Financial Lords - Kravis Schwarzman
Lets define the problem:
It is 596 trillion dollars in deriatives = 10 times bigger than the whole world economy, it has doubled in two years, it has gone up 6-fold in five years, it is out of control.
In simple terms derivatives are nothing but a giant crap game where 9000 hedge funds have been playing craps with monopoly-money that they borrowed from banks.
They have lost a lot of money and now the banks want the money back, but they want real money, they don't want monopoly money.
The subprime mortgages are a very very tiny part of the entire 596 trillion.
The 700 billion looting of the treasury are a 10 cent solution to a $1000 problem.
the banking system is frozen, look at the LIBOR, banks will not loan to each other.
We are a few days away from a bank holiday
NY Times article with some insider information:
LAST month, as Henry R. Kravis, the co-founder of Kohlberg Kravis Roberts & Company, and his wife, Marie-Josée, took their seats at the Water Cube in Beijing for a session of synchronized diving at the Olympics, they quickly recognized a couple sitting nearby: Stephen A. Schwarzman, the co-founder of the Blackstone Group, and his wife, Christine Hearst.
For a brief moment, there was an awkward pause as the longtime rivals took stock of each other. Then both men cracked smiles, and Mr. Schwarzman extended his hand, congratulating Mr. Kravis on his latest move: an attempt to take K.K.R. public despite a stock market mired in uncertainty and fear.
Mr. Schwarzman had already taken Blackstone public -- more than a year earlier at the top of the market -- and since then had watched the share price plunge, his personal spending lampooned, and his firm made a whipping boy in Congress.
Beyond those headaches, the credit crisis had all but shuttered the once high-octane private equity industry, upending the pecking order on Wall Street. Even worse, concern was mounting about whether the myriad companies that private equity had acquired and saddled with debt during the boom could survive during tighter times.
Given all that, why would Mr. Kravis want K.K.R., perhaps the nation’s most storied private equity firm, to become a publicly traded company now?
"The Blackstone deal has gone horribly in the marketplace, yet Henry seems unwilling to let it go," says Kelly DePonte, a partner at Probitas Partners in San Francisco, which helps private equity firms raise money. "There are a lot of questions about what K.K.R. is trying to do here."
The decision to go public is the latest twist for a firm that helped invent an entire industry while emerging as an object of fascination after winning the battle to take over RJR Nabisco for $25 billion in 1988. The buyout became fodder for a best seller ("Barbarians at the Gate") and an HBO movie.
In the two decades since, K.K.R. and its principals have grown wealthy and the firm has built up a $58 billion war chest, even as its inner workings have remained a mystery to outsiders. K.K.R.’s pursuit of a public offering has opened a window into a firm struggling with success and failure, ego and greed -- and is ultimately a tale of ingenuity and desperation.
Surrounded by economic uncertainty, heightened competition and questions about his firm’s performance, Mr. Kravis is also grappling with how to transform K.K.R. into an even bigger institution that would outlive the names on the door. By trying to tap into public markets, he is also rejecting a gospel he has routinely preached over the years: the virtues of private, rather than public, ownership.
"The trouble, in my opinion, with corporate America today is that everything is thought of in quarters," Mr. Kravis said in an interview with the American Academy of Achievement several years ago. "Analysts push them: ‘What are you going to earn this quarter?’ We say to the management of companies: ‘You are here today. Where do you want to be five years from now, and how are you going to get there?’ "
The same is now being asked of Mr. Kravis. Where does he want to be five years from now, and how does he plan to get there?
LATE last March, Mr. Kravis got on the telephone in his newly renovated 42nd floor office with sweeping views of Central Park to gather members of his brain trust for an urgent conference call.
On the line was George Roberts, Mr. Kravis’s cousin and fellow co-founder, and Scott C. Nuttall, 35, a rising star at the firm who had interrupted his family vacation to take the call.
Mr. Kravis, with his steely drawl, was searching for fixes to a clutch of problems bedeviling the firm.
The biggest challenge involved a publicly traded European affiliate that was stumbling badly, causing some investors to grow increasingly anxious. Inside and outside the firm, the affiliate’s stock price -- a public proxy for the value of K.K.R.’s own secretive private equity funds -- had become an embarrassment.
Although K.K.R.’s longtime investors, mostly state pension funds and large institutions, had been rewarded amply since 1976 with an internal rate of return of 20.1 percent, net of fees, the firm’s more recent investments had given investors pause.
At the same time, the firm had another lingering concern: its much-ballyhooed effort to go public, a move initially planned for the previous summer, had been stymied by the credit crisis. And, given the direction of the markets, it seemed unlikely anytime soon.
Because of securities regulations forbidding firms from talking about their operations and prospects before a public offering, Mr. Kravis and other K.K.R. principals were prohibited from commenting for this article.
But according to people familiar with that phone call in March, Mr. Kravis and his two colleagues fruitlessly batted around a number of ideas before hitting on a possible solution: the firm could try to buy the European affiliate outright, a takeover that would allow K.K.R. to shore up the struggling unit. A takeover also offered an end-run around the I.P.O. process by allowing the firm to become listed on the New York Stock Exchange.
For the next four months, Mr. Kravis and his partners held a series of secret meetings across the globe, code-named "Project Colt-King," before surprising Wall Street with the news that the firm was going public.
On a Sunday afternoon in late July, Mr. Kravis, stuck at his home in East Hampton because a storm had prevented his helicopter from ferrying him to Manhattan, watched the announcement of the proposed deal cross the tape. If the offering goes through as planned, it could give K.K.R. a market capitalization of $12 billion to $15 billion.
While Mr. Schwarzman and Blackstone had already beaten K.K.R. to the punch with an I.P.O., the offering at that point had been a resounding failure for its investors. Nonetheless, Blackstone insiders had profited handsomely and the I.P.O. had cemented the firm’s reputation as private equity’s new alpha dog.
Moreover, Blackstone now had a valuable currency it could use to lure talent and make acquisitions, allowing it to diversify the firm beyond private equity into new arenas like asset management, for example. Other private equity firms, like Apollo Management, which was founded by Leon Black -- and whose office is in the same building as K.K.R.-- also were planning public listings so they could enjoy the same benefits.
Going public is not a recent fixation for Mr. Kravis -- he began considering the idea more than five years ago, when he started to have a series of meetings with longtime K.K.R. bankers, like Vikram S. Pandit, the chief executive of Citigroup, back when he worked at Morgan Stanley. Over the years, Mr. Kravis continued to bounce the idea around with Robert Scully, a vice chairman of Morgan Stanley, and Michael Klein, a former Citigroup executive who oversaw relationships with major clients of the bank.
Mr. Kravis and Mr. Roberts, who runs the firm’s office in Menlo Park, Calif., had spoken about "institutionalizing" and diversifying the firm for years -- getting into real estate, infrastructure and fixed-income investments, for example. (K.K.R. recently even tried to lure Alan Schwarz, Bear Stearns’s former chief executive, to the firm to help it start an advisory practice, people briefed on the discussions said, and contemplated how to buy Neuberger Berman from Lehman Brothers.)
They were also aware that some of the early success stories in Buyout Land -- like Forstmann Little & Company and Hicks Muse -- fizzled during bad times, and they wanted to leave behind a more lasting institutional legacy.
Going public forces private equity firms to more directly confront nagging questions that have swirled around the industry ever since K.K.R. burst into the popular imagination in the 1980s.
Back then, private equity firms were called "leveraged buyout" operators and, over time, critics became concerned that the firms -- whose goal was to privatize publicly traded companies and make them more efficient and profitable -- were instead larding takeover targets with unmanageable debt and raking in handsome fees before flipping the companies to other buyers.
The private equity world has sought in recent years to reverse that perception, pointing to a number of deals that have benefited newly privatized companies, as well as their employees, investors and customers.
The new, public, supersized version of private equity is a much headier mission than Mr. Kravis and Mr. Roberts, both 64, dreamed up when they left Bear Stearns to open their own shop in 1976 with their other co-founder, Jerome Kohlberg Jr.
== What Does Henry Kravis Want?
To juice returns even more, firms like K.K.R. recently began "recapitalizing" earlier deals, essentially adding more debt to companies in their portfolios so they could pay themselves and their investors hefty dividends before ever even having to sell them.
"It was leveraged recaps that were fueling the really high returns that the L.B.O. funds were showing in 2005 and 2006," says Colin C. Blaydon, the director of the Center for Private Equity and Entrepreneurship at the Tuck School of Business.
The frenzy around private equity in 2006 persuaded K.K.R. to make its first run at the public markets -- latching onto the idea of raising "permanent capital," the holy grail of investing. Instead of going hat in hand every year to raise new investment funds, they want access to steadier financing, allowing them to make long-term investments.
It listed an affiliate, KKR Private Equity Investors, known by its ticker symbol KPE, on Euronext, the exchange based in Amsterdam. The fund let small investors and mutual fund companies like Fidelity Investments get a piece of the action in private equity deals.
KPE invested in K.K.R.’s private funds and participated in several co-investments with it. (Mr. Kravis and Mr. Roberts were part of the five-member board that oversaw KPE; the firm also benefited by charging KPE various fees and expenses for its services.)
Investors couldn’t get enough. The firm planned to raise $1.5 billion through the KPE offering. In the end, it snared $5 billion.
But just as quickly as the firm catapulted KPE’s $25-a-unit I.P.O., it began to tank.
Within two months, the price had dropped to less than $22 a share, a decline so precipitous that virtually no other private equity firm, with the exception of Apollo Management, could pursue a similar listing. Blackstone, the Carlyle Group and other firms had planned offerings similar to KPE, but the investor reception was so chilly that they pulled back those plans. At the time, Mr. Schwarzman said K.K.R.’s offering had "destroyed the market for anyone else."
After a few months, KPE stabilized. And by early last year, private equity was booming again. And Mr. Kravis seemed to be on top of the world.
"The stars are aligned," he boasted at a meeting of Canadian private equity and venture capitalists at the time, adding that the private equity world was in its "golden era."
And so began a parlor game: Which private equity firm would dip into the public trough first? Some bet on Mr. Kravis, others on Mr. Schwarzman and others still on David Rubenstein, the co-founder of Carlyle, who was salivating over a possible I.P.O.
The race was on.
Inside K.K.R., a small group of the firm’s partners was tasked with strategizing for an I.P.O.
Mr. Nuttall led the project, holding marathon meetings in the firm’s wood-paneled conference room. They studied other I.P.O.’s, like Goldman Sachs’s, debating various structures and the impact that I.P.O.’s had on cultures.
K.K.R. also started thinking more about its public image. In an effort to burnish its reputation as a pioneer, it joined forces with the Environmental Defense Fund, a prominent advocacy group, on its deal for TXU and later asked the group to help it improve the environmental performance of the dozens of businesses it owns. And as Congress began looking at private equity’s tax rates, K.K.R. retained Ken Mehlman, a lobbyist and former chairman of the Republican National Committee, to help it establish relationships in Washington and fine-tune its public image; Mr. Mehlman later joined K.K.R. as the head of public affairs.
Despite all of K.K.R.’s jockeying, Mr. Schwarzman made the first move. When Blackstone went public, the firm had a market capitalization of $38 billion at the end of its first day of trading.
Although Blackstone’s shares quickly sank, K.K.R. filed its own $1.25 billion offering plan.
After studying Blackstone’s offering line by line, according to people familiar with the discussions, K.K.R. tried in its offering to draw sharp distinctions between the two firms. One of the biggest differences? Nobody at K.K.R. would take any money out in the offering, in contrast to Mr. Schwarzman (who cashed out $677 million) and his co-founder, Pete Peterson (who took out $1.88 billion) at Blackstone.
Mr. Kravis even decided that all K.K.R. employees should receive shares, including secretaries and the employees in its private kitchen. The firm also put aside 20 percent of the proceeds for future employees. But the market turned sour within weeks of its filing. The collapse of two Bear Stearns hedge funds in the summer of 2007 touched off a seizure in the credit markets, which began to wreak havoc on some of K.K.R.’s own holdings.
==
The race was on.
Inside K.K.R., a small group of the firm’s partners was tasked with strategizing for an I.P.O.
Mr. Nuttall led the project, holding marathon meetings in the firm’s wood-paneled conference room. They studied other I.P.O.’s, like Goldman Sachs’s, debating various structures and the impact that I.P.O.’s had on cultures.
K.K.R. also started thinking more about its public image. In an effort to burnish its reputation as a pioneer, it joined forces with the Environmental Defense Fund, a prominent advocacy group, on its deal for TXU and later asked the group to help it improve the environmental performance of the dozens of businesses it owns. And as Congress began looking at private equity’s tax rates, K.K.R. retained Ken Mehlman, a lobbyist and former chairman of the Republican National Committee, to help it establish relationships in Washington and fine-tune its public image; Mr. Mehlman later joined K.K.R. as the head of public affairs.
Despite all of K.K.R.’s jockeying, Mr. Schwarzman made the first move. When Blackstone went public, the firm had a market capitalization of $38 billion at the end of its first day of trading.
Although Blackstone’s shares quickly sank, K.K.R. filed its own $1.25 billion offering plan.
After studying Blackstone’s offering line by line, according to people familiar with the discussions, K.K.R. tried in its offering to draw sharp distinctions between the two firms. One of the biggest differences? Nobody at K.K.R. would take any money out in the offering, in contrast to Mr. Schwarzman (who cashed out $677 million) and his co-founder, Pete Peterson (who took out $1.88 billion) at Blackstone.
Mr. Kravis even decided that all K.K.R. employees should receive shares, including secretaries and the employees in its private kitchen. The firm also put aside 20 percent of the proceeds for future employees. But the market turned sour within weeks of its filing. The collapse of two Bear Stearns hedge funds in the summer of 2007 touched off a seizure in the credit markets, which began to wreak havoc on some of K.K.R.’s own holdings.
KKR Financial, an affiliate in which K.K.R. executives held a 12 percent stake, faced steep losses starting last summer. Struggling to come up with a way to shore up KKR Financial, Mr. Kravis and Mr. Roberts soon became aware of a growing problem with yet another affiliate, KPE.
While not in the headlines like KKR Financial, it was clear that KPE was becoming a major headache for the firm as well. The value of units in KPE had dropped even further since its I.P.O., and K.K.R. tried every trick in the book to rescue it: encouraging more research coverage by analysts, and setting up a Web site detailing its investments to make them more transparent to outsiders concerned about performance.
Mr. Nuttall even took K.K.R.’s corporate jet on a round-the-world tour to meet with shareholders to help instill confidence, but the running joke inside the halls of the firm was that every time he met with an investor, the affiliate’s shares fell further.
"What caused the stock to go from $25 to $10 is that it was too big and I don’t think they put the highest-quality deals in there," said a portfolio manager at a mutual fund company that owns shares of KPE but who requested anonymity because the firm has a policy against discussing individual stocks. "And the timing could not have been worse. The fund was invested in 2006 and 2007, when valuations were at the high end of historic ranges."
Eventually, in an effort to rescue KPE -- and its relationship with investors -- K.K.R. decided to buy out the investors and go public.
"They realized their initial flotation didn’t work as well for investors, and they’re buying it out and reissuing it in the United States. That’s the right thing to do," said Christopher Ailman, the chief investment officer of the California State Teachers’ Retirement System, or Calstrs.
AS it battles a number of headwinds, K.K.R.’s biggest challenge may be whether it can convince a large pool of investors that its shares are attractive. The firm says that its public offering is for long-term investors and that it will not provide guidance about quarter-to-quarter earnings.
So far, KPE shareholders remain skeptical of the deal; KPE shares are less than half the price of what K.K.R. says its offer for them is worth.
It also needs to convince institutional investors, a primary source of funding, that going public will not force it to become overly focused on its stock price.
"One of the things we’ve liked about private equity is the fact that these firms have been private and that that has created a good culture within the firm -- very entrepreneurial in nature," says Mr. Ailman. "I have voiced the concern that by going public, it changes the culture of these firms."
There are also questions about how well K.K.R.’s most recent investments are doing.
The bulk of K.K.R.’s recent portfolio, almost $18 billion worth, "are investments that were made at the height of the bubble," said Mr. Blaydon of the Tuck School. "For a lot of the deals done in the latter half of 2006 and the first half of 2007 they’re going to be facing a challenging runway to get returns and to get returns quickly."
Despite all of these issues, Mr. Kravis has remained optimistic. In a conference call in February with KPE shareholders, Mr. Kravis dismissed criticisms that K.K.R. overpaid for assets in 2006 and 2007, noting that the firm had historically produced very strong returns for its investors.
In his interview at the American Academy of Achievement last year, he also pointed out that he thrives on adversity.
"I want people who will stand up to me," he said. "People who are not afraid to say exactly what’s on their minds, even though that’s probably not what I want to hear. That’s what I want."
And once K.K.R. goes public, that might be what Mr. Kravis will get.
It is 596 trillion dollars in deriatives = 10 times bigger than the whole world economy, it has doubled in two years, it has gone up 6-fold in five years, it is out of control.
In simple terms derivatives are nothing but a giant crap game where 9000 hedge funds have been playing craps with monopoly-money that they borrowed from banks.
They have lost a lot of money and now the banks want the money back, but they want real money, they don't want monopoly money.
The subprime mortgages are a very very tiny part of the entire 596 trillion.
The 700 billion looting of the treasury are a 10 cent solution to a $1000 problem.
the banking system is frozen, look at the LIBOR, banks will not loan to each other.
We are a few days away from a bank holiday
NY Times article with some insider information:
LAST month, as Henry R. Kravis, the co-founder of Kohlberg Kravis Roberts & Company, and his wife, Marie-Josée, took their seats at the Water Cube in Beijing for a session of synchronized diving at the Olympics, they quickly recognized a couple sitting nearby: Stephen A. Schwarzman, the co-founder of the Blackstone Group, and his wife, Christine Hearst.
For a brief moment, there was an awkward pause as the longtime rivals took stock of each other. Then both men cracked smiles, and Mr. Schwarzman extended his hand, congratulating Mr. Kravis on his latest move: an attempt to take K.K.R. public despite a stock market mired in uncertainty and fear.
Mr. Schwarzman had already taken Blackstone public -- more than a year earlier at the top of the market -- and since then had watched the share price plunge, his personal spending lampooned, and his firm made a whipping boy in Congress.
Beyond those headaches, the credit crisis had all but shuttered the once high-octane private equity industry, upending the pecking order on Wall Street. Even worse, concern was mounting about whether the myriad companies that private equity had acquired and saddled with debt during the boom could survive during tighter times.
Given all that, why would Mr. Kravis want K.K.R., perhaps the nation’s most storied private equity firm, to become a publicly traded company now?
Edward M Libby Business Roundtable Edwin L Artzt Jonh L Weinberg Business Council Stephen Friedman Council on Foreign Relations CFR Thomas L Rhodes Met Life John M Keane Marc S Lipschultz William W George Harvard Business School
"The Blackstone deal has gone horribly in the marketplace, yet Henry seems unwilling to let it go," says Kelly DePonte, a partner at Probitas Partners in San Francisco, which helps private equity firms raise money. "There are a lot of questions about what K.K.R. is trying to do here."
The decision to go public is the latest twist for a firm that helped invent an entire industry while emerging as an object of fascination after winning the battle to take over RJR Nabisco for $25 billion in 1988. The buyout became fodder for a best seller ("Barbarians at the Gate") and an HBO movie.
In the two decades since, K.K.R. and its principals have grown wealthy and the firm has built up a $58 billion war chest, even as its inner workings have remained a mystery to outsiders. K.K.R.’s pursuit of a public offering has opened a window into a firm struggling with success and failure, ego and greed -- and is ultimately a tale of ingenuity and desperation.
Surrounded by economic uncertainty, heightened competition and questions about his firm’s performance, Mr. Kravis is also grappling with how to transform K.K.R. into an even bigger institution that would outlive the names on the door. By trying to tap into public markets, he is also rejecting a gospel he has routinely preached over the years: the virtues of private, rather than public, ownership.
"The trouble, in my opinion, with corporate America today is that everything is thought of in quarters," Mr. Kravis said in an interview with the American Academy of Achievement several years ago. "Analysts push them: ‘What are you going to earn this quarter?’ We say to the management of companies: ‘You are here today. Where do you want to be five years from now, and how are you going to get there?’ "
The same is now being asked of Mr. Kravis. Where does he want to be five years from now, and how does he plan to get there?
LATE last March, Mr. Kravis got on the telephone in his newly renovated 42nd floor office with sweeping views of Central Park to gather members of his brain trust for an urgent conference call.
On the line was George Roberts, Mr. Kravis’s cousin and fellow co-founder, and Scott C. Nuttall, 35, a rising star at the firm who had interrupted his family vacation to take the call.
Mr. Kravis, with his steely drawl, was searching for fixes to a clutch of problems bedeviling the firm.
The biggest challenge involved a publicly traded European affiliate that was stumbling badly, causing some investors to grow increasingly anxious. Inside and outside the firm, the affiliate’s stock price -- a public proxy for the value of K.K.R.’s own secretive private equity funds -- had become an embarrassment.
Although K.K.R.’s longtime investors, mostly state pension funds and large institutions, had been rewarded amply since 1976 with an internal rate of return of 20.1 percent, net of fees, the firm’s more recent investments had given investors pause.
At the same time, the firm had another lingering concern: its much-ballyhooed effort to go public, a move initially planned for the previous summer, had been stymied by the credit crisis. And, given the direction of the markets, it seemed unlikely anytime soon.
Because of securities regulations forbidding firms from talking about their operations and prospects before a public offering, Mr. Kravis and other K.K.R. principals were prohibited from commenting for this article.
But according to people familiar with that phone call in March, Mr. Kravis and his two colleagues fruitlessly batted around a number of ideas before hitting on a possible solution: the firm could try to buy the European affiliate outright, a takeover that would allow K.K.R. to shore up the struggling unit. A takeover also offered an end-run around the I.P.O. process by allowing the firm to become listed on the New York Stock Exchange.
For the next four months, Mr. Kravis and his partners held a series of secret meetings across the globe, code-named "Project Colt-King," before surprising Wall Street with the news that the firm was going public.
On a Sunday afternoon in late July, Mr. Kravis, stuck at his home in East Hampton because a storm had prevented his helicopter from ferrying him to Manhattan, watched the announcement of the proposed deal cross the tape. If the offering goes through as planned, it could give K.K.R. a market capitalization of $12 billion to $15 billion.
While Mr. Schwarzman and Blackstone had already beaten K.K.R. to the punch with an I.P.O., the offering at that point had been a resounding failure for its investors. Nonetheless, Blackstone insiders had profited handsomely and the I.P.O. had cemented the firm’s reputation as private equity’s new alpha dog.
Moreover, Blackstone now had a valuable currency it could use to lure talent and make acquisitions, allowing it to diversify the firm beyond private equity into new arenas like asset management, for example. Other private equity firms, like Apollo Management, which was founded by Leon Black -- and whose office is in the same building as K.K.R.-- also were planning public listings so they could enjoy the same benefits.
Going public is not a recent fixation for Mr. Kravis -- he began considering the idea more than five years ago, when he started to have a series of meetings with longtime K.K.R. bankers, like Vikram S. Pandit, the chief executive of Citigroup, back when he worked at Morgan Stanley. Over the years, Mr. Kravis continued to bounce the idea around with Robert Scully, a vice chairman of Morgan Stanley, and Michael Klein, a former Citigroup executive who oversaw relationships with major clients of the bank.
Mr. Kravis and Mr. Roberts, who runs the firm’s office in Menlo Park, Calif., had spoken about "institutionalizing" and diversifying the firm for years -- getting into real estate, infrastructure and fixed-income investments, for example. (K.K.R. recently even tried to lure Alan Schwarz, Bear Stearns’s former chief executive, to the firm to help it start an advisory practice, people briefed on the discussions said, and contemplated how to buy Neuberger Berman from Lehman Brothers.)
They were also aware that some of the early success stories in Buyout Land -- like Forstmann Little & Company and Hicks Muse -- fizzled during bad times, and they wanted to leave behind a more lasting institutional legacy.
Going public forces private equity firms to more directly confront nagging questions that have swirled around the industry ever since K.K.R. burst into the popular imagination in the 1980s.
Back then, private equity firms were called "leveraged buyout" operators and, over time, critics became concerned that the firms -- whose goal was to privatize publicly traded companies and make them more efficient and profitable -- were instead larding takeover targets with unmanageable debt and raking in handsome fees before flipping the companies to other buyers.
The private equity world has sought in recent years to reverse that perception, pointing to a number of deals that have benefited newly privatized companies, as well as their employees, investors and customers.
The new, public, supersized version of private equity is a much headier mission than Mr. Kravis and Mr. Roberts, both 64, dreamed up when they left Bear Stearns to open their own shop in 1976 with their other co-founder, Jerome Kohlberg Jr.
== What Does Henry Kravis Want?
To juice returns even more, firms like K.K.R. recently began "recapitalizing" earlier deals, essentially adding more debt to companies in their portfolios so they could pay themselves and their investors hefty dividends before ever even having to sell them.
"It was leveraged recaps that were fueling the really high returns that the L.B.O. funds were showing in 2005 and 2006," says Colin C. Blaydon, the director of the Center for Private Equity and Entrepreneurship at the Tuck School of Business.
The frenzy around private equity in 2006 persuaded K.K.R. to make its first run at the public markets -- latching onto the idea of raising "permanent capital," the holy grail of investing. Instead of going hat in hand every year to raise new investment funds, they want access to steadier financing, allowing them to make long-term investments.
It listed an affiliate, KKR Private Equity Investors, known by its ticker symbol KPE, on Euronext, the exchange based in Amsterdam. The fund let small investors and mutual fund companies like Fidelity Investments get a piece of the action in private equity deals.
KPE invested in K.K.R.’s private funds and participated in several co-investments with it. (Mr. Kravis and Mr. Roberts were part of the five-member board that oversaw KPE; the firm also benefited by charging KPE various fees and expenses for its services.)
Investors couldn’t get enough. The firm planned to raise $1.5 billion through the KPE offering. In the end, it snared $5 billion.
But just as quickly as the firm catapulted KPE’s $25-a-unit I.P.O., it began to tank.
Within two months, the price had dropped to less than $22 a share, a decline so precipitous that virtually no other private equity firm, with the exception of Apollo Management, could pursue a similar listing. Blackstone, the Carlyle Group and other firms had planned offerings similar to KPE, but the investor reception was so chilly that they pulled back those plans. At the time, Mr. Schwarzman said K.K.R.’s offering had "destroyed the market for anyone else."
After a few months, KPE stabilized. And by early last year, private equity was booming again. And Mr. Kravis seemed to be on top of the world.
"The stars are aligned," he boasted at a meeting of Canadian private equity and venture capitalists at the time, adding that the private equity world was in its "golden era."
And so began a parlor game: Which private equity firm would dip into the public trough first? Some bet on Mr. Kravis, others on Mr. Schwarzman and others still on David Rubenstein, the co-founder of Carlyle, who was salivating over a possible I.P.O.
The race was on.
Inside K.K.R., a small group of the firm’s partners was tasked with strategizing for an I.P.O.
Mr. Nuttall led the project, holding marathon meetings in the firm’s wood-paneled conference room. They studied other I.P.O.’s, like Goldman Sachs’s, debating various structures and the impact that I.P.O.’s had on cultures.
K.K.R. also started thinking more about its public image. In an effort to burnish its reputation as a pioneer, it joined forces with the Environmental Defense Fund, a prominent advocacy group, on its deal for TXU and later asked the group to help it improve the environmental performance of the dozens of businesses it owns. And as Congress began looking at private equity’s tax rates, K.K.R. retained Ken Mehlman, a lobbyist and former chairman of the Republican National Committee, to help it establish relationships in Washington and fine-tune its public image; Mr. Mehlman later joined K.K.R. as the head of public affairs.
Despite all of K.K.R.’s jockeying, Mr. Schwarzman made the first move. When Blackstone went public, the firm had a market capitalization of $38 billion at the end of its first day of trading.
Although Blackstone’s shares quickly sank, K.K.R. filed its own $1.25 billion offering plan.
After studying Blackstone’s offering line by line, according to people familiar with the discussions, K.K.R. tried in its offering to draw sharp distinctions between the two firms. One of the biggest differences? Nobody at K.K.R. would take any money out in the offering, in contrast to Mr. Schwarzman (who cashed out $677 million) and his co-founder, Pete Peterson (who took out $1.88 billion) at Blackstone.
Mr. Kravis even decided that all K.K.R. employees should receive shares, including secretaries and the employees in its private kitchen. The firm also put aside 20 percent of the proceeds for future employees. But the market turned sour within weeks of its filing. The collapse of two Bear Stearns hedge funds in the summer of 2007 touched off a seizure in the credit markets, which began to wreak havoc on some of K.K.R.’s own holdings.
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The race was on.
Inside K.K.R., a small group of the firm’s partners was tasked with strategizing for an I.P.O.
Mr. Nuttall led the project, holding marathon meetings in the firm’s wood-paneled conference room. They studied other I.P.O.’s, like Goldman Sachs’s, debating various structures and the impact that I.P.O.’s had on cultures.
K.K.R. also started thinking more about its public image. In an effort to burnish its reputation as a pioneer, it joined forces with the Environmental Defense Fund, a prominent advocacy group, on its deal for TXU and later asked the group to help it improve the environmental performance of the dozens of businesses it owns. And as Congress began looking at private equity’s tax rates, K.K.R. retained Ken Mehlman, a lobbyist and former chairman of the Republican National Committee, to help it establish relationships in Washington and fine-tune its public image; Mr. Mehlman later joined K.K.R. as the head of public affairs.
Despite all of K.K.R.’s jockeying, Mr. Schwarzman made the first move. When Blackstone went public, the firm had a market capitalization of $38 billion at the end of its first day of trading.
Although Blackstone’s shares quickly sank, K.K.R. filed its own $1.25 billion offering plan.
After studying Blackstone’s offering line by line, according to people familiar with the discussions, K.K.R. tried in its offering to draw sharp distinctions between the two firms. One of the biggest differences? Nobody at K.K.R. would take any money out in the offering, in contrast to Mr. Schwarzman (who cashed out $677 million) and his co-founder, Pete Peterson (who took out $1.88 billion) at Blackstone.
Mr. Kravis even decided that all K.K.R. employees should receive shares, including secretaries and the employees in its private kitchen. The firm also put aside 20 percent of the proceeds for future employees. But the market turned sour within weeks of its filing. The collapse of two Bear Stearns hedge funds in the summer of 2007 touched off a seizure in the credit markets, which began to wreak havoc on some of K.K.R.’s own holdings.
KKR Financial, an affiliate in which K.K.R. executives held a 12 percent stake, faced steep losses starting last summer. Struggling to come up with a way to shore up KKR Financial, Mr. Kravis and Mr. Roberts soon became aware of a growing problem with yet another affiliate, KPE.
While not in the headlines like KKR Financial, it was clear that KPE was becoming a major headache for the firm as well. The value of units in KPE had dropped even further since its I.P.O., and K.K.R. tried every trick in the book to rescue it: encouraging more research coverage by analysts, and setting up a Web site detailing its investments to make them more transparent to outsiders concerned about performance.
Mr. Nuttall even took K.K.R.’s corporate jet on a round-the-world tour to meet with shareholders to help instill confidence, but the running joke inside the halls of the firm was that every time he met with an investor, the affiliate’s shares fell further.
"What caused the stock to go from $25 to $10 is that it was too big and I don’t think they put the highest-quality deals in there," said a portfolio manager at a mutual fund company that owns shares of KPE but who requested anonymity because the firm has a policy against discussing individual stocks. "And the timing could not have been worse. The fund was invested in 2006 and 2007, when valuations were at the high end of historic ranges."
Eventually, in an effort to rescue KPE -- and its relationship with investors -- K.K.R. decided to buy out the investors and go public.
"They realized their initial flotation didn’t work as well for investors, and they’re buying it out and reissuing it in the United States. That’s the right thing to do," said Christopher Ailman, the chief investment officer of the California State Teachers’ Retirement System, or Calstrs.
AS it battles a number of headwinds, K.K.R.’s biggest challenge may be whether it can convince a large pool of investors that its shares are attractive. The firm says that its public offering is for long-term investors and that it will not provide guidance about quarter-to-quarter earnings.
So far, KPE shareholders remain skeptical of the deal; KPE shares are less than half the price of what K.K.R. says its offer for them is worth.
It also needs to convince institutional investors, a primary source of funding, that going public will not force it to become overly focused on its stock price.
"One of the things we’ve liked about private equity is the fact that these firms have been private and that that has created a good culture within the firm -- very entrepreneurial in nature," says Mr. Ailman. "I have voiced the concern that by going public, it changes the culture of these firms."
There are also questions about how well K.K.R.’s most recent investments are doing.
The bulk of K.K.R.’s recent portfolio, almost $18 billion worth, "are investments that were made at the height of the bubble," said Mr. Blaydon of the Tuck School. "For a lot of the deals done in the latter half of 2006 and the first half of 2007 they’re going to be facing a challenging runway to get returns and to get returns quickly."
Despite all of these issues, Mr. Kravis has remained optimistic. In a conference call in February with KPE shareholders, Mr. Kravis dismissed criticisms that K.K.R. overpaid for assets in 2006 and 2007, noting that the firm had historically produced very strong returns for its investors.
In his interview at the American Academy of Achievement last year, he also pointed out that he thrives on adversity.
"I want people who will stand up to me," he said. "People who are not afraid to say exactly what’s on their minds, even though that’s probably not what I want to hear. That’s what I want."
And once K.K.R. goes public, that might be what Mr. Kravis will get.
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