KKR debuts as lead IPO underwriter

The $750m IPO registration of Dollar General marks an important step for the alternative investment firm as it seeks to become a bigger player in the capital markets.

Kohlberg Kravis Roberts is one of three lead underwriters for the initial public offering of its portfolio company, Dollar General, a milestone on its way to becoming a bigger player in the capital markets.

Dollar General registered with the US Securities and Exchange Commission yesterday to offer shares to the public. The other two lead underwriters are Citi and Goldman Sachs. Dollar General expects to raise as much as $750 million in the offering. A special dividend of $200 million will go to KKR and its limited partners.

The company, a discount retailer acquired by KKR in 2007 for $6.9 billion, is among several in the KKR portfolio to actually have been written up in value, in Dollar General’s case to 1.7 times cost. Co-investors in the deal include Citi Private Equity and Goldman Sachs.

KKR’s capital markets team, led by Craig Farr, has been involved in underwriting activity before, but never for an initial public offering. It was an underwriter for $350 million in follow-on equity for portfolio company Rockwood Holdings. It has also served as underwriter for several billion dollars worth of debt.

KKR was an underwriter for the recent IPO of portfolio company Avago Technologies, but not as a lead underwriter.

A person close to the firm said its recent acquisition of South Korea’s Oriental Brewery from InBev was facilitated by a senior KKR partner personally arranging for debt financing, including from South Korean banks. KKR did not charge a fee for that work, but it resulted in InBev selecting KKR as the buyer because of the  surety of financing, the source said.

KKR sees an opportunity to earn significant revenue for the firm through activities traditionally done by unaffiliated investment banks – syndicating debt, underwriting offerings, distributing securities. Sources close to the firm say KKR’s senior partners are eager to gain market share in a market thrown into disarray by the demise of major investment banks like Merrill Lynch, Bear Stearns and Lehman Brothers.

A key to KKR’s equity underwriting business is its recently announced agreement with mutual fund giant Fidelity. The agreement gives Fidelity “exclusive access to retail securities that are allocated to KKR in all US public offerings in which KKR participates as an underwriter”, according to a June press release.

Farr joined the firm in 2006 from Citigroup, where he was co-head of equity capital markets.