KKR's corporation in uncorporate dressing

I’ve been talking a lot about the role of large partnership-type firms (which I call uncorporations), e.g., here. I’ve been arguing that, even if they’re publicly held, these firms can and do efficiently substitute partnership-type features such as investor liquidity and high-powered managerial incentives for corporate-type monitoring.

But Dennis Berman’s discusses in today's WSJ a KKR publicly held vehicle, KKR Financial Holdings LLC (KFN) that looks more like a corporation than its "LLC" designation would suggest.  Berman suggests that KKR would prefer to sweep this entity under the rug as it focuses on the IPO of its main business. KFN is trading at a discount to its book value, which Berman attributes at least partly to

investors' continued worries about KFN's fee structure, which looks like a remnant of a bygone era. For example, KFN investors pay a 1.75% management fee based on the size of KFN's equity. This takes away an incentive for KKR to buy back stock, even though this seems an obvious path for a company trading at such a discount to book. In addition, KFN has no high-water-mark feature, a typical hedge-fund provision which keeps the funds from earning incentive fees until they completely make up any investor losses. Those incentive fees, which can award up to 25% of profits above a 2% quarterly hurdle rate, are paid quarterly, so managers just need to post a good three month's performance to cash in. Most hedge-fund managers need to hold things together for a year to get paid. During 2007, when KFN lost $100 million, its managers made incentive fees of $17.5 million.

Contrast KFN with the hedge funds discussed elsewhere in today’s WSJ:

[B]ecause of the economics of hedge funds, it can be tough for some funds to stay in business if they're down too far for too long. In exchange for a cut of trading profits that usually amounts to at least 20% of all gains, hedge funds generally promise their investors that they will recover any losses before they begin to take their share. So a fund that loses 10% won't be able to reap profits beyond a management fee until it recovers that loss, called a "high-water mark." The problem is many funds pay their employees hefty bonuses out of that performance fee, so top analysts and traders may leave if they don't see a prospect of a big bonus for years to come. Also, it has become harder for some funds to borrow money on easy terms, limiting funds' ability to rack up impressive gains. The solution for some hedge funds, especially those whose managers reaped millions in recent years, will be to shut down.

So the hedge fund managers' interests are significantly better aligned with those of the owners than are KFN's managers.  Also, the funds, lacking the “permanent” capital provided by an IPO, have to constantly meet capital market demands or shut down.

In other words, just because it's an LLC, doesn't mean that KFN is an uncorporation.