Payment processing company First Data Corp. appears to have finished raising its $3.5 billion in new equity funding, according to a regulatory filing. But the filing also shows how more than $40 million of that new money is already out the door.
The investment was led by a $1.2 billion check from private equity firm Kohlberg Kravis Roberts & Co. (KKR), which bought First Data seven years ago for $28 billion and essentially chose to double down. Certain KKR limited partners provided another $300 million via additional co-investments, while the remainder came from outside institutions like hedge funds, mutual funds and pension funds.
But here’s the kicker: The new money was technically raised by KKR Capital Markets, a KKR broker-dealer affiliate that works both for KKR portfolio companies and third parties. The group was paid $40.6 million for its efforts by First Data — monies that KKR does not share with its limited partners (i.e., the folks who indirectly own most of First Data, and thus have the most riding on its balance sheet).
“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 spokeswoman.
To be sure, the commission percentage isn’t outrageous as far as Wall Street investment banks are concerned. 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. And private equity-backed portfolio companies hire investment banks all of the time, particularly to find a buyer or manage an initial public offering.
At the same time, however, those outside investment banks don’t have any dueling fiduciary duties. KKR has all sorts of them. For example, pulling out the $40.6 million is good for KKR shareholders, but not necessarily what’s best for KKR limited partners. Given that the private equity firm is largely made up of former investment bankers, could it not have called up the mutual funds and hedge funds and pension funds on its own? And then either not charged the fees, or charged them and then shared with limited partners?
KKR has more money riding on First Data than on any one of its other portfolio companies so, in the end, a $40.6 million commission will be just a footnote in the final calculus. But it’s worth noting that the final return percentages will be a bit different for KKR than for its limited partners, because the buyout giant already has gotten a small bit of its money back.
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