KKR Founders Not Cashing Out In IPO

With its filing to sell $1.25 billion of itself on the public market, buyout firm Kohlberg Kravis Roberts & Co. has created a new variation on the increasingly common theme of going public.

Unlike their peers’ drive to realize some of the value of their managment companies, the senior partners of KKR, some of the most seasoned pros in the business, don’t plan to put any of the IPO’s proceeds in their own wallets. Instead, the firm plans to reinvest the $1.25 billion back into the business, sending a signal to investors and rivals that Henry Kravis and George Roberts, the cousins who founded the firm and still lead investment decisions, don’t plan to exit the buyout field any time soon.

KKR & Co. LP, as the publicly traded entity will be known, follows in the footsteps of Fortress Investment Group, The Blackstone Group and Oaktree Capital Management. All three of those firms this year sold pieces of themselves on public exchanges or, in the case of Oaktree, through an opaque private exchange for institutional investors run by Goldman Sachs. Apollo Management, meanwhile, has signaled that it plans to also offer a portion of itself on Goldman’s platform later this year.

Although Blackstone and Fortress said they planned to allocate portions of their IPO proceeds to their business, sizeable chunks of each firm’s haul went to a handful of senior managers. By contrast, KKR said that none of its principals plans to sell any shares of the management company in the IPO, according to KKR’s S-1 filing. Instead, the cash is earmarked to augment investment funds, provide working capital and allow KKR to expand into new and related lines of business. KKR already operates two publicly traded vehicles—a private equity investment fund listed in Amsterdam and an NYSE-listed fund that invests primarily in real estate. And the $1.25 billion the firm stands to collect could help it further diversify its lineup, principally by allowing it to take a greater role in assembling and syndicating both the equity and debt used in each of its transactions, according to the S-1.

In its prospectus, KKR also provided a level of detail about itself that Blackstone, its chief rival, did not. Whereas, for instance, Blackstone provided prospective investors a table summarizing the aggregate performance of its corporate buyout funds, real estate funds and other investment vehicles, KKR revealed the performance of every single fund it’s raised since the firm’s inception in the 1970s.

KKR also revealed that, despite solid returns on invested capital, it hasn’t kept pace with the performance of Blackstone, which is about 10 years younger. Across its first 10 funds, KKR averaged a 20.2 percent IRR net of fees. Blackstone’s corporate private equity funds, meanwhile, tallied a 22.6 percent IRR net of fees. As of March 31, KKR had $53.4 billion under management, significantly less than Blackstone’s $88.4 billion.

The two firms also demonstrated differing levels of diversification. In addition to managing buyout and mezzanine funds, Blackstone invests in real estate and funds of hedge funds; the firm runs a big collateralized debt obligation business and operates a proprietary hedge fund; and Blackstone has a well-respected mergers-and-acquisitions advisory arm.

KKR, on the other hand, is much more tied to the buyout business, although the firm’s prospectus outlines plans to expand into public equities and establish more debt vehicles. For now, though, more than Blackstone, KKR will resemble some publicly traded companies that manage focused investments in single sectors, making the firm and its potential shareholders vulnerable to shifts in a single market, said Eric Weber, a managing director and chief operating officer of investment bank Freeman & Co.

Buyout professionals looking to monetize some of the value they’ve built in their management companies now have at least three options: stay private and sell a stake to one or more investors, stay private and sell a stake on a quasi-public market such as the one developed by Goldman, or go public. “It’s a personality decision,” Weber said. “There are firms that make tens of millions of dollars but don’t want to open up the kimono.”