Henry Kravis and George Roberts defended their mega-buyout deals in a rare interview with the Wall Street Journal Wednesday, saying the firm bought good companies using cheap debt and now own companies they would not be able to purchase today.
“We identified good, strong companies at a time when the debt and equity markets were such that you could raise the money to buy them,” Kohlberg Kravis Roberts co-founder George Roberts said in the interview. “So we own companies that you couldn’t buy today and have built capital structures around these good businesses to withstand tough times.
KKR completed the largest mega-deal in history in 2007 with the $45 billion acquisition of energy firm TXU, investing alongside TPG and Goldman Sachs Capital Partners. The deal has about $8.25 billion of equity at risk and has been written down to 50 percent of cost.
KKR also joined Bain Capital and Merrill Lynch Global Private Equity in a $33 billion transaction for hospital group HCA in 2007. The firm recently marked its investment in HCA up from 1 times cost as of 31 March to 1.2 times cost as of 30 June. KKR has $1.5 billion of equity at stake in the investment.
“They’re good businesses bought with cheap debt and little or no covenants,” Roberts said. “And we’ve been able to refinance $13 billion of debt so far in companies we’re involved in. We have not much in the way of maturities due until after 2013.”
Refinancing debt is not just delaying the inevitable, the two men said.
“As long as the markets stay open you’ll be refinancing these companies,” Kravis said. “So long as the markets are open you don’t panic and you whittle away at this stuff. It is not as though all of a sudden 2015 arrives and $1 trillion comes due and you have to line up at the window and have to pay it.”
As far as investing in troubled banks – a strategy many other big-name private equity firms like The Blackstone Group have taken up – KKR has not made any moves because of regulations that make the investments less attractive.
“There are also tougher regulatory requirements for private equity that mean only the smallest and weakest of the failed banks are available to us,” Roberts said. “Of course this could change and we are talking to a number of banks.”
During the broad discussion with the newspaper, the private equity veterans also discussed some of KKR’s deals that didn’t go as planned.
Roberts noted regret at having some of the “younger” professionals at the firm convince him to buy Regal Cinemas in 1998, a deal on which KKR and the former Hicks Muse Tate & Furst lost $500 million each when the company collapsed under a $2.3 billion debt load.
He also expressed regret at “drinking the Kool-Aid” during the tech bubble and investing in telecom companies with the philosophy, “build it and it will come”.
“The key to the private equity business is that you get to bat enough so you have enough things to look at, enough opportunities to be creative and then create an investment opportunity,” Kravis said. “I wish we didn’t own any companies that failed. But that’s not our business. If that were our business we’d buy Treasuries.”