You know 2000 was a tough year for the buyouts market when Kohlberg Kravis Roberts & Co. veteran Perry Golkin mentions it in the same breath with 1989 – a year that was witness to a stock market crash, the Drexel Burnham Lambert junk bond scandal and the savings and loan crisis.
To be sure, the two years are different in many respects. But like 1989, the financial disorder of last year posed several problems for the LBO market. Most notably, lenders tightened their purse strings in 2000, effectively killing a number of deals. Meanwhile, some buyout firms stepped outside their historical boundaries to chase tech company mirages, only to be disappointed. What’s more, the shear number of firms raising mega-funds pushed limited partners to their allocation limits, causing a virtual paralysis for many fund raisers.
But amid the roller coaster ride of 2000, KKR managed to sustain its success. During the past year, the firm once again proved that experience, hard work and innovation go a long way. For its accomplishments, KKR has been chosen as the first annual Buyouts Firm of the Year. (KKR accepted its award at the 13th Annual Buyouts Symposium on Feb. 22.)
Topping KKR’s list of achievements in 2000 was the closing of its debut European fund. The firm raked in more than $3 billion and wasted no time in putting the capital to work. Total commitments to European deals in 2000 reached almost $2 billion and included such deals as the acquisition of the private networks division of Bosch Telecom GmbH in Germany and the merger of Wassall PLC with Zumtobel AG, which formed the largest light fitting business in Europe. (That deal, incidentally, won the Buyouts European Deal of the Year Award.)
While KKR’s European deal flow was no small feat, Golkin is most proud of the firm’s personnel growth overseas. In an interview at KKR’s New York headquarters, the partner spoke at length about how the London office, the newest of KKR’s three, added 14 people in 2000. The firm had set out in late 1999 to add as many people as possible to the London operations in order to take the continent by storm with its newly gathered funds. And that it did: KKR was able to build up its staff more quickly than it expected and by the end of 2000 had invested 25% of the European fund.
Of course, KKR also had its share of U.S. activity last year. One of its most memorable domestic transactions was for DPL, the parent company of The Dayton Power & Light Co. KKR invested $550 million in DPL, which provides energy services to customers in the Southwest through its subsidiaries, so that the company could continue its planned generation strategy, retire short-term debt and repurchase up to 31.6 million of its shares.
Making New Friends
While investments and funds come and go, KKR sparked two relationships last year that will be critical in carrying the firm into the uncertain future.
The most publicized of the two was KKR’s association with venture capital firm Accel Partners. Their marriage formed a new company that operates under the name Accel-KKR Internet Co., whose purpose is to provide financial and intellectual capital to companies seeking to integrate their online and offline strategies to create more rapid growth and value.
KKR saw the relationship as an opportunity to take advantage of the Internet and explore its potential without risking the money and trust of its LPs – Accel-KKR does not use capital from KKR’s funds, the KKR partners and various co-investors put up the cash to fund the vehicle’s investments. The new group made several plays in 2000, the most notable of which was the agreement with fast food giant McDonald’s Corp. to form a new online accelerator, eMac Digital, which will focus on the development of technologies and services for business-to-business ventures in the food service industry.
Golkin says KKR put together the Accel-KKR company in an effort to “change with the world.”
“We knew we would have to evolve to be successful, but at the same time, we didn’t want to get distracted from our main purpose as investors,” he says. “We looked at business and saw that the world was changing and we would have to change with it. If you remain stagnant, you won’t be successful.”
KKR also formed a relationship with Capstone Consulting, a group of consultants focused solely on KKR and its portfolio companies. Capstone assists KKR in bringing resources to the companies that the KKR employees do not have access to, or time to deal with. Capstone’s services include providing expertise on Internet opportunities and cutting superfluous costs.
The Big Kahuna
Perhaps KKR’s biggest initiative last year was launching the KKR Millennium Fund, which took in some of the largest commitments ever from institutional investors.
While KKR has never publicly confirmed or denied rumors that the Millennium fund could reach as high as $10 billion, the firm is expected to raise an amount in the neighborhood of $6 billion – the same as its 1996 fund, which would give the firm enough money to compete effectively for a wide range of deals. The Millennium fund has no official documented target.
However, gathering that much money in the current fund-raising environment, say industry sources, is virtually impossible – even for KKR.
Considering KKR’s 1996 fund is only two-thirds invested, and the European fund is just getting started, there’s an ample amount of capital for the firm to work with until the Millennium fund closes. Sources can only speculate as to when that might be, but a first close by mid-year is not unlikely. Golkin declined to comment on KKR’s fund raising activities.