Kohlberg Kravis Roberts & Co.

Encyclopedia : K : KO : KOH : Kohlberg Kravis Roberts & Co.

Kohlberg Kravis Roberts & Co (commonly referred to as KKR) is a New York City-based private equity firm that focuses primarily on late stage leveraged buyouts. It was founded in 1976 by Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts, all of whom had previously worked together at Bear Stearns.

Contents

1 The KKR approach
2 Deals
3 Team
4 See also
5 External links

5.1 References

The KKR approach

KKR helped develop and popularize the acquisition concept known as the leveraged buyout (LBO) by creating a series of limited partnerships to acquire various corporations, which they deemed to be underperforming. In most cases, KKR (often with management) financed up to twenty five percent of the acquisition price with its own capital and borrowed the remainder through bank loans and by issuing high-yield bonds, while having a more favorable approach towards the latter. KKR would often ensure that the target company's management retained an equity interest to create a personal financial incentive for them to approve of the takeover and work diligently towards the success of the investment.

The bank loans and bonds used to finance the acquisition were collateralized by the tangible and intangible assets of the target company. Because the bondholders only received their interest and principal payments after the banks were repaid, these bonds were deemed riskier than investment grade bonds in the event of default or bankruptcy, and popularly became known as "junk bonds."

Investment banks such as Drexel Burnham Lambert, led by Michael Milken, helped raise money for leveraged buyouts. Once the targeted company was acquired, KKR would help restructure the company, usually selling off certain underperforming assets and implementing a series of cost-cutting measures. The new, "leaner and more efficient" company could then be resold, often at significant return on investment.

Deals

After the 1987 resignation of Jerome Kohlberg at age 61 (he later founded his own private equity firm, Kohlberg & Co.), Henry Kravis succeeded him as senior partner. Under Kravis, the firm was responsible for the 1988 leveraged buyout of RJR Nabisco. At a cost of $31.4 billion including net debt of $6.3 billion, it was the then highest price ever paid for a commercial enterprise and is still the largest LBO in history. The deal was financed with a combination of bank debt, high yield bonds, and a $3.6 billion equity investment by KKR.

Today an LBO of that size is unlikely to be repeated for structural reasons. Private equity funds have concentration limits which prevent any one investment from being more than ten percent of the fund, effectively limiting the maximum equity commitment to $1-2 billion. As well banks will not lend to a borrower proposing 11-fold leverage (or a loan to value ration of over 90%).

The publicity surrounding the buyout led to a book, and subsequent film. The initial equity injection by KKR was $1.5bn, in July 1990 they were forced to put in an additional $1.7 bn. -- [link]

The RJR transaction benefited many of the parties involved. Investment bankers and lawyers who advised KKR walked away with over $1 billion in fees, and Henry Kravis and George Roberts attracted unprecedented amount of publicity that turned the cousins into instant celebrities.

However, KKR's investors, mainly public and private pension funds who provided KKR with the capital for this buyout, did not do so well. After over fifteen years of efforts that included taking RJR public, as well as exchanging shares of RJR for the ownership of Borden Foods, formerly chemicals-to-pasta conglomerate, KKR finally exited the investment in 2005, selling the remnants of its stake in Borden's Chemical division to Apollo group at a signifcant loss.

In the recent years, KKR's track record has been mixed. Heavy losses on such investments as Regal Cinemas, Spalding, Primedia were offset by successes in Willis, Shoppers Drug Mart, Bell Canada Yellow Pages,Wincor Nixdorf, and TXU, among others. KKR opened a successful office in London led by Johannes Huth, but it lost many of its original partners, including Saul Fox, Ted Ammon, Ned Gilhuly, Mike Tokarz and Scott Stuart who were instrumental in establishing KKR's reputation and track record in the 1980s. KKR remains tightly controlled by Kravis and Roberts. The issue of succession will likely continue to leave a large dark cloud over KKR's future.

Team

As of 1996, general partners (as opposed to associates) included Henry Kravis, George R. Roberts, Paul E. Raether, Robert I. MacDonnell, Michael W. Michelson, Saul A. Fox, James H. Greene, Jr., Michael T. Tokarz, Clifton S. Robbins, Scott M. Stuart, Perry Golkin and Edward A. Gilhuly. Gilhuly was the Managing Partner of KKR's European operations, based in London until November 2004, when he returned back to the United States. Johannes Huth, a 44 year old German national, was appointed new head of the London office.

External links

References