KKR crescendo

For most of its 30 years in business, Kohlberg Kravis Roberts has been a dominant force in the private equity market. Following some intense introspection and retooling in the late 1990s, the New York-based firm is poised to again become the industry's heavyweight champion as it expands product lines, offices and head count around the world. David Snow takes a measure of the firm that invented, and reinvented, the big buyout.

Last July, when the $32.7 billion (€25 billion) buyout of US hospital operator HCA was announced, much was made of the fact that the deal was the largest of its kind since the landmark RJR Nabisco deal in 1989, which had a value of $31.4 billion.

Of special interest, both deals were driven by New York-based Kohlberg Kravis Roberts (HCA also involved Bain Capital and Merrill Lynch). It seemed fitting that the RJR Nabisco record should be dashed by the firm that first set it.

But the KKR behind HCA is a much larger, and quite different, firm compared to the KKR that won RJR Nabisco 18 years ago. The world in which KKR operates has changed significantly, as well. KKR's founders, Henry Kravis and George Roberts, both 63, have acted aggressively to change their firm to better capture the upsized opportunity in their home market and globally.

The signs of an evolved KKR are hard to miss. Its New York headquarters, hovering high above 9 West 57th Street in the curving Solow Building, recently saw the combination of two conference rooms to produce one enormous gathering hall. The room, which overlooks the entirety of Central Park and the Upper West and East Sides, includes an almost comically long conference table ringed by additional seating. The firm recently held a summit in the room that included roughly 60 KKR investment professionals and many more joining via videoconference.

This contrasts markedly with a 1983 New York Times profile of KKR, which called the firm “tiny”, noting that it employed only four partners and three associates. But the small team already had $3.5 billion worth of LBOs under its belt.

As Kravis himself took pains to point out in a recent Wall Street Journal interview, if KKR's growth is viewed in the context of the growth of the buyout opportunity, the firm is just about keeping pace. He noted that over the past 20 years, the size of the average company on the Standard & Poor's 500 has increased eight-fold. In the meantime leveraged finance has become a commodity, while the private equity route is increasingly sought out by corporate executives. This acceptance is solid in the US, growing in Europe and beginning to crystallise across Asia-Pacific.

With Kravis and Roberts still firmly at the helm, KKR is not content to merely be a participant in the global private equity market. It wants to be the dominant participant, a position the firm enjoyed for most of its history, according to several sources familiar with KKR's leaders.

Partners at KKR declined to comment for this article.

KKR's recent geographic, personnel and fundraising expansions are consistent with an ambition to win. The firm has beefed up its presence in Europe and, following 2005 office openings in Tokyo and Hong Kong, has rapidly built up a team of senior investment professionals in Asia (see p. 51 for biographies of some of these professionals). The firm's marketing literature stresses that it specialises in “large, complex buyouts”. The firm's website features flashing headlines noting which KKR deals were the first or largest in a given region.

As part of a fairly new tack, KKR now sees a benefit to managing more than buyouts. The firm took its market by surprise with two unconventional publicly traded affiliates, which have added billions to KKR's assets under management as well as expanded the market intelligence resources at the firm's disposal.

The upsized opportunity as KKR sees it is going to require a lot of money, and in this respect the firm's engines are at full throttle. KKR, among the earliest buyout managers to receive institutional capital, is now on the fundraising trail with an elephantine target in its sights. To date the KKR 2006 fund has raised more than $16 billion with no final closing yet announced. The firm's next Europe fund is expected to raise at least $6 billion. A KKR Asia fund is reportedly targeting $4 billion. And the firm's Euronext vehicle, KKR Private Equity Investors, will commit at least $2 billion in additional capital to the 2006 fund. All these funds added together equal a rough target amount of $28 billion.

Even a final take several billion dollars shy of this amount would cement KKR as the biggest buyout firm in the world, a position for which it has competed vigorously and with great ingenuity. In the process, Kravis and Roberts have been as vigilant as ever in bolstering the powerful brand associated with the three letters K, K and R.

“When you walk in the door and you're a KKR person, you automatically have credibility about putting a deal together, getting financing, going global.”

“They recognised pretty early that a small number of firms were going to be the big brand names in private equity,” says Mario Giannini, the chief executive officer of Hamilton Lane, a Philadelphia investment manager who has channeled billions in client capital to KKR funds. “They saw that to do that you had to, one, go global, and two, go through a product expansion. They've seized the moment.”

KKR TIMELINE

1976 KKR buys Safeway, largest grocery chain in the US, for $4.1 billion. KKR
Jerome Kohlberg, Henry Kravis and George Roberts leave Bear Stearns and goes on to see a 56-times return on this deal.
establish Kohlberg Kravis Roberts in New York. 1987
1977 KKR raises $5.7 billion for its 1987 fund
KKR acquires AJ Industries in a $26 million deal using $1.7 million in equi-
ty. Jerome Kohlberg leaves the firm to found Kohlberg & Co. He cites
“philosophical differences”.
1978
Houdaille Industries is acquired for a reported $355 million. The first 1989
leveraged buyout of a public company will go on to generate a 5.7 times After a protracted battle, RJR Nabisco goes to KKR for $31.4 billion.
return for its sponsor. For 18 years this remains the largest-ever LBO. But the firm's nearly $3.7
billion equity investment ends up producing a slightly negative return.
1981
Oregon Investment Council Fund commits $25 million to a KKR fund. The 1990
public pension will reap a 3.3 times return on that investment and Barbarians at the Gate, by Bryan Burrough and John Helyar, is published
become a major backer of the firm's activities. A 1993 made-for-HBO movie follows. Headlines using the word
'Barbarians' become perennial features of KKR press coverage.
1984
KKR completes the acquisition of conglomerate Wometco Enterprises, the 1993
first billion-dollar LBO. KKR raises $2 billion, a big step down from its 1987 effort.
1986 1995
Food processing conglomerate Beatrice accepts a $6.2 billion buyout. The Canadian General Insurance becomes KKR's first non-US acquisition.
investment more than quadruples the $400 million in equity spent by
KKR.

1996KKR makes its first investment in Europe in the form of UK-based Newsquest Media Group. The deal goes on to become a major win for KKR.1997$6.1 billion is raised for the KKR 1996 FundKKR buys Regal Cinema together with Dallas-based Hicks Muse Tate & Furst., The movie theater chain flounders and goes on to become one of KKR's biggest losses.1998London office is established, led initially by partner Edward Gilhuly. In 2004 former Investcorp professional Johannes Huth is placed at the helm.UK-based Willis Group is taken private by KKR in a $1.7 billion transaction. It is the first private equity-backed take-private in the UK, and the deal generates the biggest return in the 1996 fund.1999KKR European Fund raises $3.1 billion.2000An investment committee is formally established.Captive consulting firm Capstone is established.KKR TIMELINE CONTINUED

2001
company, KKR completes the $835 million IPO of KKR Financial, a real estate
The Deal publishes an article headlined “Mediocrity at the Gate”, detailing
investment trust and specialty finance company.
what the M&A newspaper reported as KKR's middling post-1989 track record.
(In 2004 the same reporter updated that performance in an article headlined
2005
“The Comeback Kids”.)
KKR establishes an operating committee to oversee day-to-day
management of the firm.
2002
KKR Millennium Fund raises $6.1 billion.
European Fund II raises €4.5 billion.
French manufacturer Legrand is acquired for €4.6 billion.
The firm establishes offices in Hong Kong and Tokyo and begins an
The state pension funds of Oregon, Washington and Michigan reportedly
Asian hiring spree.
decline offers to buy a stake in KKR's management company.
Senior partners Edward Gilhuly and Scott Stuart leave the firm to start
2004
a hedge fund. The two had been believed by some to be heirs apparent
Following a failed bid to launch a publicly traded business development
at KKR.

2006The US Department of Justice reportedly approaches KKR and severalDenmark's TDC is acquired for €12.3 billion. KKR participates.other buyout firms as part of an investigation into uncompetitive prac-tices related to corporate take-privates.Capmark Financial is spun out of General Motors for $16.7 billion.The firm begins approaching limited partners about a KKR Asia fund,KKR Private Equity Investors goes public on the Euronext Amsterdam,with a reported target of $4 billion.raising $5 billion for the firm and astounding industry observers. Thevehicle makes a $2 billion commitment to KKR's 2006 Fund.KKR is among several big buyout firms to back the creation of thePrivate Equity Council, a lobbying group.KKR agrees to buy Flextronics, an Indian software concern, for $900 mil-lion.2007KKR joins the $44.5 billion LBO of Texan utility TXU.KKR joins Bain Capital and Merrill Lynch in the $33 billion acquisition ofhospital group HCA, the first LBO to eclipse RJR Nabisco in size.