KKR [NYSE:KKR] has been investing in North America’s middle market for over a decade via its flagship buyout funds. The sponsor’s Ascendant fund, which closed on USD 4.6bn last month, signals an evolution of this strategy as its first vehicle to focus exclusively on mid-market opportunities.

Successful middle market deals, such as Geostablization International (GSI), which KKR exited last month with a 5x return following a nearly six-year hold, helped forge a path for a dedicated strategy. Another driver was demand from existing and new LPs for direct middle market exposure.

“There’s been a good mix of existing LPs, who wanted to come on the journey with us, and new investors who wanted to invest with KKR, but what they really liked was the middle market,” said Brandon Brahm, a partner and co-head of the Ascendant strategy. “There was a lot of excitement around that being an opportunity for the first time for them to invest, where they want to invest, with KKR.”

The fund was oversubscribed and closed at the hard cap, despite the tough overall fundraising market. Brahm credits this to KKR’s focus on generating returns primarily via operational improvement rather than relying heavily on leverage or betting on multiple expansion.

The fund is nearing 30% deployment. So far, there is a heavy industrials component, with the sector accounting for three of the six deals closed to date. “We expect to diversify the fund, but industrials will continue to play a pillar role, not least because industrials is 40% of all US middle market deal activity,” said Brahm. “It’s the biggest slice of the pie.”

Within industrials, the focus is on mission-critical products and services that offer KKR multiple avenues for value creation. For example, New Castle, Delaware-based testing and inspection business Industrial Physics has completed two add-on acquisitions this year: UK quality control measurement business Torus Group and Greensboro, North Carolina-based measurement company Sensory Analytics.

Meanwhile, Potter Global Technologies, a manufacturer of fire and life safety equipment in St. Louis that KKR also acquired last year, is pursuing an organic growth strategy amid steady growth in demand for its products, Mergermarket reported previously.

“Our differentiation in the middle market is everything that happens after signing,” added Brahm. “The common thing that you’re going to find across all of our investments and across all of our industries are businesses with strong, durable demand for the product or service and a lot of avenues for value creation that we can execute on in different ways.”

Outside of industrials, investments include e-commerce business mdf commerce, survey software provider Alchemer, and 123Dentist, a Canadian dental support network. Looking ahead, home services is expected to emerge as another prominent theme.

Overall, the middle market fund is targeting the seven industry verticals covered by KKR’s broader Americas private equity group: industrials, consumer, financial services, healthcare, media, software, and tech-enabled services.

“Whereas many middle market funds would invest across one or two sectors, here we’re able to invest across all our seven verticals,” said Brahm. “That creates unique opportunities for us to build a diverse fund but with the depth behind every deal that a sector specialist has.”

Consistent with the model KKR has rolled out extensively in recent years, employee ownership will be a central theme across all investments under the middle market strategy.

“[All-employee ownership] goes hand in hand with our investing style, which is predicated on taking good businesses and making them great,” said Brahm. “We found that in order to get the outcomes we wanted, we needed to have the alignment that wasn’t there in these companies.”

Debevoise & Plimpton acted as KKR’s legal counsel on the fundraise.