Friday, December 11, 2009

"The Perfect Private Equity Model."

By Emily Thornton

It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.

Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."

What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."

That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business.

Read the rest of the article here.

1 comment:

  1. I haven't read the article yet, but your excerpt strikes me as strange in the sense it's like a marriage of opposites.

    As I am just a layman in terms of finance, somebody correct me if I'm wrong, but doesn't KKR rely on huge amounts of debt to get deals? Berkshire Hathaway, so far as I know, has always had little to no debt. Buffett also built up his wealth via Graham/Dodd strategies and his insurance companies' float over 40 years. Kravis used massive leverage and then sold off near gutted companies. Short term, Kravis strategy looks better in terms of profits, but long term Buffett wins out.

    I'd have to add that I think Kravis is a sort of ego-manic that desires a media image of a powerful Wall Street arbitrageur. Unfortunately, this is pure conjecture, I only say this based on apocryphal stories. Being like Berkshire Hathaway is not as necessarily exciting in the usual business press sense. Huge amounts of money are always interesting to the press, but the style in which it is earned is doubly so. Incremental, steady investments and equity built up over decades are not as bold and press friendly as quickly done, galactically gigantic RJR Nabisco buyouts.

    I think KKR being more like Berkshire Hathaway is a good thing, but I don't see it as possible based on past history. Of course, people and companies can change. I hope KKR adopts a Buffet-like value investor strategy, it'd be good for KKR and good for anybody involved with them.