The big league: KKR in Europe

PrivateEquityOnline spoke recently to Neil Richardson, a director in the London office of Kohlberg Kravis Roberts & Co, about what the US buyout firm is up to in Europe.

The big league of US private equity firms is devoting around $40 billion to European investments. And they don’t come bigger than Kohlberg Kravis Roberts & Co – which has a European fund worth $3 billion.

A leveraged buyout specialist, KKR is preparing to try its hand at early-state venture capital. It has teamed up with established European players to form a new company, European Digital Partners, that will aim to build a portfolio of 20 investments valued at around $50m by the middle of the year.

PrivateEquityOnline spoke recently to Neil Richardson, a KKR director based in London. He spoke about the firm’s European activities, where the bargain buys might be and whether KKR did in fact inspire Oliver Stone’s Wall Street.

Click on the questions to below to read his answers:

KKR is said to be the buyout firm which inspired Oliver Stone's Wall Street. Has your past reputation as an 'asset-stripper' made it difficult for you to strike deals with European investors and managers, who favour buyouts which are about growth rather than asset sell-offs?

KKR decided to take the plunge into Europe quite recently. What were your initial expectations and how have you found the going since – better or worse than expected?

Many analysts say there are lots of bargain buyouts to be had in Europe, particularly in old economy sectors such as retail, chemicals and basic resources. Do you agree and, if so, what do you think are the forces conspiring to create these bargains?

Some suggest that US firms such as KKR are compensating for their lack of local knowledge and contacts by paying over the odds in European deals. How would you respond?

What advice do you have for other US firms considering setting up in Europe? What do they need to be aware of, how might they need to change the way they work?

The Internet space is winning all the headlines in private equity. So far you have avoided dot.com investments. Is this a conscious decision or are you waiting for the right opportunity?

Do you think dot.com investments are overvalued at the moment?

European governments are falling over to create more favourable climates for entrepreneurs and investors. Do you think they are doing enough, are they getting it right, and what more could they be doing?

US interest rate volatility and the continuing reliance of the European high yield market on US investors made for a rocky 1999. Do you have any views on the outlook for high yield in 2000?

On a personal note, what gets you up in the morning and keeps you fresh and excited about your job. Which parts of your day-to-day work give you the most personal satisfaction?

PEO: KKR is said to be the buyout firm which inspired Oliver Stone's Wall Street. Has your past reputation as an 'asset-stripper' made it difficult for you to strike deals with European investors and managers, who favour buyouts which are about growth rather than asset sell-offs?

KKR: I think the principle problem is the book that was written on RGR Nabisco – “Barbarians At The Gate” – which was a very good title, but really conveyed aggression and hostility.

All we have done for 24 years is do management buyouts. We don’t do hostile deals, we do deals in partnership with management and I think there is some misunderstanding of us and of US private equity firms in general.

It’s really incumbent on us to increase the knowledge of what we do, you know, by getting out and meeting with senior people in companies and explaining what we do. But basically we have been managing buyouts, the same as all our European and US competitors, and we don’t do hostile asset stripping deals.

In fact we don’t really generally like deals where we have to sell a significant component of the business. I mean we are prepared to do that, because if there is a diversified business where parts of it really belong or would have better prospects if they were bolted together with somebody else. Then we are prepared to recognise that, but it’s not really our major thrust.

We really focus on getting a business and building it over time for the future. We have a longer ownership period on average than any other major private equity firm, which means that we really have a medium to long-term focus. We think this differentiates us from, in particular, a lot of European firms that have a shorter investment horizon. Back to top

PEO: KKR decided to take the plunge into Europe quite recently. What were your initial expectations and how have you found the going since – better or worse than expected?

KKR: Six years ago we set up this affiliate, which I set up together with Ian Martin, called Glenisla, which was meant to be an underground window through which to really monitor and participate in the developing European deal flow.

Through that we made some successful investments and became convinced that the opportunity, in terms of the volume of deal flow, the attitudes of the management of businesses in Europe, and the attitudes of the vendors of business, had developed to a point where it was appropriate to commit significant resources on the ground here. We decided to call it KKR and raise the funds dedicated to investing in Europe. It was an evolution rather than a sort of overnight decision.

We found we were on top of the competitive dynamic, on top of pricing, and that we had a good network of relationships. Obviously, as we built our team up, we further developed our network of relationships and deepened our understanding of the market opportunity.

I think we have successfully competed for a number of businesses in competitive situations, having reviewed a lot of proprietary opportunities. We feel very good about our deal flow and we think it’s a competitive market like most markets around the world.

We are still as convinced about the opportunity, in fact more convinced, because the volume of deals has continued to grow, and as people have understood better our commitment to this marketplace, the volume of proprietary opportunities has continued to build.

We continue to be very excited about the team that we have been able to build here. We have got some very good people. We have our fund, which will be finally closed before too long, so I think we are in good shape for the future. Back to top

PEO: Many analysts say there are lots of bargain buyouts to be had in Europe, particularly in old economy sectors such as retail, chemicals and basic resources. Do you agree and, if so, what do you think are the forces conspiring to create these bargains?

KKR: Well. it depends whether you are talking about public companies, public to private deals or divisional purchases.

I think that where large, high quality divisions are made available for purchase, I don’t think there will be any obvious bargains in terms of the price in relation to current financial performance.

The possible exception to that might be our recent purchase of the Private Networks business within Bosch Telecom. It was a business that frankly required a lot of work to really understand it; to get under the skin of the business and really understand what the future outlook was for it.

If you go back through the businesses that were auctioned last year, whether it’s Zeneca Specialities, Alpha or Grower, there were a number of high quality businesses that were made available for purchase and they attracted full prices in relation to their current financial performance. Time will tell whether the situation changes in the future. But I am sure they will all be good deals.

I think the bargains the analysts are talking about, are really public-to-private opportunities. There it’s really a question of what sort of premium do you have to add to the prices that are prevailing right now; many of which you know represent 12-month lows, or 24-month lows.

There are boards of directors and shareholders who are going to demand very substantial premiums, because they haven’t accepted this level of valuation. Others are going to be prepared to accept the normal premium to the levels these companies are currently trading at. It really depends on their view as to whether this old economy/new economy set of evaluation parameters is temporary or permanent.

And that hasn’t really been tested. We have not had a wave of major companies going private since this fairly recent divergence of the new and old economy businesses. So I think the potential may exist for some deals to happen that could provide a good return for private equity investors but I think, you know, that will evolve over the next 6 months. Back to top

PEO: Some suggest that US firms such as KKR are compensating for their lack of local knowledge and contacts by paying over the odds in European deals. How would you respond?

KKR: I obviously wouldn’t agree with that. I think that there are European firms paying up to win auctions and the result of a lot of recent activity has yet to work it’s way through. Cinven prevailed in the auction for Zeneca Specialties with a clearly high bid, and that's a very good company too.

All I can say is, I don’t know what other US firms are doing in the way that they reviewing their investments. We obviously don’t think we have paid too much in the deals that we have done.

Our Newsquest deal is one deal we have exited from in Europe. It was a very successful deal and we hope we are going to carry on in that vein. We feel good about recent investments we have made: Wincor Nixdorf, the Private Networks business, and the Wassall transaction. Back to top

PEO: What advice do you have for other US private equity firms considering setting up in Europe? What do they need to be aware of, how might they need to change the way they work?

KKR: I wouldn’t be presumptuous enough to try to give advice to very smart people in US private equity firms. I think everybody knows that if you can bring together a seamless mix of local, talented people, who have relationships and an understanding of the cultural nuances of doing deals in the major European economies, with the longer standing experience, financing expertise, knowledge of how to work and create value in businesses in different market conditions that some of the leading US firms like KKR have, that's a very powerful mixture.

So that's what we have tried to do. We have got some people here that are from KKR in the United States and have been with KKR for a very long period of time. Then we have people, including myself, who have spent all or most of their careers in Europe and have the relationships here. We think we have got a very good mixture and I think that's what US firms need to do, and that's what by and large they are doing. Back to top

PEO: The Internet space is winning all the headlines in private equity. So far you have avoided dot.com investments. Is this a conscious decision or are you waiting for the right opportunity?

KKR: Well, two things. We have a pretty sizeable fund here and so to put that to work in very small pieces is going to involve too many deals. So we are not making typically $10m or $20m investments, which is the quantum of money that is typically going in to early stage Internet businesses.

I think we are very focused on the convergence of the Internet economy and the old economy. We have created a joint venture with Accel Partners, which is one of the leading Silicon Valley venture firms, to exploit that convergence phenomenon worldwide.

You will also see very shortly another European initiative that hasn’t yet been announced, that will in part address this question. And you know, in a business like Private Networks, there is a significant dot.com aspect. It’s not a dot.com business, but there are opportunities to benefit from the mushrooming demand for communication services there. The business has to deal with the new world of the Internet protocols.

So there are a lot of Internet aspects to the investments that we make and I wouldn’t rule out making a pure dot.com investment if the right one came along. We have made quite a number of investments in early stage dot.com businesses in the US: a significant number in the last 12 months and we have learned a lot about the Internet economy. Back to top

PEO: Do you think dot.com investments are overvalued at the moment?

KKR: I do think they are being overvalued by the market, but that's a personal view. Back to top

PEO: European governments are falling over to create more favourable climates for entrepreneurs and investors. Do you think they are doing enough, are they getting it right, and what more could they be doing?

KKR: I think that the German tax law change is a massive plus. It just makes tremendous sense. It makes no sense in my view to have companies retain holdings that they really don’t want to have, but they don’t want to sell for tax reasons. I think that Germany has shown itself to be fully prepared to be pragmatic and to move itself towards being more competitive in a globally competitive world.

Governments can help but it really has to – it’s an attitude thing – come from the workplace upwards. And I think that has developed and built in Germany. I think it’s really France where developing the right attitude has further to go.

I think the UK is excellent and has been for some time. People recognised a long time ago that if they were not competitive on a European and global stage, they would lose market share and wither on the vine. I think the flexibility exists on the part of the workers and the right attitude exists on the part of the government. Back to top

PEO: US interest rate volatility and the continuing reliance of the European high yield market on US investors made for a rocky 1999. Do you have any views on the outlook for high yield in 2000?

KKR: I think that it was more in 1998, with the Russian crash, that the European high yield market really took a major bath. Which is unfortunate, because it was at an early and important stage of its development.

I think that the factors driving investor interest in European high yield securities are set to stay. European investment you used to be able to invest in Italian government bonds that double the yields. You don’t have that opportunity any more. You have to reach down the yield curve.

There is also obviously good interest from the US. So I think that the demand is going to be there. The single currency means the market is going to be much deeper, better researched, better understood. It’s going to build and it will build towards a size that's similar in GMT terms to that which exists in the US. There is no reason why it shouldn’t. It’s an efficient way for a company to raise capital. Back to top

PEO: On a personal note, what gets you up in the morning and keeps you fresh and excited about your job. Which parts of your day-to-day work give you the most personal satisfaction?

KKR: What I have always been interested in my business career are: how to really assign value to businesses; how to be as good as I can be at doing that; and how to add value to businesses?

We get the opportunity to do that every day here at KKR, and that involves really trying to look into the future and to understand properly the corporate dynamic and the market dynamic that businesses face; and therefore the challenges that managers face and then try to contribute and help them.

So I really enjoy the up-front part of the job, which is trying to find good value-for-money opportunities to invest capital. Then I enjoy trying to build the value of that capital by really working shoulder-to-shoulder with a management team to try to make the businesses that we invest in better. So I think that's a pretty interesting job and it’s a satisfying job.

Given the pace of development and so on these days, if you can’t get out of bed and get excited in this environment then you should probably go and do something else, because it doesn’t get much more exciting than this. Back to top