KKR POWER SHIFT
Kravis, Roberts step back
KKR announced the end of an era on Monday with co-founders Henry Kravis and George Roberts saying they were stepping back immediately to allow Co-Presidents Scott Nuttall and Joseph Bae to become co-CEOs.
The KKR co-founders, along with original partner Jerome Kohlberg — who left the firm in 1987 and died in 2015 — are credited with inventing leveraged buyouts in the 1960s and 1970s.
KKR bought businesses by making small down payments and having the companies they acquired borrow most of the rest of the purchase price — making the companies responsible for repayment. The acquired companies would claim the money they borrowed as depreciation — operating expenses — and their tax rates would fall dramatically.
“This was something the KKR guys discovered. It was really driven by tax benefits,” John Canning, who formed the private-equity firm Madison Dearborn, said in this reporter’s book, “The Buyout of America.” Canning funded many of the first Kohlberg deals as a First Chicago lender.
By the early 1990s, LBO firms had rebranded themselves as privateequity firms. This came after Michael Douglas portrayed a corporate-raiding character modeled on Kravis in the movie “Wall Street.”
KKR went from its creative beginnings to having completed privateequity transactions worth $655 billion of enterprise value, according to the firm. It now owns companies including 1-800 Contacts, Gibson Guitars, US Foods and hospital biller Envision Healthcare.
So what have been some of its biggest hits and misses?
Hits:
KKR in 2018 invested $400 million for a stake in AppLovin, a software-maker for mobile gaming apps, at a $2 billion valuation. AppLovin went public this year and presently has a $33 billion valuation. KKR has made more than $6 billion.
KKR in 1986 invested only $132 million of equity in a highly leveraged $4.3 billion buyout of the supermarket chain Safeway. After 17 years, KKR made more than $7 billion.
The co-founders when working for Bear Stearns in 1972 bought Vapor Corp., makers of door-opening systems for mass-transit networks. They put down $4.4 million and would produce a 12-times return in six years. A 1975 buyout of Rockwell division Incom, which made gears and filters, resulted in a 22-times return.
KKR raised its first infrastructure fund in 2011, attracting $1 billion. This year, it raised a $14 billion infrastructure fund, greatly increasing the firm’s reach and profits.
Misses:
KKR in 1986 bought RJR Nabisco for $30 billion in a deal that was chronicled in the book and movie “Barbarians at the Gate.” KKR eventually traded half its shares in RJR for Borden Inc., and much of what Borden became went bankrupt.
KKR in 2007 co-led the biggest LBO of all time, a $45 billion buyout of Dallas utility TXU. KKR lost about $4 billion when the business went bankrupt seven years later.
KKR was one of the lead investors in the $6.6 billion 2005 leveraged buyout of Toys ‘R’ Us. The chain liquidated in 2017, and after a public outcry, KKR contributed $10 million to a severance fund for workers.