KKR Founder Henry Kravis on PE climate

Henry Kravis, co-founder of KKR, just finished up his keynote address “Current State of the Private Equity Business” to about 500 people attending the CVCA AGM in Halifax. I’ll do a follow-up post on some of his PE trends once the day is out.

The first point that has to be made is that he has a great sense of humour, and comes across as a far more approachable person that the business media – and the news photos that go along with the written words – may occassionally portray. Everyone in the auditorium thoroughly enjoyed the talk.

KKR began in 1976 with two offices (Menlo and New York) and three partners. Merely $120,000 of capital between the three of them. Kravis’ original investment was just $10k, with Jerry Kohlberg putting up $100k: “he was older”, said Mr. Kravis.

The second point is that he used a powerpoint for his one hour plus presentation and Q&A session, making the rest of us feel a bit less silly that we often use that tool to get our messages across.

The third point won’t come as a surprise, but he didn’t give us any hints about his plans for BCE (BCE:TSX). But he took the chance to clearly position his firm as an experienced telecom investor, highlighting KKR’s existing buyout syndicate investor in TeleDenmark. And he played the “we’re in the backseat on that deal” card as well.

Since inception, KKR has invested US$41 billion across 160 transactions in 25 industries (to think they failed in their attempts to raise an institutional fund in 1976, and had to rely on high net worth individuals using SPVs). Only 3 deals (Canadian General Insurance, Shoppers Drug Mart and Yellow Pages) have closed in Canada, however, worth US$738 million; it took 19 years before the first Canadian deal closed. Despite representing 3% of the world’s stock market, Canada has attracted less than 2% of KKR’s deal funds to date.

KKR’s BCE relationship began during the process that preceeded the acquisition of the Yellow Pages business in 2002 by KKR and the Ontario Teachers Pension Plan Board. OTPPB also partnered with KKR on the Shoppers deal.

KKR’s Canadian investments have earned a 4x return (he referred to it as “money realized”) as a group, which is excellent by any measure. Is that what they’re hoping for on BCE?

Despite having a “seven year average hold” since the firm was founded, KKR is “out of all” of their Canadian deals, but Kravis said they are all “larger, stronger and employ more people than when we acquired them.”

During the Q&A session, Mr. Kravis was asked if he was aware that the federal Liberal Party was advocating a more robust review process for foreign takeovers. His response will make the dead tree media tomorrow: After establishing that the BCE management and board were running an auction, he made it clear that “should we be fortunate to be picked as the party to acquire it, we are just a minority investor [in BCE], we will not be controlling it. We’re not the buyer. Two or three Canadian pension funds are.”

Which is a good segue to his public recognition of several long-standing or more recently-minted KKR “partners”: CPP Investment Board, OMERS and CDP. As well as CIBC and Scotiabank. No mention of you know who.

The final point for this post is his comment regarding the “bubble question”. As in, is private equity going through a bubble?

While allowing that “private equity is in its golden era right now”, he sees no reason for that to change. Interest rates have been stable for the past five years, but the drivers for more going-privates will remain. Management teams are “being prevented from making long term investment decisions” as “analysts focus on the next quarter”. He raised this inability to make long term investment decisions as the primary reason why management teams are so receptive to going-private proposals. He also said that activist investors pushing for short term moves to bump up a stock price as “one of the worst things you can do to build long term value”.

As for the Sarbanes-Oxley Act, Mr. Kravis took an uncoventional tact and called it a “great thing.” “It needed some tweaking, and the SEC is putting forward some proposals” that would address some of the problem areas.

And the final reason why management teams are attracted to going private proposals? CEOs don’t like the criticism” they get about their pay packages and option grants.

As to the rumours about a pending IPO of KKR, he did his best non-denial: “CNBC can say what they want. We haven’t announced anything yet,” before pulling out the “I don’t comment on rumours” line. But none of us heard the word “no”.

The best laugh of the speech came when Kravis advised that the German media had begun referring to private equity funds as “locusts”. “I went from being a barbarian to a locust”, said Mr. Kravis. “I was disappointed. Being a barbarian is better.”

MRM