Kohlberg Kravis Roberts’ recent record $6 billion fundraise generated concerns from LPs about resources, deployment and macroeconomics, but the firm remains highly confident the capital can be deployed, said KKR’s co-founder and co-chief executive officer Henry Kravis, who is on a visit to Asia.
“LPs wanted assurance that KKR in Asia had enough people and full access to global resources,” Kravis said. “We assured them Asia is very important to us. [The Asia team] is not an island. They have accesss to the whole firm globally and yet they have autonomy — the firm is not strangling them.”
“They also asked, `will people stay at the firm?’ We’ve been fortunate because the Asia team hasn’t had any turnover,” Kravis explained.
Private equity firms need to increasingly deal with governments due to heightened regulatory regimes worldwide, and issues such as the environment, healthcare and labor unions require GPs to identify and work with “all the stakeholders” involved in an investment.
Henry Kravis, KKR co-founder
In addition to the $6 billion fund, KKR also has a $1 billion China Growth Fund, which is 40 percent invested, bringing the firm’s total dry powder in Asia to $6.6 billion, added Joseph Bae, managing partner of KKR Asia.
“LPs asked, can you deploy that capital and deploy it well?” Bae said.
He explained that LPs liked the returns from the firm’s first Asia fund, a $4 billion vehicle with a 2007 vintage, which provided a track record in the region. In addition, when Fund I was raised, KKR had 20 people in Asia and today the firm has 100 across seven offices, as well as Capstone, the firm’s internal team of operational experts that work on value creation.
“That gives investors tremendous confidence the platform is bigger, broader and fully implemented and our investment pace is more active.”
On the issue of macroeconomics, Bae admitted that “it’s been a tumultuous time for emerging markets in the last 18 months as investors are readjusting expectations around growth. They’re asking what will the [US federal reserve] pullback mean, what are the implications on Asian currencies, borrowing costs and access to capital?”
“As investors this is an incredible opportunity to deploy capital in a dislocated environment. Valuations are at the lowest we’ve seen in the past 5-7 years. In China, companies are trading less than 10x price-to-earnings. It’s a great time to be sitting on $6 billion in dry powder,” Bae said.
Kravis spoke about synergies between KKR’s asset classes, such as real estate and debt lending, in addition to its public market activities, as being particularly helpful in Asia, where family groups tend to control businesses.
For example, most family groups in Asia have large real estate holdings and KKR’s exposure to that asset class added dimension in understanding the family group requirements, he said.
Valuations are at the lowest we’ve seen in the past 5-7 years. In China, companies are trading less than 10x price-to-earnings. It’s a great time to be sitting on $6 billion in dry powder
Joseph Bae, managing partner, KKR Asia
Credit, as well, “is highly synergistic with core private equity”, Bae added, because not every entrepreneur wants to give up equity.
“As we develop further capabilities around real estate, credit and direct lending, we can engage families holistically and ask, how can we help you? This is giving us a huge competitive advantage on the ground here in Asia.”
Kravis also spoke about the changing investment landscape globally. Private equity firms need to increasingly deal with governments due to heightened regulatory regimes worldwide, and issues such as the environment, healthcare and labor unions require GPs to identify and work with “all the stakeholders” involved in an investment.
“Government regulations are a very important part of investing today and can make or break a company,” Kravis said.
KKR’s average holding period for a company over the past three decades is 7.5 years, he said, adding that engaging all the stakeholders, doing operational improvements and addressing ESG responsibilities “are what being a good long term investor is all about”.
“[Private equity] is not about financial engineering, not a pre-IPO investment where you flip it and you’re gone.”
Kravis added that people shouldn’t be discouraged by the slowing macro indicators in India and China.
In India, if the plunge in the Indian rupee continues, it will at some point act as a magnet for US dollar investments, he said.
KKR, he added, sees the longterm thematic stories in Asia still intact: urbanisation, a growing consumer base and the region accounting for the biggest slice of world GDP in 15 years.
“[The current economic slide] is a normal part of a long cycle and there will always be setbacks along the way. We’ve always believed that we make the best investments when go against the tide,” Kravis said.