Friday Letter Much bigger boots, with broader straps

Sceptics say private equity is a business on life support, but if the recent exploits of KKR are anything to go by, it would seem the industry’s reinvention is making excellent progress.  

At a recent dinner party, one senior executive at a recently established buyout group peered out over his wine glass and asked his table companions which other private equity firms they thought he could learn from.

“KKR,” said one long-time industry observer, without pause. “Their transformation has been incredible.”

Indeed, KKR’s evolution in the past several years – both pre-and post-crunch – is impressive. The label “buyout shop” has long ceased to describe it, and the firm remains at the forefront of the institutionalisation of multi-asset class management firms.

The 33-year-old house has moved well beyond its “boot strap” origins, adding infrastructure, fixed income, mezzanine, real estate and public equities platforms, not to mention a capital markets advisory business. The integrations of these units, KKR’s founders note in the firm's recently released annual report, is now seen as crucial to the success of an investment firm faced with a changing landscape.

KKR has also created a slew of internal positions that LBO firms in the olden days would never have dreamed of having. A chief administrative officer now coordinates and integrates the firm’s internal infrastructure, communication and global interaction, while an in-house regulatory affairs guru, HR and IT chiefs have also been added.

All of this, of course, is intended to help the firm ready itself to eventually list its management company on the NYSE. And the way it has revised its plans to do that – now via a reverse merger with its Amsterdam-listed co-investment fund that had been trading at a wide discount to NAV – has also won praise for finding a creative way to nimbly side-step the choppy equity markets and deal with the “widespread frustration” the firm says it has experienced over the lacklustre performance of the Euronext fund. Its renewed plans to undergo the reverse merger in October is also an encouraging sign for the beleaguered buyout market, The Economist argues this week.

KKR’s recent investment and exit activity is also worth looking at, as it highlights the industry’s ability to change with the times and get deals done in today’s marketplace despite the credit crisis.

The firm’s $1.8 billion deal for Anhueser-Busch InBev’s Korean subsidiary, Oriental Brewery, in May, for example, wasn’t just notable because of its size. Financed “enthusiastically” by 16 banks, according to a source familiar with the transaction, the deal was structured so as to give debt-laden Anheuser the option to repurchase the assets after five years at 13 times EBIDTA. KKR, which is understood to have paid roughly 8 times EBIDTA for the assets,  then syndicated the $800 million equity cheque, selling half its stake to Affinity Equity Partners, an Asian buyout firm with an established track record in Korea.

Meanwhile, the upcoming $504m IPO on NASDAQ of Singaporean portfolio company Avago, which it bought in 2005 along with Silver Lake, will also break moulds, allowing KKR to show off some of its newer bells and whistles. KKR’s broker-dealer arm will underwrite the IPO along with 10 other banks, triggering for the first time the share distribution deal it agreed in June with Fidelity Investments. Under the agreement, Fidelity's retail and institutional customers have exclusive access to shares allocated to KKR in all US-based public offerings underwritten by KKR Capital Markets.

The IPO’s allocation, as well as the float itself, will be watched closely by peers and pundits, as are most moves by the legendary firm. The house that claims to have invented the LBO business continues to be at the forefront of private equity’s development. What the mega-firms will ultimately evolve into remains to be seen, but KKR for one is working very hard indeed to position itself and its people for a prosperous future. For as long as this work continues,  dinner party conversations about the firm are bound to carry on.

For more detailed info and research notes on KKR, which ranks fourth on our PEI 300 list of the world’s largest private equity firms, click here.