KKR in 2004: Looking for the Second Act

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Case Details:

Case Code : BSTA050
Case Length : 17 Pages
Period : 1976 - 2004
Organization : Kohlberg, Kravis, Roberts & Co (KKR)
Pub Date : 2004
Teaching Note :Not Available
Countries : Global
Industry : Finance

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"In the 28 years since we opened out doors, we have seen an explosive growth in financial and human capital dedicated to the industry. Private equity is here to stay, and so is KKR".

- Henry Kravis, Founding Partner, KKR¹

Introduction

In 2004, Kohlberg, Kravis, Roberts & Co., (KKR), one of the most well known Leveraged Buyouts (LBO) firms, was at the crossroads. While one founder Jerome Kohlberg (Kohlberg) had left the firm long back (1987), the other founders Henry Kravis (Kravis) and George Roberts (Roberts) having turned 60 were on the verge of retirement. The LBO business in which the company specialized had been facing severe competition from other firms. This had eroded KKR's market share. Kravis and Roberts wondered what KKR needed to do as returns tumbled and deal flows ebbed.

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KKR's Business Model

KKR specialized in LBOs i.e., using debt to buy out companies. KKR bought its companies by raising money from institutional investors. KKR's investors included state and corporate pension funds, banks, insurance companies and university endowments. KKR had offices in New York, California, and London. Eight members had been with KKR for at least 15 years. From 1976 to early 2003, KKR had completed more than 100 transactions valued at above $100 billion.

KKR borrowed and made equity investments for long-term appreciation. It either controlled the ownership of a company or took strategic minority stakes. KKR's strategy was to increase the value of its stake over time. KKR did not sell securities to the public or generate fees by providing merger and acquisition advice as a typical investment bank did. Rather, it had a significant portion of the founders' personal assets committed to the investments, and the risks of ownership were shared. KKR's investment professionals had together committed almost $500 million to current KKR Funds...

Excerpts >>

1] "Buyouts, Younger Faces, Lower Profits," Bloomberg Markets, August 2004, p-57.

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