The Stock-Picking Giant Capital Group, Known for Its American Funds Present in Brokerage Accounts for Nearly a Century, Ventures into the Lucrative World of Private Investments Together with Private Equity Pioneer KKR.

Capital Group and KKR Plan a Series of Hybrid Funds Investing in Both Publicly Traded and Private Assets. The first two strategies, set to launch next year, will invest about 60% in public bonds selected by Capital managers and 40% in direct and asset-based loans provided by KKR.

These New Funds Target Affluent Private Clients Willing to Invest Between $100,000 and $1 Million. This Customer Group Holds the Majority of Assets in Prosperity Accounts and Represents the Next Frontier for Firms Managing Alternative Assets Such as Private Companies, Loans, and Real Estate.

Capital Group and KKR also intend to explore various versions of hybrid funds and private assets in different markets worldwide.

"We speak of this partnership as a marriage," said Scott Nuttall, Co-CEO of KKR. "We will try to figure that out, and this is the first step."

The two managers rely on their complementary investment strengths and Capital Group's close relationships with financial advisors to have better chances than others who have struggled to attract this affluent but not wealthy group of investors. Of the 290,000 financial advisors in the US, about 220,000 hold at least one Capital fund, said Capital CEO Mike Gitlin.

Managers Gain Ground with Ultra-Rich Individuals and Families Who Qualify as Accredited Investors and Can Therefore Buy Less Liquid, Riskier Funds. For Instance, KKR Manages Over $70 Billion in Assets for Wealth Clients (as of December).

The challenge is greater in lower asset classes where managers have to package private assets in vehicles that offer investors more frequent access to their money. They must also convince investors and their advisors that the potential returns of the funds are worth the higher fees.

"The plan marks one of Capital's largest forays into private assets since the 1970s when the company helped establish a venture capital fund that later gave rise to Sequoia Capital. Since then, the asset management industry has changed dramatically as trillions of dollars have flowed into low-cost funds that replicate market indices."

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"Capital's Largest Push into Private Assets Since the '70s"

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"For KKR, the partnership will help to extend the reach beyond the ultra-wealthy individuals and families who currently invest in their products through asset managers and financial advisors."

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"About 5% of US households would meet this qualification," Nuttall said. "There's an entire universe that we're not even close to reaching."

Facing the relentless pressure to lower their own fees, traditional equity and bond managers have begun to invest in alternatives. These investments still demand higher fees and are more difficult for index and exchange-traded funds to replicate. The argument for clients is the chance of achieving returns above the market.

Franklin Templeton and other competitors of Capital have acquired a series of private lenders and similar companies.

Gitlin said his team spent two years figuring out how to shape their own entry into alternatives. The Los Angeles-based company quickly decided against acquisitions and ultimately chose to partner with a large private investment firm rather than build its own capabilities, according to Gitlin. There were three finalists, and KKR prevailed.

The Private Credit team at KKR has around 230 investors who provide loans to companies and structure debt instruments.

"That's just not us," said Gitlin. "That's just not our expertise."