Monday, June 8, 2009

un-Holy Alliance

AlphaNinja - IPO market stalled? Got an over leveraged company you can't sell? Well then get creative, as Kohlberg Kravis Roberts has done. It appears that Fidelity and KKR are working on a deal to give Fidelity exclusive access to KKR's initial public offerings:

"Fidelity Investments and Kohlberg Kravis Roberts & Co. are expected to announce an agreement on Monday to give some of the mutual-fund giant's customers access to initial public offerings and other stock offerings from the private-equity firm's companies.

The deal provides a distribution channel for KKR's nascent capital-markets business, which underwrites stock and bond offerings for the companies it owns.

It also enables Fidelity's retail and institutional brokerage customers to buy into IPOs, in bull markets often considered desirable investments. These customers don't normally have the same access to IPOs as customers of investment banks with large underwriting businesses, such as Morgan Stanley and Merrill Lynch."

AlphaNinja - So KKR needs a new "distribution channel" to unload shares in the companies it purchased and now needs to flip. The above quote mentions the Fidelity customers who didn't have the same "access" to IPO's that bigger, more important institutional investors did. So now KKR has the Fidelity platform, upon which brokers will call mom-and-pop investors and pitch them along the lines of "Saaaay, have I got a deal for you. There's an IPO from Kholberg Kravis Roberts, and Fidelity has reserved shares for our BEST clients!"

Retail Fidelity investors appear to be chosen to "mop-up" shares of IPO's that the rest of the market doesn't want. They will be pitched on the basis of investing "alongside" KKR, but in reality they are taking the opposite side of a trade with very intelligent (and probably well-timed) investors. This is a truly unfortunate scenario.

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