THE prospectus for Kohlberg Kravis Roberts & Co.'s initial public offering includes evidence that private-equity firms and their investors are at risk from what's known as asset bloat.More than half of the $59.7 billion in capital that the New York-based firm raised from investors in its 31-year history was received since October 2005, according to the filing.

The influx includes $5.1 billion in "permanent capital," which KKR doesn't have to return to investors, raised through the IPO of a private-equity fund in June 2006. Shares of the fund, KKR Private Equity Investors LP, trade in Amsterdam.

KKR now wants to line up more permanent capital by following the example of two buyout firms, Blackstone Group LP and Fortress Investment Group LLC, and going public in the US market. The firm is looking to raise as much as $1.25 billion, according to an estimate used to calculate a registration fee.

Add this to the $32.4 billion that KKR raised during the past 21 months, and it's clear that the firm will have a bigger challenge in matching past returns. Here's where asset bloat, a term more commonly used with mutual funds, comes into play.

When investors pour money into funds, the managers may have to invest in larger companies and keep their holdings for longer time periods. These kinds of shifts can hurt performance, as the history of Fidelity Investments' Magellan Fund shows.

Magellan surpassed the Standard & Poor's 500 Index by an average of 13.4 percentage points annually during Peter Lynch's 13 years as manager. Although Magellan later became the largest actively managed stock fund, peaking at $110 billion of assets in August 2000, its returns have trailed those of the S&P 500 since Lynch stepped down in May 1990.

KKR, like Lynch, has a track record of market-beating returns. The firm's first 10 private-equity funds produced a cumulative annual return of 20.2 percent after fees, exceeding the S&P 500's 13.6 percent, according to the prospectus.

The document shows the biggest of these funds, raised in 1987, had the lowest return: nine percent. The fund helped finance the 1989 takeover of RJR Nabisco Inc. — now known as Reynolds American Inc. — for $31 billion, which stood as the largest- ever buyout until last year.

KKR was part of a buyout group that beat the record by buying the HCA Inc. hospital chain for $33 billion. Blackstone has since bought Equity Office Properties Trust for $39 billion and KKR and TPG Inc. have joined forces to bid $45 billion for TXU Corp., the biggest power producer in Texas.

As the numbers get bigger, so does the potential for 1987-style disappointments. KKR isn't the only buyout firm in this position, either.

Blackstone had raised $19.6 billion for its latest fund as of May 1, according to its IPO prospectus. The amount equals 22 percent of the firm's $88.4 billion in assets under management. Assets at Fortress have soared by 97 percent a year on average since the firm was founded in 1998, its prospectus shows.

These kinds of numbers indicate that asset bloat isn't just a concern for mutual-fund investors any longer.

The performance of US homebuilding stocks in the past year shows what can happen when investors get caught in a so-called value trap.

An index composed of builders in S&P's benchmark US stock indexes, including the S&P 500, has given back a 40 percent gain from last year's low and kept on falling. The S&P Supercomposite Homebuilding Index is approaching 500 for the first time since May 2004, when house prices were on the rise.

The one-two punch of declining sales and lower prices has left the industry reeling. Lennar Corp., the country's largest builder, has projected a loss for the fiscal quarter that ends August 31 after an unexpected $244.2 million loss last quarter.

Investors with the biggest bets on the industry added to their stakes in the country's eight largest builders by market value, including Lennar, during the first three months of 2007. Back then, the S&P homebuilding index's value relative to sales was about half its peak, set in July 2005. Now it's even lower, making those bets ill-timed.

Greenlight Capital Re Ltd., started by hedge-fund manager David Einhorn, received its first investment ratings this week from UBS Securities LLC and Lehman Brothers Holdings Inc., the managers of its IPO. Neither recommended buying the stock.

"Growth will be a challenge" for the Cayman Islands-based reinsurer because of price competition, UBS's Brian Meredith wrote in a report. Meredith, an analyst based in Stamford, Connecticut, assigned a "neutral" rating to the stock.

Lehman's Bruce Harting started his coverage of Greenlight with an "equal weight" recommendation, equivalent to "hold." The share price already accounts for the potential benefits of having Einhorn manage the company's investments, the New York-based analyst wrote in his first report.

Both analysts estimated the stock may reach $26 within the next 12 months, up 17 percent from yesterday's close of $22.23. Yet their calls followed the lead of William Yankus, an analyst at Fox-Pitt Kelton Ltd. in New York who began coverage with an "in-line" rating three days ago. Fox-Pitt co-managed the IPO.

(David Wilson is a Bloomberg News columnist. The opinions expressed are his own.)