Private Equity Tycoon Reveals How He Turned His Company into a $90 Billion Business

Bundles of cash.

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Everybody loves a good story about the American Dream, and this one’s pretty big. In a recent interview with Institutional Investor, American financier Henry Kravis gave the inside scoop on how he built one of the biggest private equity firms in the world.

It all started in 1976, when Henry Kravis and his cousin, George Roberts, decided to start their own investment company. Both men were 32 years old at the time. With limited financial resources, they each invested $10,000 into the company. Their partner, Jerome Kohlberg, was about 20 years older and was able to put $100,000 into the company.

Their strategy was to build a company with a unique workplace culture. Both Kravis and Roberts had worked for global investment bank Bear Stearns in the past, which Kravis described as being an “eat what you kill” environment. Kravis and his partners decided very early on that they didn’t want that type of culture, so they set out to design a company that was centered on active involvement and collaboration.

“We set a firm up that everyone would participate in everything we did, and that way we got everybody to work together. And today, 40 years later, that’s the same kind of culture that we have,” Kravis stated.

Being the optimists that they are, Kravis and his partners set an extremely high goal for themselves: raise $25 million. But they soon figured out that they couldn’t raise $25 million on terms that were acceptable to them. So they decided to regroup and set the bar a little lower: raise $500,000 to cover overhead costs.

“And so we said, ‘okay. Let’s go out to have a group of individuals that will put up $50,000 each for a commitment for five years, and if they put that kind of money up, we’ll show them every deal we do. They can come in or not come into the deal, but if they come in, we want 20% of the profits.’”

And that’s how KKR was born. Kravis says that to this day, neither he, Roberts, or Kohlberg have needed to put another penny into the company. With just $120,000, the three of them built the second largest private equity firm in the world, managing a total of more than $90 billion in assets.

Henry Kravis Shares Wisdom on Running a Business

Man in front of building

Henry Kravis offers some advice based on his experiences in the business world.
Image: Unsplash

Recently, KKR cofounder Henry Kravis sat down with Bloomberg to answer questions about the founding of one of the largest private equity firms today. He also talked about his experiences managing other managers and his insights and memorable moments from his career. Running a business isn’t easy, even for someone who’s been doing it for forty years, but Kravis’s wisdom could make it easier for those eager to follow in his footsteps.

Kravis has not only bought and sold companies, he’s changed the way they’re managed. Kravis and his KKR co-founders, Jerome Kohlberg and George Roberts—the other K and R, respectively—changed the landscape of finance and private equity. Pretty incredible, considering the firm started with only $120,000 in 1976.

Part of what makes this firm special is the relationship between Kravis and Roberts, who are first cousins. They’ve been close all their lives, and it’s a bond Kravis doesn’t believe any other firm has. Even when they made mistakes, Kravis and Roberts were able to come out on top, even if just for a learning experience. “We made [mistakes] together, so let’s figure out what we’re going to do. Everything we’ve ever done has been split right down the middle. It always has been, and it always will be,” Kravis says about their relationship and what makes it work like it does.

Kravis says that the most surprising thing KKR is doing now is that it’s doing so many different things. The company worked only in private equity until 2004, when they began to branch out. Now, KKR works with private, public, and capital markets. “We didn’t start off thinking we would be in the credit business. This is an evolution,” he said. The company certainly has a diverse portfolio, which includes Sundrop Farms, a sustainable tomato farm in South Australia that has the power to change the produce market considerably.

Kravis does have some sound advice for young entrepreneurs looking for their big break. “Believe in yourself, build an incredibly strong team, and focus on your company’s culture,” he says, adding, “If I can take one thing other than integrity and install that in people, I’d want it to be curiosity. Because to me, people who are curious are going to be better investors and better stewards of others’ money. If there’s no curiosity, you’re basically doing something that’s already been done by someone else.”

How Much Are Competing Companies Willing to Bid for Wine?

Treasury Wine Estates

IMG: via Treasury Wine Estates

TPG Capital Management and Kohlberg Kravis Roberts (KKR) must really love wine – both private equity firms have made significant bids on Australia’s Treasury Wine Estates.

Treasury Wine Estates, which owns popular wines such as Penfolds and Rothbury Estate, announced on Monday that it had received a bid from TPG Capital, competing with KKR’s $3.2 billion buyout offer. TPG Capital’s bid only matched KKR’s offer of 5.20 Australian dollars ($4.82 a share), so a possible bidding war could be about to ensue! Investors are predicting that one or more of the companies will raise their current bids.

At 10:00pm EDT on Sunday, Treasury Wine Estates was valued at $3.4 billion. Investors were bidding the stock up 2.4 percent, anticipating that the battle will continue.

KKR is a private equity company based out of New York, and was co-founded by Henry R. Kravis and George R. Roberts, who still are active in the company. The company offered $2.8 ($4.70 per share) billion for Treasury Wine in April but was rejected. TPG Capital is based out of Fort Worth, Texas, and was founded by James Coutler, William S. Price III, and David Bonderman. Each firm is a strong contender in the impending bidding war for Treasury Wine.

Maybe these competing companies are gearing up for the holiday season and hoping for some free samples? More likely than that, both companies see a great investment opportunity. Treasury Wine also owns Lindeman’s, Rosemount Estate, and Wolf Blass labels, among over 80 other wine brands. Michael Clarke, a former senior executive at Kraft Foods and Coca-Cola was recently hired as the company’s chief executive. Clarke is hoping to resolve this matter quickly so it isn’t a distraction, a spokesman said.

Who do you think will get this investment?

Richard Sarnoff to Take Over as Head of KKR’s Americas Media and Telecommunications Team

Digital Media

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Kohlberg Kravis Roberts & Co. (KKR), a private equity company founded in 1976, just announced that Richard Sarnoff will be taking over as head of its Americas media and telecommunications industry team. Sarnoff, a former senior executive at European media conglomerate Bertelsmann SE & Co KGaA, will succeed Alex Navab.

This change in management will allow Navab to focus on his new position as head of KKR’s Americas private equity group. He has been co-leading this group alongside Michael Michelson since 2008, and has had to focus even more energy on this asset since Michelson stepped down from this position in May to focus his efforts on investing at KKR.

Richard Sarnoff will also be a managing director at KKR, the private equity firm said in a memo this week announcing his appointment to its investors. Business insiders are speculating that Sarnoff’s experience working in media firms such as Bertelsmann will allow him to thrive in KKR’s Americas media and telecommunications team.

Bertelsmann is a German multinational mass media corporation that was founded in 1835. It is best know for its book publisher, Random House, which is the largest general-interest trade book publisher in the world. This company has published popular books including Gillian Flynn’s Gone Girls, and Piper Kerman’s Orange is the New Black. Sarnoff left the company in 2011 to work as a senior advisor for KKR and sit on the board of directors of music rights management company BMG, a joint venture between KKR and Bertelsmann.

Sarnoff is credited with leading Bertelsmann’s digital media efforts and orchestrating its acquisition of Random House. Sarnoff’s transition into a more prominent role has been seamless, and he is expected to make a big impact at KKR.

KKR Pumps $1.2 Billion into First Data

First Data

IMG: via First Data

Kohlberg Kravis Roberts & Co has injected $1.2 billion into credit card company First Data. Looking to reduce the interest payments for First Data, KKR also looks to prepare the company for a future public offering.

KKR, with the guidance of CEO Henry R. Kravis, committed to the payment. Of the total amount, $700 million will be funded from its own balance sheets and $500 million will come from its private equity fund that had been set up in 2006.

Said Kravis, “Our original investment thesis was that First Data was the largest credit and debit card company in the world, and that it would continue to grow if we could get the management right.”

The New York-based KKR first acquired First Data back in 2007 for $29 million. At the time, it was one of the world’s biggest leveraged buyout deals. However, since the recession, First Data has been struggling against consumer spending. At the end of the fiscal year in March 2014, First Data had a loss of $732 million, and the majority of its cash flow was absorbed in servicing the net debt of $24 billion.

The capital infusion would lower the annual interest burden of First Data by $375 million. Including the new investment, many believe First Data will account for almost 16% of KKR’s balance sheet investment portfolio. As a private equity firm, KKR often purchases struggling companies, invests in making them more efficient, and sells the improved company off later.

KKR Looking to Entice Smaller Investors

Invest

Get out your piggy bank, now is the time to invest. IMG: via Shutterstock.

In a new U.S. Securities and Exchange Commission filing, KKR, the private equity firm led by George Roberts and Henry Kravis, is allowing smaller investors to contribute with as little as $10,000. Previously, the Carlyle Group, a chief competitor with KKR, allowed smaller investors to pledge as little as $50,000 beginning in 2013.

To be able to contribute, an investor must have a net worth of more than $1 million, which can’t include their primary residence. Generally, most firms include those who have at least $5 million in investments. Traditionally, both firms have relied on public and corporate pension funds for the majority of their capital. In recent years, however, they have been turning to individuals for more funding.

A professor at Harvard Business School, Josh Lerner, says that private equity at one time was much more restrained in sidestepping retail investors.

Said Mr. Lerner, “If we’re going to end up with an industry that is dominated by hot money flowing into the sectors that are the most overheated flavors of the moment, it probably doesn’t augur well for the kinds of returns private equity is going to deliver.”

This new filing will make KKR the firm with the lowest minimum requirement for investment. Altegris Advisors LLC will manage the fund, investing at least 70% of its assets in private equity funds and businesses run by KKR. To avoid legal obstacles, KKR has structured its new product in such a way as to navigate regulatory challenges by allowing a third party to manage.

A 1.2% annual management fee will be charged by the fund, and pending regulatory approval, it will offer shares for as little as $10 each until it has raised $25 million for its initial closing.

Investing in the Digital Boom

Investing in the Digital Boom

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Unlike the dot-com boom of the early 2000’s, investors are now realizing that many technological companies have solid platforms and receive tangible revenues. Many firms are looking to get a piece of this successful digital boom, including big names like TPG, Facebook, CVC Capital Partners, and KKR.

In late 2013, TPG invested roughly $90 million into Uber, a phone app that people can use to get a driver to pick them up at their GPS location and take them to their destination. Many big-name companies are investing in phone apps, the largest being Facebook’s high profile acquisition of WhatsApp—at $16 billion.Uber

King, the creator of the highly successful Candy Crush Saga, has established itself as no small firm. Creating and selling merchandise outside of its digital realm, the London-based Apax received a $3 billion profit, having invested $29 million initially in the company back in 2005.

CVC Capital Partners is looking at getting into technology deals in medium sized groups. Henry R. Kravis and his company KKR, a private equity firm, is also planning to make the jump into such investments. KKR plans to invest in small yet fast growing technology companies, which is outside of what the investor usually seeks. Some tech companies tend to be riskier investments. They tend to be smaller, less mature and involve themselves in backing swift expansion.

The knowledge that so many digital firms can go ‘viral,’ expand quickly, and go global, has big name investors eager yet cautious. Many acknowledge that becoming a high tech investor requires a deep knowledge of the technology. Many investment companies have the capital, however most struggle with the technological expertise to identify soon-to-be successful tech firms.

KKR Continues Energy Infrastructure Expansion

Hong Kong

One of KKR’s Asia offices is located in Hong Kong. IMG: via Shutterstock

KKR, the private equity and global investment company founded by Henry Kravis, George Roberts, and Jerome Kohlberg in 1976, is no stranger to the energy and infrastructure sectors. For the past thirty years, the company has invested in global energy opportunities—and it’s not slowing down anytime soon.

Recently, KKR announced that it would be continuing the investment trend by expanding its global energy and infrastructure business in Asia by appointing Tony Schultz and Ash Upadhyaya to lead the charge.

“KKR aims to create a unique offering in the energy, infrastructure and natural resources market, and part of that comes from combining our local geographic knowledge with industry expertise,” said Joe Bae, who heads KKR Asia, and Mark Lipschultz, who is Global Head of Energy & Infrastructure. “We are very pleased to have Tony and Ash leading this effort in Asia.”

Schultz and Upadhyaya will focus their efforts on energy, resources, and infrastructure in Australia and Asia. Their goals will include continue building up the team in Asia Pacific, finding new global metals and mining opportunities, and providing flexibility in capital and solutions, according to Justin Reizes of KKR Australia.

Tony Schultz was formerly Managing Director at Sydney’s EIG. While there, he focused specifically on energy, metals, and mining investments in Asia Pacific—making him very well suited to his new post at KKR. Ash Upadhyaya has been with KKR since 2011, previously working as a Director on KKR’s Energy & Infrastructure team in the U.S. Both men bring a huge amount of knowledge about the sector to their new positions.

KKR Executive and Former RNC Chairman Kenneth Mehlman Takes the Helm of PEGCC

PEGCCKenneth Mehlman has a résumé to be envied: he is a former RNC Chairman, ran President G.W. Bush’s successful reelection campaign in 2004, had a successful career as a lawyer, and is a top executive at private equity firm KKR. Additionally, Kenneth Mehlman is a prominent Republican gay rights advocate, working with groups like AFER, Project Right Side, and Marriage for All to fight for equal rights for all.

Recently, Kenneth Mehlman set off on yet another venture that he can add to his résumé: he was elected as the chairman of the Private Equity Growth Capital Council (PEGCC) on Thursday, December 19th, 2013. The group is the “most prominent industry advocacy group” for private equity firms across the country, according to CNBC. It began in 2007 and since then has defended and promoted private equity groups both domestically and globally.

Mehlman takes on the responsibilities of improving the group’s outreach efforts, which aim to educate stakeholders on the value of private equity. These responsibilities will be taken on in addition to his ongoing work as Global Head of Public Affairs for KKR, the director of the American Foundation of Equal Rights (AFER), and the founder of Project Right Side.

“I have enormous respect for the PEGCC’s important work engaging with public policy makers to encourage more economic growth and retirement security for millions of Americans,” he said. “I also share the PEGCC’s goal of building a community of investors who seek superior returns while also emphasizing active, responsible governance, long term investment and measuring success in years, not quarters.”

As the group’s new chairman, Mehlman succeeds Mark Tresnowski and will work alongside CEO Steve Judge, who leads the PEGCC on a daily basis. His focus, according to CNBC, will be to “continue several long-running fights, including higher taxes for PE firms from a potential change in the treatment of carried interest and increased registration and disclosure rules from the Dodd-Frank Act.”

Leading Pharmaceutical Gland Pharma Acquired by KKR

Pharmaceuticals

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Gland Pharma Limited, one of the leading pharmaceutical companies in India, announced today they had reached an agreement under which KKR will acquire a minority stake in the company. This stake will be for approximately $200 million US dollars. KKR’s acquisition of the stake will be held by Evolvence India Life Sciences Fund, which is an existing private equity investor in Gland Pharma.

KKR (Kohlberg Kravis Roberts) is a private equity company run by CEOs Henry R Kravis and George R Roberts. KKR’s investment in Gland Pharma is the fourth announced investment from the KKR Asian II Fund.

Gland Pharma was established in 1978 and is based in Hyderabad. The research-focused company develops niche products such as generic injectables for the global pharmaceutical markets, mainly being the United States and India. Their products are used to help Osteoarthritis, Gynaecology, Anti-coagulants and Ophthalmology. Gland Pharma was the first company in India to get US Food and Drug Administration (FDA) approval for their pharmaceutical liquid injectable products.

Gland Pharma Founder-Chairman P V N Raju said,

“Gland Pharma is at an important juncture in its evolution where we have proven our sterile manufacturing capabilities, established ourselves as a high-quality manufacturer of complicated injectables products and achieved a track-record of strong financial performance. Our partnership with KKR will help us in our next phase of growth as we look to materially expand our manufacturing capacities and invest more in our development work with the goal of expanding our product registrations.” P V N Raju also said, “We thank the Vetter family of Ravensburg, Germany, who are investors in Gland Pharma, for inspiring Gland Pharma in the niche field of pre-filled syringes. Vetter Pharma, owned by the Vetter family, enjoys a pre-eminent position globally in the field of pre-filled syringe technology.”

What do you think of this acquisition?

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