Friday Letter Well beyond buyouts

Oversimplifying the multipronged business models many private equity firms now employ risks wrongly evaluating their purposes and prospects.

Woe betide those who still think of the large, brand-name investment firms in the private equity universe as “buyout shops”.  If that was right, you would have to assume these firms are now marching toward their graves as leverage remains elusive and M&A depressed. And that would most probably be a mistake.

The fact is: single-strategy buyout specialists have been thin on the ground for some time, especially among the bigger firms.  As Apollo’s Leon Black noted last year, as traditional LBOs have “gone the way of the dodo”, so, too, have large private equity firms with just one investment thesis.

Ben Jenkins, co-head of Blackstone’s Asian private equity activities, gave a speech in Hong Kong earlier this week that touched upon this point. He reportedly quoted Mark Twain: “Rumours of our demise have been greatly exaggerated.” Alternative asset management firms will, he said, “continue to exist and flourish”.

An excellent example, in fact, is the presence of firms like Blackstone (which didn’t even start out in buyouts; its first role in life was in M&A advisory) and KKR in Asia, a region where the use of leverage has never been integral to the private equity business model, and certainly isn’t now. What are these “buyout shops” doing there, you might ask? The answer: not buyouts.

Talk to Sanjay Nayar, the freshly installed CEO of KKR India, and you’ll learn that the firm’s India strategy has three components: to invest in Indian businesses and add value through operational improvement; to advise and support Indian companies wishing to expand abroad; and to help KKR’s international portfolio businesses expand into India.

That sounds sensible, does it not? Given KKR’s firepower, infrastructure, global networks and increasingly proven ability to adapt its business model to new markets and changing conditions, it is easy to see the firm turning the Indian operation into a meaningful part of its empire. India may not have a buyout market, but so what? KKR – just like Blackstone, Apollo and other peers and rivals – is very obviously no longer just a buyout firm.

Such firms stand as examples of private equity’s ability to reinvent itself as an opportunistic provider of capital to companies, investing in whichever part of the capital structure the return potential seems most attractive. It’s a powerful formula – and needs to be recognised for what it is. Otherwise you run the risk of underestimating some very influential participants in today’s marketplace.