An older article, but one that I hadn't seen before.
"It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.
Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."
What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."
That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered.
Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny."
The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Other private equity firms see the value in KKR's emulating Buffett. "This makes sense for them,"
says John Canning, chairman of buyout shop Madison Dearborn Partners. "A firm that big can't rely [solely] on historical methods of capital raising anymore. Things change." If Kravis and Roberts get this experiment right, their strategy could point the way for other buyout firms. Even bankers acknowledge the need for firms to move beyond leveraged deals. "Private equity will become broader and broader," predicts Morgan Stanley CEO John J. Mack. "Instead of buying companies and restructuring them, they will have a whole panoply of investments."
Of course, KKR isn't alone among buyout shops in wanting to tap the public markets. Blackstone and Fortress Investment Group (FIG) got a head start, selling shares in 2007. But the financial crisis was cruel to their stocks: Even after a recent rally, they're down 57% and 79%, respectively, since their debuts.
KKR, in contrast, is going public at a time when the markets are on the mend. Call it patience or dumb luck, either way it could pay off. Since bottoming in March, Blackstone shares are up 245%, while Fortress' stock has jumped 272%. "These stocks were decidedly out of favor," says Michael Holland, chairman of Holland & Co., a New York investment firm. "But smart money that went in over the last several months has done very well."
ANSWERING TO MANY
Kravis is the first to say KKR will never become Berkshire East. After all, Berkshire's source of strength is its 32-year-old insurance business, which boasts an estimated $110 billion in assets, something KKR can't easily whip up for itself. What's more, Buffett built Berkshire over many decades using equity, not just debt, to buy companies. Kravis is just now venturing down that path.
There are more immediate challenges. Once KKR goes public, it will face intense scrutiny from many quarters. "Going public makes the firm accountable to many groups—the SEC, stockholders, and the exchanges," warns Edwin Burton, a trustee for the Virginia Retirement System. Adds Charles R. Schwab, founder and chairman of Charles Schwab Corp. and a longtime friend of Roberts: "I told George to think long and hard about jumping into the fish bowl."
As KKR polishes its investor-relations skills it must be careful not to alienate the pension funds, university endowments, and other wealthy investors who put money directly into KKR's buyout funds and are increasingly sensitive to fees. They pay KKR a hefty management fee of 1.5% or more of their assets and 20% of the profits. For that they expect the firm to concentrate on selling companies—not on branching out into new businesses. "We're trying to take a long, hard look at fees across the board and make sure they're justified," says Jay Fewel, a senior investment officer at the Oregon State Treasury, one of KKR's investors.
There's also a danger that, as KKR expands, Kravis and Roberts could lose focus on its main business. "The more you scale an organization, the less impact key individuals have on investment decisions," says Jeff Ennis, chief investment officer at Wilshire Associates. Already there's reason for concern. Fitch Ratings issued a report in October warning that six companies in which KKR has invested—Energy Future Holdings, HCA, First Data, Toys "R" Us, Nielsen, and Sungard Data Systems—could soon face trouble repaying their debt, though Kravis says the worries are overblown.
LBO VETS
On a dreary Wednesday in October at KKR headquarters in New York, Kravis, in a crisp white shirt and blue tie, is leading a meeting of KKR's portfolio management committee, with Roberts joining by videoconference from KKR's Menlo Park (Calif.) office. Their close relationship has been a key to KKR's success over the years. The cousins played together as kids and studied at the same college, Claremont McKenna in Southern California. After going their separate ways for graduate school they reconnected at Bear Stearns, where they worked on some of Wall Street's first leveraged buyouts. "
For remainder of the article: http://www.businessweek.com/magazine/content/09_51/b4160038935523_page_2.htm
"It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.
Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."
What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."
That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered.
Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny."
The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Other private equity firms see the value in KKR's emulating Buffett. "This makes sense for them,"
says John Canning, chairman of buyout shop Madison Dearborn Partners. "A firm that big can't rely [solely] on historical methods of capital raising anymore. Things change." If Kravis and Roberts get this experiment right, their strategy could point the way for other buyout firms. Even bankers acknowledge the need for firms to move beyond leveraged deals. "Private equity will become broader and broader," predicts Morgan Stanley CEO John J. Mack. "Instead of buying companies and restructuring them, they will have a whole panoply of investments."
Of course, KKR isn't alone among buyout shops in wanting to tap the public markets. Blackstone and Fortress Investment Group (FIG) got a head start, selling shares in 2007. But the financial crisis was cruel to their stocks: Even after a recent rally, they're down 57% and 79%, respectively, since their debuts.
KKR, in contrast, is going public at a time when the markets are on the mend. Call it patience or dumb luck, either way it could pay off. Since bottoming in March, Blackstone shares are up 245%, while Fortress' stock has jumped 272%. "These stocks were decidedly out of favor," says Michael Holland, chairman of Holland & Co., a New York investment firm. "But smart money that went in over the last several months has done very well."
ANSWERING TO MANY
Kravis is the first to say KKR will never become Berkshire East. After all, Berkshire's source of strength is its 32-year-old insurance business, which boasts an estimated $110 billion in assets, something KKR can't easily whip up for itself. What's more, Buffett built Berkshire over many decades using equity, not just debt, to buy companies. Kravis is just now venturing down that path.
There are more immediate challenges. Once KKR goes public, it will face intense scrutiny from many quarters. "Going public makes the firm accountable to many groups—the SEC, stockholders, and the exchanges," warns Edwin Burton, a trustee for the Virginia Retirement System. Adds Charles R. Schwab, founder and chairman of Charles Schwab Corp. and a longtime friend of Roberts: "I told George to think long and hard about jumping into the fish bowl."
As KKR polishes its investor-relations skills it must be careful not to alienate the pension funds, university endowments, and other wealthy investors who put money directly into KKR's buyout funds and are increasingly sensitive to fees. They pay KKR a hefty management fee of 1.5% or more of their assets and 20% of the profits. For that they expect the firm to concentrate on selling companies—not on branching out into new businesses. "We're trying to take a long, hard look at fees across the board and make sure they're justified," says Jay Fewel, a senior investment officer at the Oregon State Treasury, one of KKR's investors.
There's also a danger that, as KKR expands, Kravis and Roberts could lose focus on its main business. "The more you scale an organization, the less impact key individuals have on investment decisions," says Jeff Ennis, chief investment officer at Wilshire Associates. Already there's reason for concern. Fitch Ratings issued a report in October warning that six companies in which KKR has invested—Energy Future Holdings, HCA, First Data, Toys "R" Us, Nielsen, and Sungard Data Systems—could soon face trouble repaying their debt, though Kravis says the worries are overblown.
LBO VETS
On a dreary Wednesday in October at KKR headquarters in New York, Kravis, in a crisp white shirt and blue tie, is leading a meeting of KKR's portfolio management committee, with Roberts joining by videoconference from KKR's Menlo Park (Calif.) office. Their close relationship has been a key to KKR's success over the years. The cousins played together as kids and studied at the same college, Claremont McKenna in Southern California. After going their separate ways for graduate school they reconnected at Bear Stearns, where they worked on some of Wall Street's first leveraged buyouts. "
For remainder of the article: http://www.businessweek.com/magazine/content/09_51/b4160038935523_page_2.htm
