Goldman prop traders are heading to KKR

October 21, 2010, 6:15 PM UTC

Private equity giant Kohlberg Kravis Roberts & Co. (KKR) has agreed to acquire hire the New York proprietary trading desk of Goldman Sachs (GS), both firms confirmed today. The move seems to be in response to the financial reform bill’s so-called Volcker Rule, and a source says that discussions between the two firms have been ongoing since at least this past summer.

The Goldman traders don’t formally join KKR until January 1, which means that the firm’s new long/short practice won’t actually launch until sometime next year. There are nine traders, plus some assorted support staff.

Bloomberg reports that KKR was in competition for the traders with investment bank Perella Winberg Partners and hedge fund Avenue Capital Group.

No financial terms of the transaction are being disclosed.

“This is part of a strategic build-out of our asset- management platform,” said KKR’s Henry Kravis and George Roberts in a statement. “Our goal has been to add new capabilities and exceptional talent that allow us to strengthen our product offering and better service our clients. Bob [Howard] and his team will be an ideal fit for that objective as we’ve been impressed with their investment experience and performance as well as their ability to manage risk.”

Goldman Sachs added: “Over several decades, Principal Strategies has been a successful global investing business with a strong performance record and a culture of disciplined risk management. We wish Bob Howard and his team every success in their new home.”

KKR has made no secret of its plans to expand beyond private equity, particularly by using the “public currency” generated by trading on the New York Stock Exchange. Its asset management business, led by William Sonneborn, already features fixed-income and mezzanine strategies. That is where the Goldman traders will be housed.

KKR also has a capital markets unit, which has been listed multiple times as an underwriter for IPOs of KKR-backed companies.

With the Goldman move, KKR becomes one of several large private equity firms to transition into hedge funds. The Blackstone Group (BX) paid $930 million in 2008 to acquire hedge fund manager GSO Group, while Apollo Management (currently in registration for an IPO) also has hedge activities. One notable exception is The Carlyle Group, which ended its Blue Wave hedge practice after more than a year of poor performance.