With its plans to become a public company in Q4, the folks at KKR have a lot on their plate. Even so, the company realizes it needs to keep building the firm.
In light of the credit crunch and slowing economy, this is a tough thing. After all, much of KKR's business comes from its buyout business, which has been mostly frozen for the past year.
But KKR understands that private equity is a long-term proposition, and there are certainly some great investment opportunities right now. One attractive area is infrastructure, and in May KKR announced plans to raise a $10 billion infrastructure fund and retained a top Lazard (NYSE: LAZ) executive, George Bilicic, to manage things.
This week there was more activity on this initiative. KKR retained John Bryson as a Senior Advisor. No doubt, he's a maestro of infrastructure. He was formerly the CEO of Edison International (he joined the firm in 1984) where he had to deal with complex regulations as well as find ways to grow operations. Before this, he was a partner at the law firm, Morrison & Foerster and even served as the president of the California Public Utilities Commission.
Of course, KKR is facing lots of competition in the infrastructure category, such as from other tier-1 private equity operators and even sovereign wealth funds. Take a look at TPG, which has recently made a preliminary $6.5 billion bid for Australia's Asciano, a port and rails firm.
But infrastructure is a massive space with room for many players. More importantly, private equity firms are bulging with cash and need to find places to put it.
Back in the mid 1970s, three smart investment bankers from Bear Stearns started a new firm, KKR. They helped create a new way of buying companies called an LBO -- a leveraged buyout. Since then, KKR has been an innovator in that and other financial structures.
Well, this week, we got news of another one: KKR is going public through a complicated exchange of securities. KKR will merge into KKR Private Equity Investors, which is listed on the Euronext Amsterdam. This firm essentially is a co-investor in KKR deals; it raised $5 billion in May 2006 soon after it was formed. Ultimately, KKR will own about 79% of the entity.
From there, KKR will then list on the New York Stock Exchange, likely in Q4.
Something else: KKR will not get cash in the transaction, nor will the partners or employees. The insider shares will be locked up for six to eight years.
In the rarefied world of private equity, there is a well-known PR operator: Kekst & Co Inc. Founded in 1970, the firm has a sterling client list, which includes biggies like KKR. No doubt, it's a complex specialty, which requires a strong understanding of securities regulation and shareholder relations.
Well, Kekst is selling out to Publicis Group, which is a global advertising and marketing firm. The price tag was not disclosed.
Kekst has a storied past. For example, the firm was involved in the leveraged buyout of RJR (back in the late 1980s). Kekst is also advising Anheuser-Busch Companies Inc. (NYSE: BUD) on its fight against InBev.
The disk drive business isn't exciting. But it does generate nice cash flows.
Over the weekend, KKR announced that it is buying Unisteel, which is a disk drive component developer in Singapore. There were other bidders at the table, such as the Carlyle Group, TPG, and Bain Capital.
The price tag: $578 million.
Unisteel is listed on the Singapore exchange. Because of low trading volume, there are many bargains to pick from, which should be attractive to private equity players.
From a strategic standpoint, the Unisteel deal is another sign of the consolidation in the global disk drive market, in which scale is incredibly important.
Interestingly enough, KKR purchased another disk drive operator, MMI Holdings, about a year ago. So, by combining MMI and Unisteel, there should be some juicy cost savings.
Moreover, it looks like KKR will continue to focus on Asia. After all, the firm recently raised a $4 billion fund that is focused on the region.
Posted May 1st 2008 2:00PM by Jon Ogg Filed under: KKR
Today, the Environmental Defense Fund (EDF) and Kohlberg Kravis Roberts & Co. L.P. (KKR) announced a "Green Portfolio" partnership. The first environmental organization and private equity partnership, it will build on the 2007 TXU Corporation acquisition and gauge and enhance the environmental performance of KKR's portfolio of U.S. companies.
KKR and the EDF designed a set of metrics to track the environmental improvements portfolio companies have made and enable managers to improve cost-effectively enhance efficiency and reduce waste, while simultaneously addressing the impact that their greenhouse gas emissions, toxic substance use and water generation and consumption have on the environment. The concept has financial and environmental benefits for the companies that utilize the program.
Initially, the Green Portfolio will implement the program in pilot projects for six months before analyzing and applying to the full portfolio in the next year, publicly announcing results at each phase. The partnerships ultimate goal is to design a program that will be used by companies around the world.
Posted Apr 24th 2008 12:00PM by Tom Taulli Filed under: KKR
Lately, there have been some scary stories -- such as in BusinessWeek and Forbes.com -- about the buyout of Freescale, which is a major semiconductor operator. The transaction came in September 2006 at $17.6 billion.
The latest earnings report was anemic. Plus, the company's bonds are selling at distressed levels. And CEO Michel Mayer quit his post in February (but don't cry for him as he took millions in a nice payday). And of course, Freescale's key customer, Motorola, Inc. (NYSE: MOT), is ailing.
So, might this prevent further buyout deals in the semiconductor space?
Not necessarily. According to a piece in Financial News, it looks like KKR is still bullish on the sector. Actually, the firm made an investment in the sector, NXP, which has taken a drubbing.
But, then again, private equity is supposed to take the long view, right?
Well, KKR thinks that NXP could be a vehicle for consolidation. And, the firm has no shortage of cash to pull it off. Besides, NXP recently sold its wireless assets to STMicroelectronics for a cool $1.5 billion.
As if Cleveland needed any more trouble, the two leading banks in the city are rumored to be considering a merger or even an outright sale. According to The Wall Street Journal, KeyCorp. (NYSE: KEY) may acquire National City Corp. (NYSE: NCC). Buyout firm Kohlberg Kravis Roberts & Co. could provide the capital for the buyout.
National City has had a difficult few months. The bank has a lot of exposure to the subprime mortgage market, and the company's stock has dropped from the mid $30s to about $10 in the last year. Although National City has a $1 billion stake in Visa (NYSE: V), it has laid off over 3,000 workers recently, and is likely to reduce staff even further. An acquisition by neighbor KeyCorp. would no doubt guarantee many more firings -- or "redundancies," as they say in Britain.
So far, these rumors are good news for KeyCorp, which is up nearly 5% to $24.66. For National City, it's a different story, with the stock down nearly 2% to $9.78. I guess the market thinks KeyCorp. will pick up some decent assets at fire sale prices. Let's hope that this isn't another mistake by the lake.
According to The New York Times, everybody's doing it! Well, maybe not the birds and the bees, but certainly Blackstone (NYSE: BX), KKR, and now Apollo Management, the latter to the tune of $1 billion, are investing in distressed debt.
It's no surprise that Blackstone is ahead of the game and has already raised a $1.4 billion fund to focus on cheap loans and bonds. The Deal.com also lists Cerberus and Carlyle as being interested in joining the party.
Apollo's Leon Black wrote in a letter to investors:"We're doing exactly what you would expect of us in this market -- using our distressed expertise and appetite for complexity to find investments in good companies that are available at a significantly discounted basis."
Luckily for Apollo, they happen to own some of those "good companies" that are "significantly discounted." So some of the bonds it will invest in will be issued by companies it already owns. Neat trick, huh?
As for the "appetite for complexity" -- I'll bet. Blood from a stone, anyone?
Not that long ago, the private equity folks were often called "masters of the universe." Actually, based on the compensation structure, it seemed that they could buy the universe, several times over.
Private equity firms were able to exploit market efficiencies as well as get access to cheap capital. And something else: they had the benefit of focus.
But over the past few years, some of the top private equity firms have diversified into other categories, such as hedge funds, venture capital and real estate. With a strong platform – and lots of capital – it seems like a no brainer. Right?
Well, reality has been much different, at least according to a recent piece in The Wall Street Journal. Just look at the Carlyle Group and KKR. Essentially, both firms are getting whacked by their exposure to the mortgage sector.
In fact, Carlyle's mortgage entity – Carlyle Capital Corp., which is traded on the Euronext Amsterdam exchange, has defaulted on some of its loans, even though they are high-quality offerings. Now we know that the firm ramped its leverage ratio over 30X!
As for KKR, it has its own debt vehicle – called KKR Financial Holdings (NYSE: KFN) – which is suffering from "high quality" mortgages.
If anything, these forays have become major distractions -- not to mention being big reputational hits.
I suspect that diversification is likely to be a strategy that gets much less emphasis going forward.
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.
Beleaguered shareholders of Getty Images (NYSE: GYI) got some good news today. According to The New York Times, the company is exploring "strategic alternatives." This is essentially finance-speak for selling the company.
To get things rolling, Getty has hired Goldman Sachs (NYSE: GS) as its financial advisor. The buzz is that a deal could fetch $1.5 billion.
The buyers? Well, despite the credit crunch, it's the private equity crowd, such as KKR and Bain Capital.
While Getty has a strong business in licensing of media (such as photos), there have been competitive pressures lately. Some of the competitors include Jupitermedia (NASDAQ: JUPM) and Corbis Corporation. There are also a number of smaller photo sharing sites, some of which that give away their photos.
Interestingly enough, the CEO of Jupitermedia, Alan Meckler, has a blog post on the possible sale – and, no doubt, thinks his company is in better shape to deal with the changes in the industry. According to him: "While the Getty team might be bailing out, management at Jupiterimages remains confident that we have the best chance of the big three in the image industry to come out on top. We are the only company with the right mix in this difficult environment to hopefully create a solid business model for success."
According to a study by Moody's, the buyout firm KKR is actually less likely than other similar firms to do what many critics say buyout firms do: replace assets with debt in order to take a big payday, thereby leaving their target companies in precarious financial condition. Examining 176 deals over the last five years, the Moody's study paints a surprisingly positive view of KKR in this regard, at least when compared to similar firms.
In details discussed over at Deal Journal, KKR traded big money for big debt -- a process known as "dividend recapitalization" -- less than half the time over the five year period. By contrast, Providence Equity Partners and Cerberus Capital Management took that route in the majority of cases.
Another surprising bit of data: KKR is the only major private equity firm that saw the debt ratings of its target firms rise after the majority of its buyouts.
So say what you want about the savage pirates at KKR -- it turns out that they are actually the nicest pirates you're likely to encounter in the financial markets.
A good sign of a bottom in an industry or market is when private equity firms start to get interested. LBO interest indicates that the stocks are so beaten down that some very smart people think they can use debt to buy the entire company, and then use the company's cash flow to service it.
Now the Carlyle Group, the famed private equity firm that was among the first to spot signs of trouble in credit is "getting close" to buying up beaten-down financials. According to the Wall Street Journal, "In July, the firm hired Edward "Ned" Kelly, former chief executive of Mercantile Bankshares Corp., to head a new, 10-person team to look for financial-services deals. His focus includes distressed businesses where a jolt of Carlyle capital could help mend things. He also is watching big, integrated financial-services companies that may need to divest themselves of solid subsidiaries to raise cash in a hurry."
KKR has also expanded its team looking at financial services stocks. Should ordinary investors follow suit? I'm not so sure. There are tremendous transparency problems associated with the sector, as the wave of surprise subprime writedowns showed. It's hard to do securities analysis to determine if a stock is a good value when the financials aren't reliable.
You might miss out on a great buying opportunity by waiting for more information and disclosure, but that's a price I'm willing to pay. Buying companies with financials you don't really understand isn't value investing: It's speculating.
Kohlberg Kravis Roberts & Co. recently unveiled a £593 million ($1.2 billion) offer for British human resources software maker Northgate Information Solutions plc despite recent concerns about its debt.
Including the debt, New York-based KKR will pay £1.4 billion for the business.
KKR said it would pay 95 pence per Northgate share, a 49% premium to the stock's Thursday close and 60% above the closing price on Dec. 11, the day before Northgate confirmed it was in takeover talks. The Northgate board is recommending shareholders accept KKR's offer.
Today's Wall Street Journalreminisces about the height of the private equity boom: "Remember when Blackstone Group and Kohlberg Kravis Roberts & Co. seemed to be competing for the title of World's Largest Buyout? Or when talk of a $50 billion or even $100 billion buyout was bandied about?"
What's interesting is that the top of the buyout bubble seems to have been marked by a lot of talk about big buyouts and competition among buyout firms for the biggest deals.
It's reminiscent of the deal that was the high point of the LBO-mania of the 1980s (after that bubble, LBOs got a bad name so now they're called private equity deals. I wonder what they'll be called next?). KKR's high-profile buyout of RJR Nabisco was very similar: the top buyout shops in the world were competing for a prize, and KKR couldn't afford the reputation hit that would come from losing out to any of the other players, nearly all of whom were involved. In the end, KKR went home with a Pyrrhic victory and, having paid too high a price, failed to generate value from the deal.
So maybe that's a good sign of the top of a market: it becomes about ego rather than greed.
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With its plans to become a public company in Q4, the folks at KKR have a lot on their plate. Even so, the company realizes it needs to keep building the firm.
Back in the mid 1970s, three smart investment bankers from Bear Stearns started a new firm, 
In the rarefied world of private equity, there is a well-known PR operator: 
The disk drive business isn't exciting. But it does generate nice cash flows. 
Lately, there have been some scary stories -- such as in 
Not that long ago, the private equity folks were often called "masters of the universe." Actually, based on the compensation structure, it seemed that they could buy the universe, several times over.
Beleaguered shareholders of 
