KKR’s Infrastructure Whisperer Looks to Reawaken Property Arm

o0sbin448g0rp1eo753ahicn_media_dl_1.png KKR 10K

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(Bloomberg) — When KKR & Co. thought about the future of a unit investing in the most sluggish part of private markets, it turned to a hot sector.

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Infrastructure head Raj Agrawal got the nod to oversee KKR’s real estate unit in addition to his own earlier this year, handing him a newly combined business totaling more than $171 billion at last count. Former global real estate head Ralph Rosenberg initially pitched the move, according to people familiar with the matter, who asked not to be named as the deliberations were private. 

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In doing so, Co-Chief Executive Officers Joe Bae and Scott Nuttall have positioned Agrawal to scale up businesses dominated by larger rivals Blackstone Inc. and Brookfield Asset Management. Agrawal delivered sparkling returns while overseeing bets on the likes of fiber-optic cable in London, waste management in Korea and data centers in the US. Now he can bring his talents to an asset class that has struggled in recent years. 

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The shift highlights the changing fortunes of infrastructure and real estate across the investment industry, according to Dirk Aulabaugh, global head of advisory services at Green Street. More firms and investors view the two asset classes as components of one strategy, what KKR calls “Real Assets.”

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“The lines between the two are definitely blurring,” he said, speaking broadly about the industry. 

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A cocktail of rising rates, persistent inflation and an uneasy economy eroded real estate values in recent years, while infrastructure spending boomed. Boring businesses like toll booths and power stations garnered investor dollars on the basis of their resiliency. Apartments and offices — shuttered during the Covid-19 pandemic — fell out of favor, appearing fickle in comparison. 

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At KKR, the divergence is clear. Its infrastructure vehicle for high net worth-investors counted $3.1 billion of assets at year-end, making it the firm’s best-selling wealth product alongside private equity. A similar effort focused on property bets had $1.3 billion in assets under management at the end of the year — down $300 million from two years prior — and underperformed peers. The firm last year injected $50 million into the REIT and promised to support the share price for years into the future.

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“Infrastructure, there’s probably no better time to invest right now. Interest rates are high and there’s a lot of good quality assets out there,” KKR co-founder George Roberts said on May 5 at the Milken Institute Global Conference in Beverly Hills. “Real estate, I don’t think it’s there yet,” he said.

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This story is based on interviews with about a dozen people with knowledge of KKR and its businesses, including current and former employees, investors and executives, who asked not to be named because the matters were private.

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KKR told investors it created the unified group to pursue opportunities of “mutual interest,” like logistics and data centers. Although separate funds and investment teams for each business will remain, the real estate and infrastructure groups are working more closely together and sharing resources. The sides have come together before, working in lockstep on KKR’s 2022 acquisition of data center company CyrusOne and this year’s strategic partnership with energy service provider EGC.