KKR in 2003



Authors: Ravi Madapati,
Faculty Member,
ICMR (IBS Center for Management Research).

We are fortunate to have been involved in the creation of an industry. When we founded the firm in 1976, private equity and leveraged buyouts were a foreign language. Today, private equity investing is an integral part of mainstream business and finance.

- Kohlberg, Kravis, and Roberts1

Henry Kravis (Kravis), the man who was once touted as King Henry, was under pressure in early 2003. The company that he had cofounded in 1976, Kohlberg, Kravis & Roberts (KKR), along with his cousin George Roberts (Roberts) and mentor Jerome Kohlberg (Kohlberg) was at the crossroads. While Kohlberg had left the firm long back, Kravis and Roberts at 60 were approaching the end of their careers. The Leveraged Buyout (LBO) business in which the company specialized had been in a slump since the late 1990s. Competition from other firms had significantly eroded KKR's market share. Kravis wondered what KKR needed to do under the circumstances.

Recent Developments

Performance of LBO funds declined from an annualized return of 35% in 1989 to 20% in the first quarter of 2000. In the same period, venture-capital returns soared to over 50% from 5%2. This made investors skeptical about investing in LBO fund. Oregon Investment Council (OIC) and Washington State Pension Funds (WSPF) had been the foremost investors in KKR's takeover ventures during the period 1986 to 2002.

The Oregon Treasury had committed $2.34 bn of retirees' pension money in various KKR takeovers. By and large, the pension fund had been handsomely rewarded. The state had invested an additional $800 mn in KKR's latest fund in 1996, as it believed the company's illfated takeover of RJR Nabisco in 1989 was an exception and that most of its deals earned annual returns of 20% or more. The state's most prominent KKR deal, the 1981 buyout of Fred Meyer Inc., had fetched returns of nearly 22% annually.

WSPF and OIC had decided to pull out of a deal to invest up to $1 bn in a direct stake in KKR. WSPF did so because of fears about the liquidity of the investment. The fund needed the flexibility to sell assets to meet potential withdrawals. OIC had pulled out taking a cue from WSPF's decision. The $30 bn Massachusetts Pension Reserves Investment Management System decided against investing in the KKR Millennium Fund after putting money into KKR's previous funds. The $ 8.5 bn Montana Board of Investments, an investor in KKR funds since 1987, also complained that KKR had held its stakes for too long. It would be pulling out of the next fund.

Some early forays in the 1990s were among KKR's most successful ventures. It made $ 2.25 bn on a $280 mn investment in the Bank of New England and $1.97 bn on a $300 mn investment in insurer American Re Corp. In 1996, KKR raised a record $6 bn. The firm averaged two investments a year from 1987 to 1994. It tripled its pace from 1995 to 1999. From early 2000, KKR found the deals drying up. After making two investments in 2000, KKR did not close a single new deal in 2001. Instead it pumped $ 475 mn into existing holdings. Before its $ 225 mn April 2002 buyout of Covanta Energy Group, KKR's most recent US buyout had been in November 2000: The $1.2 bn purchase of chemical company Rockwood Specialties. In July 2002, KKR agreed to Europe's biggest-ever buyout, the $ 5.1 bn purchase of electrical products maker Legrand SA from Schneider Electric SA. That same week, KKR bought seven industrial businesses from Siemens AG for $ 1.7 bn. KKR had made only one new investment in the US in the period early 2002 till fall 2002. In September 2002 KKR bought BCE Inc.'s Canadian yellow pages business for $ 1.8 bn.

Next >>

1] Source: KKR, Thoughts on a Quarter-Century, March 2001.
2] Source: BusinessWeek, October 16, 2000.