This week Emily Thornton of BusinessWeek reports on the new activity at KKR. You may remember them from a long time ago. For those of us who were reading the business news back in the 80s, we all remember the leveraged buyout of RJR Nabisco. That was the largest buyout transaction ever (at the time, and remained so for 17 years) and the subject of the book Barbarians at the Gate, by Bryan Burrough and John Helyar. For those of you who were paying attention to something else back then, KKR is Kohlberg, Kravis and Roberts, a trio who emerged from Bear Stearns, back when it was a great company. Henry Kravis and George Roberts are cousins. They went to college together in California, and worked at Bear Stearns, along with Jerome Kohlberg. Kohlberg was the senior statesman of the group. He eventually went his own way, and Kravis and Roberts carried the baton for the next twenty plus years.
Fast forward to 2009, and KKR is a leader in the world of private equity. TPG, Blackstone, Carlyle, Citadel and others are the other big players, but KKR has been around the longest. Who would argue with success? Well, looks like Henry Kravis would: he’d like to be more like Warren Buffett. BusinessWeek has a wonderful term for it: portfolio envy.
What does Warren Buffett and Berkshire Hathaway have that KKR might want? Berkshire Hathaway (BH) is a publicly traded company, and doesn’t have to go through the rounds of raising money to provide new capital for its investments. In the past KKR never had trouble, but the slowdown in 2007 made raising funds tougher for everyone. According to BusinessWeek, in the last two years 543 private-equity owned companies went bankrupt – ouch! That will slow returns, and all those institutions looking for a place to park their cash will be choosier in the future.
KKR will most likely be just fine and come out a winner on the other end, but being the bright people they are, they are using this slowdown opportunity to become a better player, ready to surge ahead when the economy turns around. For one thing, private equity has changed: it’s not just a world financed by debt anymore. For an explanation of private equity, see my previous post.
KKR now has a four-part plan which they divulged to BusinessWeek. The first part is an in-house investment bank to handle the underwriting, sales and other investment bank functions needed. Next, KKR is going public in the U.S. to have a ready source of investment cash. The third part is to take a greater number of smaller investments in the form of minority stakes and joint ventures. The last part is new management techniques in their own company.
John Canning of Madison Dearborn partners has also said that things are changing, and firms must change with the times. Will other buyout firms follow the lead of KKR? John Mack of Morgan Stanley, now a commercial bank, also predicts wider options different from the usual previous situations.
Blackstone and Fortress, two other private equity firms, went public in 2007. However, they had the misfortune of going public at the peak of the market, and now have to live with their reduced share price. KKR - if it goes public now – will do so in a more favorable market, with an upward trend line.
How is KKR different from Berkshire Hathaway? The green gecko for one. BH is mostly an insurance company. And BH financed its acquisitions with equity, not debt, which matters over time.
KKR will encounter all the usual challenges when its takes the plunge into being publicly owned – compliance and scrutiny. But they must also satisfy the institutions who have invested with them and are looking for continued returns. BW points out KKR could lose focus on its main business. Six companies owned by KKR may have financial trouble.
Kravis and Roberts are handing over more authority to other managers within their company, which is appropriate given their long tenure at the firm.
KKR has been creating an in-house financial services firm, part one of their four part plan. It has taken an effort to get it going and sell the idea to the rest of KKR, but it seems to be taking flight now. Merrill Lynch, Lehman and Bear Stearns are now out of the picture, resulting in less competition, and in 2009, KKR was the lead underwriter for an IPO(Dollar General) for the first time. The deal was shaky for a while, but due to 11th hour intervention, all ended well.
Warren Buffet apparently has no affection for the private equity industry. He says the industry piles on debt and burdens companies with fees. But KKR still wants to be like them. KKR wants to be public, so they can use their own stock to buy companies. Henry Kravis says, “ We’re not just a private equity firm…we’re an asset management firm”.
But the investors who come to KKR for outsize returns are just as capable of investing in ordinary mutual funds, and if KKR takes too many small positions, they start to look a lot like a mutual fund. A mutual fund with outsize fees, that is. KKR has experimented with taking an active role in Kodak, without owning it directly. They’ve done this through providing needed financing, receiving seats on the Kodak board, and a role in management. But the Kodak stock price is still low, so the jury is still out on that one.
KKR has expanded, making it vulnerable to the challenges of a big, lumbering company. With a former McKinsey consultant on board, they are implementing changes to try to avoid this. Rajat Gupta, the advisor, says “The vision is to develop a premier global institution for alternative investments”. BW follows with “More than anything, Kravis and Roberts want to create a mature, meritocratic company that will long outlast them”.
This has all come a long way from the days of RJR Nabisco. I give kudos to them for lasting so long, so successfully, and for being innovators in a ruthless field. BW closes with a great quote from Henry Kravis: “The days are long gone when you just buy a company and hope that financial engineering will work. Our job today is to create value. Private Equity to me, is thinking and acting like an industrialist”.
No comments:
Post a Comment