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September 18, 2019  

KLS Carves Out 'Structured Income' Book

KLS Diversified Asset Management has a new fund in the market.

The drawdown vehicle, KLS Structured Income Fund, would isolate several of the least-liquid strategies the debt-fund operator manages through its $2 billion hedge fund, KLS Diversified Master Fund. Since 2012, the “structured income” component of the flagship fund has generated double-digit returns every year but one via investments in specialty finance, commercial and residential real estate debt and bank regulatory capital-relief programs.

The planned vehicle is designed to “capture more durable yield premia as a result of illiquidity and complexity,” according to marketing materials KLS began circulating in the past few weeks. And with a two-year investment period and three-year harvest period — plus two one-year extension options — the vehicle would help investors “gain ‘higher ground’ should market and/or economic conditions soften.”

The New York firm is seeking to raise $300 million to $500 million of equity for KLS Structured Income Fund, with a first close planned for early 2020.

The vehicle would target net returns of 9-11%. Limited partners would pay a 20% performance fee after pocketing a 7% preferred return, to be paid quarterly. Investors who commit ahead of the first close would pay management fees of 0.75-1%, depending on the amount invested. Later investors would pay 1-1.25%.

Co-chief investment officer Jeff Kronthal, who oversees KLS’ structured-product team, will manage the new fund. Before co-founding KLS in 2007, Kronthal spent 17 years in senior structured-finance roles at Merrill Lynch. He began his career as an early member of Salomon Brothers’ mortgage department.

KLS manages about $3.9 billion overall.

KLS Structured Income Fund will target specialty-finance investments including aircraft and equipment leasing, consumer and small-business lending, and litigation finance. Its regulatory-capital relief plays would include exposure to bank trade-finance obligations, business loans and consumer loans. And its real estate-debt portfolio could encompass both senior and mezzanine loans secured by commercial properties in North America, as well as bridge loans on residential investment properties in both the U.S. and Europe.

KLS recently completed fund raising for another drawdown vehicle, KLS Special Situations Fund. The firm is among an increasing number of debt-focused hedge fund managers that have adopted longer-term fund structures to better manage liquidity. “These funds serve an important purpose of equipping our professionals with additional, longer-dated capital as they pursue less-liquid opportunities,” KLS wrote.

The structured-income component of the KLS Diversified Master Fund was up 9.1% this year through July, following gains of 13.7% last year, 13.1% in 2017 and 12.8% in 2016. It fell 1.2% in 2015.

The flagship fund’s total returns have been less impressive, with gains of 1.8% this year through July, 1.8% last year, 4% in 2017 and 10.6% in 2016 — its only double-digit advance in the past eight years. The flagship fund lost 1.9% in 2015.