Henry Kravis, co-founder of New York-based buyout firm Kohlberg Kravis Roberts, struck an upbeat tone at the World Economic Forum in Davos today.
Referring to the $400 billion of equity capital residing in GP coffers globally, he said that there would be a “very important need” for private equity in the event that the equity and debt markets did not re-open in the near future.
He also said that private equity firms would be able to access debt finance, albeit from “different sources” such as sovereign wealth funds, state and corporate pensions and insurance companies. Despite the more modest amount of leverage available, Kravis insisted that returns need not suffer because “lower purchase prices and running the company in a better fashion” could compensate.
Rejecting the notion that the private equity model was broken, Kravis referred to two prior periods when it had demonstrated its resilience in tough times. In 1979, he said, private equity survived a 21 percent prime rate, 13 percent inflation, credit controls and high unemployment. In the 1990/91 Savings and Loan crisis, “3,000 financial institutions went bankrupt or were taken over [by the Resolution Trust Corp]”. He suggested there was less capital available to private equity then than now.
Kravis said holding periods for portfolio companies would likely increase due to the lack of buyers and depressed stock markets, but pointed out that KKR’s historic average holding period was a lengthy seven years. He said today’s climate meant you had to “focus 100 percent on operational improvement”.
Regulation for financial institutions, said Kravis, was “coming in a major way”. He added: “Will private equity get pulled in to some extent? No doubt. Will it go too far? That remains to be seen. The pendulum usually swings too far one way and then comes back a bit.”
Kravis was jokingly chastised by the chairman of the panel for failing to observe this year’s Davos etiquette of being even gloomier than the previous speaker.