key leadership and market shifts towards private capital.

A Decade of Significant Expansion

Since its launch in 2015, KKR's real estate credit division has shown remarkable growth. The business started with a modest $400 million seed investment. Today, it manages $43.2 billion in assets. This expansion also involved increasing its professional staff from 10 to 110 individuals across operations in the United States and Europe.

The firm has established itself as a significant player in commercial real estate finance. It is currently the largest third-party buyer of commercial mortgage-backed securities (CMBS) B-pieces in the U.S. This position reflects its deep market engagement and strategic investments over the past ten years.

"When we started the real estate credit business back in '15, we had a really small team," said Chris Lee, president of KKR's global real estate business. "The first few loans we made, we had to strongly convince people to let us lend them money."

Lee recalled early challenges in securing borrowers, emphasizing the need to build trust and demonstrate commitment. He assured potential clients that KKR would provide capital and close deals reliably. The first loan, a $55 million whole loan for an office property acquisition in Nashville, Tennessee, was made in 2015.

This early effort set the stage for future growth. The business now operates on a much larger scale. Chris Lee credits Matt Salem, KKR's partner and head of real estate credit, for bringing this expansion together. Making 10 loans a year is very different from originating a loan every week, Lee noted.

Building a Unified Platform

The real estate credit practice at KKR was built through a deliberate, step-by-step process. A critical first step involved assembling the right team. Chris Lee joined KKR in 2012, tasked with defining the future direction of the firm's real estate operations. The decision was made to become a provider of both equity and debt.

Lee then recruited Matt Salem and nine colleagues from Rialto Capital to spearhead the new credit initiative. The vision was to create a fully integrated debt and equity platform, a key strategic advantage. This integration aimed to leverage shared resources, thematic investment insights, and a unified investment committee for risk pricing.

"We knew we could be much more powerful if we had the equity business and the credit business sitting adjacent to each other, sharing a lot of the same resources, sharing a lot of the same thematic work around where and how to invest, and then having the risk priced by the same investment committee," Lee explained.

Matt Salem added that the credit business aimed to overlap with the equity business in terms of real estate quality and market focus. This approach allowed KKR to expand its credit offerings while maintaining a focus on areas where it had proven equity-side success. This translated into a highly institutional product, lending on high-quality real estate.

KKR's credit strategy focused on lending to large, sophisticated sponsors, similar to its real estate equity clients. This naturally led to larger loan originations. The firm developed a clear credit box and investment thesis, which guided the business's long-term direction.

Diversification and Strategic Acquisitions

KKR initially launched two debt-focused strategies: KKR Real Estate Finance Trust (KREF), a REIT originating senior commercial mortgages that went public in 2017, and KKR Real Estate Credit Opportunity Partners (RECOP), which focused on purchasing junior tranches of CMBS. However, a crucial element of KKR's long-term success has been its ability to diversify its capital sources.

The firm now manages eight distinct capital pools. These include bank, insurance, mortgage REIT, and debt fund capital. This diversification allows KKR to adjust its lending activities based on prevailing market conditions. Each pool can be activated or paused as market needs change. This flexibility has enabled KKR to remain active in the market even during periods of volatility, strengthening its relationships with borrowers.

"Borrowers say, 'You have all these products. Here's what we need. What can you do?'" Salem noted. "We have a lot of flexibility within each pool of capital to create the right solution for them. It's pretty neat when we can send a term sheet to our clients and you have three different bids laid out [from different pools]."

A major turning point for KKR's credit business was the acquisition of insurance company Global Atlantic. KKR first acquired a majority stake in 2020 and then the remaining portion in 2024. This acquisition significantly expanded KKR's access to stable insurance capital. Since the initial announcement, Global Atlantic's assets under management have nearly tripled to an impressive $201 billion.

Chris Lee highlighted the impact of this acquisition: "That acquisition really took us from having one core product, debt fund product, to us having a much different scale and reach in the business. It changed how we were thought of as a brand, from lending $3 billion a year to $10-plus billion a year." He added that integrating Global Atlantic required significant effort to manage a much higher volume of business, moving from 15 loans a year to 50 loans a year. Once complete, the brand recognition and franchise strength were transformed.

The acquisition was a mutual fit. KKR sought to add insurance capital, while Global Atlantic needed larger investment teams to support its growth. Both firms shared cultural values and a strategic vision for expansion. Salem confirmed that Global Atlantic has exceeded expectations, and the journey continues.

Future Growth and Strategic Focus

KKR sees significant potential for future growth in its real estate credit business. While no immediate large acquisitions are planned, the firm intends to expand its insurance capital offerings. This includes natural growth through successive fund series, allowing for larger and more frequent deals. There is also potential to offer insurance capital products to other insurance companies, leveraging KKR's expertise in managing its own insurance capital.

Other potential growth areas include accessing wealth channels, targeting affluent and mass affluent investors, and expanding into infrastructure lending. Data centers, in particular, represent a strong focus. KKR approaches these opportunities through various avenues, including its asset-backed securities (ABS) business, CMBS investments, and hyperscale construction net-lease activities.

Chris Lee emphasized KKR's long-standing expertise in digital infrastructure. "If you think about who's out there that can actually lend on data centers and has the expertise, understands the power, understands the tenants, the construction and who the right construction affiliates are, we have a playbook that allows us to do all of that and participate in scale." He noted that KKR has been investing in digital infrastructure for 15 years, giving it a significant advantage over newer entrants.

This deep understanding, from a private equity perspective, allows KKR to assess opportunities comprehensively. The firm's ability to be smarter and faster than competitors, and to adapt to market ebbs and flows, leads to better performance and increased capital formation. This integrated knowledge base, combining equity and credit insights, is a key competitive differentiator.

K-Star: Enhancing Asset Management

In April 2022, KKR launched K-Star, its asset management subsidiary, led by Lindsey Wright. K-Star offers underwriting, due diligence, and special servicer capabilities. This launch addressed a market need for direct lender access and assistance during volatile periods when loan issues arose.

Matt Salem described the timing as "better lucky than good," noting that the business had matured sufficiently to justify building an in-house team. This move also helped address challenges in retaining outsourced third-party asset managers. The leadership team, including Lindsey Wright and her recruits, has been instrumental in K-Star's success.

KKR chose Dallas, Texas, for K-Star's base due to a strong talent pool. The team has grown to 70 people and achieved rated special servicer status in the fall. An additional K-Star office was opened in Dublin, leveraging KKR's existing presence and the city's deep talent pool and lower operating costs compared to London.

CMBS B-Piece Program Success

KKR's CMBS B-piece program, now nine years old, was launched in response to the Dodd-Frank Act's risk retention regulations that took effect in 2017. The firm created its first dedicated fund, KKR Real Estate Credit Opportunity Partners I (RECOP I), in 2016 to capitalize on this upcoming regulatory change.

"We started it before the risk retention rules went into effect, but we knew they were coming in January of 2017 and we were able to go out and raise a pretty substantial amount of capital in anticipation of that — for something that didn't even exist yet," Salem stated. "We ended up acquiring the first CMBS deal that was actually subject to the risk retention rule, and that allowed us to negotiate all the precedent documents with the banks."

KKR has since become one of the largest and most consistent investors in the risk retention space, with strong performance. The firm's initial thesis was that risk retention would positively impact the market by encouraging better credit profiles through increased lender accountability. Analysis has confirmed this, showing reduced leverage and improved fundamental performance in these loans. KKR continues to invest in both conduit and single-asset/single-borrower (SASB) CMBS B-pieces.

The team's strong relationships allow almost 98% of deals to be negotiated off-market. This granular business requires extensive underwriting, but it has historically provided good returns and serves as a differentiator for KKR in a niche market with few participants.

Looking Ahead: Opportunities in the Current Market

As KKR's real estate credit business enters its next decade, it sees significant lending opportunities amidst ongoing market adjustments. The KKR Opportunistic Real Estate Credit Fund II, launched for opportunistic investments in senior loans and real estate securities in the U.S. and Western Europe, was over 50% deployed by May.

Salem described the current investing environment as "unique and exciting." High transaction volumes persist, driven by refinances and a picking up acquisition market. Values have reset, and despite relatively high rates, KKR is lending at reasonable bases, often below replacement cost. This creates a margin of safety and incremental return potential.

The re-emergence of banks in the credit market is viewed positively by KKR. While banks return to lending, they are also increasingly providing back-leverage facilities, which supports the growth of KKR's debt fund and mortgage REIT businesses. This creates a healthy and functioning market for all participants.

Regarding asset classes, KKR maintains a high bar for office properties but sees interesting opportunities as the sector reprices and leasing for quality assets recovers. The firm is more conservative on enclosed malls due to difficulty in assessing outcomes. Preferred asset classes include multifamily, condo buildings, student housing, industrial, self-storage, and manufactured housing.

Real estate credit has become increasingly attractive to institutional investors like pension systems and sovereign wealth funds. A higher rate environment translates to a safer lending market and the ability to deploy capital at scale. Post-GFC, real estate credit is becoming a standard component of institutional portfolios.

Chris Lee emphasized the importance of basis. Assets trading at a 10% to 20% discount to replacement costs allow KKR to lend at 50% to 60% of replacement costs, offering inherent safety. Reduced supply pipelines in industrial and housing sectors, combined with a healthy economy, create an attractive environment for real estate risk-taking.

KKR's real estate credit business will continue to leverage the firm's extensive infrastructure to identify and invest in the most strategic real estate opportunities. Matt Salem expressed pride in the business's growth and the development of his team, calling his decision to join Chris Lee the best career choice he ever made.