bloggingbuyouts

KKR is the firm that pioneered the private equity business getting its start in the mid 1970s. Over the years, the firm has established 14 funds and generated average returns of 20% (net of fees).

Lately, though, KKR has come under attack (as have many other private equity operators). So, when the firm's Private Equity Investors group, which is publicly traded in Amsterdam, had its conference call recently, Henry Kravis talked about the state of private equity.

It was not an easy talk since the fund had to mark down the valuations of seven holdings. In fact, the return of the portfolio was a horrible -0.1% last year, and the fund is trading at a 38% discount to its net asset value.

Simply put, Kravis says that dealmakers will need to be creative. This means locating capital from alternative sources, such as private investors and hedge funds. There will also be more minority investments.

Kravis also stressed that KKR will continue to stick to its investment philosophy. This means focusing on companies that have stable revenues, diversified global platforms and room for operational improvement.

More importantly, Kravis said that the private equity business is about the long-term. If anything, the best opportunities are when markets are in the midst of dislocations – which is certainly the case now.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

The New York Times is reporting today that a group of protesters will be demonstrating outside of Henry Kravis's 28-room apartment on Park Avenue today. The demonstration will have a holiday feel, complete with carols and ringing bells. A movie with the jolly title of "The War on Greed, Starring the Homes of Henry Kravis" will be shown on sandwich boards worn by protesters. The film is apparently a satirical look at Kravis's many homes and opulent lifestyle, with a comparison to the more modest homes and lifestyles of ordinary American workers.

Kravis is one of the founders of Kohlberg Kravis Roberts or KKR, one of the older buyout firms. Starting 30 years ago, KKR pioneered the use of leveraged buyouts and has now done over 160 deals. KKR manages $53.4 billion and has offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo. Some of its notable achievements include the first leveraged buyout in excess of $1 billion and the largest buyouts ever in the Netherlands, Denmark, India, Australia, Singapore and France.

The protesters are focused on the lower tax rate payed by partners in private equity firms, as well as the general excess of extreme wealth in the U.S. You can see the protesters movie at warongreed.org.

The New York Times [registration required] reports that KKR partner, Henry Kravis, is belatedly and ineffectively entering the battle to keep Congress from raising his taxes. At issue is the 15% capital gains rate which private equity firms pay on the 20% of the profits their funds generate, known as carried interest. Congress wants to tax this 20% as ordinary income -- meaning Kravis and his pals would pay a 35% tax.

Despite his arguments about the jobs KKR created in Rep. Sander Levin's home state of Michigan and his claim that a tax increase could hurt the investment returns of the pension funds which invest in KKR, Kravis appeared not to have dissuaded Levin in his drive to raise the tax rate from 15% to 35%.

I wrote an e-mail to Rep. Barney Frank (D-MA) who chairs the House Financial Services Committee. My suggestion, on which I posted earlier, is that the real problem is that private equity firms and their bankers get rich by taking risks -- such as borrowing too much money -- and they often leave society to pay the costs of failed deals, as they did with the $150 billion bailout of the junk-bond fueled collapse of the Savings & Loan (S&L) industry.

While I've wondered frequently and publicly about the sustainability of the private equity boom, Henry Kravis of KKR offered a compelling case for a continuation of the Golden Age of Private Equity on Friday. Here's the key statistic that just might make a believer out of me:

In 1987, the average deal was paid for with 7% equity and 93% debt.

In 2006, the average deal was paid for with 33% equity and 66% debt.

Aside from the obvious decrease in default risk that happens when companies aren't so debt-burdened, here's what's important: By taking huge equity stakes in the companies they're taking private, these firms have skin in the game, rather than just generating profits through exorbitant fees as so many did in the 1980's.

So companies may not be doing deals just to get deals done. They just might actually be focusing on putting together deals that make sense. And that could lead to a long-term "golden age of private equity" as Mr. Kravis seems to predict.