KKR in 2003
Ravi Madapati
Faculty Member
Icfai Knowledge Center
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Overseeing Portfolio Companies
Over the years, KKR’s
involvement in helping its
companies enhance shareholder
value became widely recognized.
KKR believed its executives,
while working as active directors
had to serve as a model of
effective corporate governance.
KKR attempted to add value in various
ways such as:
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Attracting strong management: KKR believed that the best professional
managers should run each company in its portfolio. It looked for individuals
whose full time and attention were focused on creating value from a given
business. In most situations, a strong operating management came with the
acquisition and was a principal reason for KKR’s interest in the investment.
When it became necessary to supplement the existing management, KKR leveraged
its relationships and long-standing track record in the industry, to attract
the best managers for its portfolio companies. For instance, Louis Gestner who
became famous, as IBM’s CEO was first spotted by Kravis to run RJR Nabisco in
1989. |
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Management and employee incentivization: In addition to attracting
talented executives, KKR attempted to structure management incentives and
compensation plans that aligned the interests of managers and shareholders. All
managers of KKR companies were expected to make a significant investment in
their businesses and thus share directly the rewards and risks of equity
ownership. Pursuing acquisitions and divestitures: KKR’s portfolio companies
were opportunistic in both buying and selling businesses. KKR served as an
important catalyst, offering an array of contacts as well as its own experience
in executing transactions. The acquisitions and dispositions of KKR’s portfolio
companies enabled these organizations to expand and solidify market positions,
better focus their businesses and increase their financial and operational
flexibility.
Helping portfolio companies arrange
funding: KKR continually adjusted the capital structure of each portfolio
company by taking advantage of opportunities in the capital markets to obtain
lower cost funds or added flexibility. At the appropriate time, KKR would take a
number of companies public, generally using the proceeds to reduce debt. But KKR
typically retained a controlling stake and continued its oversight role.
Providing effective oversight:
KKR believed the core oversight role that it played on a day-to-day basis
through its position on the Boards of Directors of its portfolio of companies
was important. KKR worked closely with each management to put in place robust
processes to monitor corporate results. KKR executives were expected to be
deeply involved in and knowledgeable about all aspects of a company’s business,
continually reviewing budgets and providing inputs in strategic planning and
financial forecasting.
Maximizing value when
exiting investments: The
duration of the average KKR
investment was typically five to
ten years. KKR maximized the
value of its investments by
carefully timing the exit and
choosing the method of sale.
Since its inception, KKR had
distributed in excess of $31.5 bn
in value to its investors after
liquidating its investments. Over
$10 bn of this value had been
generated through secondary
offerings of stock in certain portfolio companies, as KKR took
advantage of strong equity
markets and went public.
KKR at Crossroads
The Road Ahead
© Icfai Press. Icfai Reader |
September 2003, All Rights
Reserved.
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