KKR’s 50th birthday celebrations last week were not short on self-celebratory grandeur.
After its co-founders Henry Kravis and George Roberts rang the New York Stock Exchange opening bell on Friday morning, the private capital group hosted dinner for 100 or so partners and their families in the evening in the “whale room” of Manhattan’s American Museum of Natural History.
Accompanied by cellist Yo-Yo Ma, the cousins paid tribute to their decades-long evolution, presenting KKR’s seminal moments as different eras akin to geologic ages on display within the museum. This year will mark the start of another: the post-Kravis and Roberts era, as the pair relinquish their voting control and become ordinary shareholders.
In half a century, KKR has transformed from an upstart corporate raider set up with $120,000 of savings to a staid Wall Street conglomerate worth $100bn. The duo immortalised in the book Barbarians at the Gate pioneered a more aggressive version of dealmaking that forced US capital markets to embrace leverage and helped turn the country into the world’s exporter of high-octane finance to the Middle East, Europe and Asia.
But KKR’s big birthday comes at a time when the industry they helped create faces a reckoning, after an influx of capital and a logjam of $3.8tn in unsold investments raised questions about the value private equity creates for investors.
Kravis told the FT in an interview that he believed the company had remade Corporate America, as KKR wrested the ownership of large conglomerates from complacent professional managers. When Roberts and Kravis give up their special voting rights, it will finally expose KKR to the same governance standards they championed decades ago as corporate rebels.
“It used to be that I’ll be on your board and you’ll be on my board. We’ll play golf every weekend and I won’t ask too many questions,” said Kravis. “We saw that companies could be run so much better, particularly if you could change the mindset of being a renter of a corporate asset versus being an owner.”
Roberts said KKR had also changed how companies were valued on Wall Street. When they started striking large leveraged takeovers, the price of a company was based on its assets. KKR instead focused on corporate cash flows, tapping state pension funds for equity cheques and banks for debt raised against current and future corporate earnings streams: an approach which is now standard.
“We were the first people to say let’s look at cash flow investing, not what’s on the balance sheet,” said Roberts.
The duo conceded that the private equity industry had become brutally competitive. Roberts said that KKR had changed its investment approach in recent decades, globalising its investment operations and pushing into markets such as India, Japan and Europe, where valuations are lower and deal opportunities often stem from relationships instead of competitive auctions.
“It used to be easy in the old days. Companies were trading at 10 times their earnings and they were mismanaged and had lots of businesses that didn’t make sense. That was pretty simple to figure out. It’s a lot harder now. So you need different tools,” he said.
Kravis and Roberts have already stepped back from operational management, making Scott Nuttall and Joseph Bae co-chief executives in 2021. Kravis is the firm’s emissary to business leaders and heads of state, while Roberts prefers to tend to investments from KKR’s Menlo Park offices.
Bae, who made his name at the firm building its investment operations across Asia, said large corporate carve-outs and joint ventures in Asia and Europe presented attractive new opportunities. Nuttall, who has spearheaded an effort to build an internal debt and equity underwriting unit and a $40bn corporate balance sheet at the firm, emphasised the lessons learned from the financial crisis about consistency.
Then the firm had overextended itself on megadeals including Toys R Us and Texas utility TXU. Some of KKR’s bets were wiped out, forcing it to pace its investments to guard against overinvesting in overheated markets — like the takeover frenzy of 2021 that has derailed some firms.
“I think this backdrop is starting to reveal investment acumen through a cycle. We had a long period of time from 2010 through 2020, where everybody looked reasonably intelligent. That’s when we said internally, ‘Don’t confuse a bull market with brains’,” said Nuttall.
While private equity remains KKR’s most profitable business, Nuttall and Bae oversee an increasingly diversified group that has grown quickly in infrastructure and through the acquisitions of insurer Global Atlantic and sports and secondaries investment platform Arctos.
It is also a business that has sought to shake off the perception that the industry has created immense wealth for the very few, fuelling inequality. Roberts acknowledged that in Barbarians, published in 1989, the firm was portrayed in a “less than savoury way”. It now gives shares in private-equity portfolio companies to rank-and-file employees, and has paid out more than $2bn in profits to workers from recent successful deals.
But the firm faces many tests. Its real estate and credit businesses have struggled to grow as quickly as rivals such as Blackstone, with leadership changes and some investment struggles. Its private equity operations have also endured challenges: some international markets are less lucrative; profits last year were crimped by clawbacks paid to investors in Japan; and there is a US probe into its antitrust disclosures ongoing.
Still, KKR has lined up more than $15bn in private equity asset sales this year, a 50 per cent increase from a year ago, putting it on track to return a record amount of capital to investors. On Tuesday, it reported first-quarter earnings that showed adjusted net income had risen 21 per cent in the first quarter from this time last year, surpassing analyst forecasts.
Kravis and Roberts insisted that the wider turmoil sweeping private markets — much of it linked to concerns about software valuations — could play into KKR’s hands as rivals struggle with troubled portfolios and lukewarm investor interest. KKR recently raised a record $23bn for its latest North American buyout fund, exceeding its target by more than $1bn.
The 2021 dealmaking bonanza meant many firms overpaid for assets, loading them up with debt that is no longer sustainable. “There are really some good software companies with bad balance sheets,” Roberts said. “So we can put some money into those companies to get a major stake and get them growing.”
“George and I would like to be given $10 for every article we’ve read over the years that says private equity is dead. We’d be rich just off that alone,” said Kravis. “There’s a zillion firms that don’t give any money back to investors. They can’t and they haven’t, and they’ll become zombie firms. But nine out of the last 10 years, we have given more money back to investors than we’ve invested, and as we keep doing that, we’ll find opportunities everywhere.”
Kravis added: “The best time for us is when everybody’s looking at their feet and saying, ‘Woe is me, the world’s coming to an end’.”
