You know your stature has risen in the schoolyard when the coolest kids start being nice to you. This must be how the limited partners of Kohlberg Kravis Roberts feel now that the firm has taken at least two major steps toward being more communicative and responsive to investor desires.
According to sources, the iconic New York buyout firm has hired an in-house investor relations and placement professional. In addition, the normally tight-lipped firm has confirmed reports that it is conducting an extensive survey of its LPs in order to better determine their views of the industry and of KKR. These are notable moves from a firm not otherwise known for working itself into a lather over investor relations. Its senior partners once told a hard-bargaining CalPERS that the pension's money wasn't welcome at KKR.
Without dispute, the LP-GP game is changing. Even the slickest operators now realise that their continued dominance will depend increasingly on building and nurturing relationships with the kids who once could be counted on for unconditional devotion.
KKR's decision to go in-house with an IR pointman may also have implications for private equity placement firms, which may increasingly lose the business of established mega-firms and be left to compete fiercely for newer and smaller funds.
According to a source familiar with the situation, KKR has hired Tony Hass, a former investment banker from the Los Angeles offices of Deutsche Bank, to a unique position within the firm that blends the role of investor relations professional and placement agent. A source says Hass used to cover LBO firms. Prior to settling on Hass, KKR conducted an extensive search in which many experienced fundraising professionals were contacted about the opportunity to become KKR's in-house placement agent.
KKR's partners have historically done just fine raising capital on their own. In particular, KKR has enjoyed enormous support from the state pensions of Washington and Oregon, which committed $1.5 billion and $1 billion (€1.2 billion and €790 million) to the $5.1 billion 2001 KKR Millenium Fund, respectively.
That said, the firm has opportunistically hired outside consultants for specific purposes related to securing capital commitments. In 2001, it hired the placement group at Merrill Lynch to raise new money for its $3 billion Europe fund, for example.
But, as indicated by its polling effort, KKR appears to be paying extra attention to its image among investors now, and it feels that spreading the gospel on a continuing basis is the best way forward. “They recognise it's a changed world,” says one placement agent. “The fact is, there's no way a placement agent who's hired for a 12 to 18 month time period can know a story as well as someone inside.”
One of the firm's goals may be to broaden its investor base. Oregon and Washington represent almost half of the Millennium Fund.
Hass is an interesting choice – he appears to have little experience on the road selling funds, but perhaps this isn't what KKR was looking for. To be sure, an investment banker of any stripe understands the value of client relationships and salesmanship, but as a buyout specialist, Haas understands LBOs, his new firm's bread and butter. He will be equipped to communicate even the most technical aspects of any KKR transaction to LPs.
Finally, for a very large firm – such as The Carlyle Group for instance, which has long had a team of in-house placement agents – an in-house placement agent is simply less expensive. Placement agents typically get paid as much as 2 percent or more on new money. Even if KKR were to secure as little as $500 million in new money for its next fund, a 2 percent deal with an outside placement agent would cost $10 million. You can hire a pretty motivated full-time placement employee for far less than that.
The placement business has always been fiercely competitive. As veteran firms like KKR opt to raise their own money, the placement game will become more competitive. On the other hand, the talents of experienced IR and placement professionals are as in-demand as ever as the industry's 800-pound gorillas get an appetite for fresh capital and a desire for friendlier images.