In an article that appeared today in The Wall Street Journal, Henry Kravis and George Roberts, the two cousins who run famed private equity firm Kohlberg Kravis Roberts, discussed their thoughts on the evolution of the private equity market, stating that they believe concerns over risks facing the industry have been overblown.
“We don’t believe there is a bubble,” Roberts told the Journal.
“In 1987, the average deal was 93 percent debt and 7 percent equity. In 2006, the average deal had 33 percent equity and 67 percent debt,” said Roberts. “Given that the average company in the Standard & Poor’s 500-stock index is now eight times the size of 20 years ago that means 32 times the amount of equity of the old days to do a comparable deal.”
Roberts attributed the current private equity boom in part to management disillusionment with the public markets. “Managements want to take the long-term view, but they know they get clobbered in the short term,” Roberts said. “When we say our average hold is seven years, they sit up.”
Kravis and Roberts told the Journal that they spend a minimal amount of time on “financial engineering” and the bulk of it on “operating decisions”.
“We have deeper teams,” Kravis said. “Our processes are better. We have formalized plans before we buy. We also make decisions more quickly on things like whether we have the right management structure.”
Kravis also noted a significant globalisation in its firm’s limited partner base and its deal geography. “Fifty percent of the money raised comes from outside the US,” Kravis said. “In the 1980s everything was domestic. In 2006, eight of the 12 deals we did were foreign.”
Kravis said that more expansion is in the works. The firm is considering plans for possible moves in Eastern Europe, Turkey and even South Africa. KKR already has significant operations in Asia and Europe.
The media interest in private equity is too much focused on doing deals and too little on making profits, the two men said. “Any fool can buy a company,” Kravis said. “You should be congratulated when you sell.”