Kravis has entirely rethought the playbook, wanting "more control over our destiny" Thomas Broening
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Roberts and Kravis at the Fairmont Hotel in San Francisco: Their closeness has been key to KKR's success Thomas Broening
Kohlberg and Kravis in 1978
Roberts and Kravis as fellow students at Claremont McKenna College in Southern California
(L to R) Adrian Moser/Bloomberg News; Santi Burgos/Bloomberg News
It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.
Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."
What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."
That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered.
Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny."
The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Other private equity firms see the value in KKR's emulating Buffett. "This makes sense for them,"
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