KKR opts to trust the process

After two years of slowdown, is renewal of private equity investing close at hand?

Yes, says KKR. The storied alternatives giant, pioneer of the LBO, sees encouraging signs, including narrowing of the bid-ask spread and stronger credit markets. “Things are getting better,” Pete Stavros, co-head of global private equity, says.

Unlike some peers, KKR had deep pockets going into the downturn, closing a 13th flagship fund at $19 billion before capital raising fell off. This, and discipline pre-2022, positioned it for vintage dealflow and left dry powder for an upturn.

But when it does come, don’t expect a ramp-up in investing. KKR’s “linear deployment” philosophy, developed over time, emphasizes a consistent pace, rain or shine.

Stavros and Nate Taylor, also co-head of global private equity, were last year named to their current roles, indicating “a fundamental shift” in how KKR does deals, Stravros says.

In a Buyouts interview, they discuss this shift, their market take, opportunities found in dislocation, and their promotion of employee ownership – an idea that reminds the world that “private equity is a force for good,” Taylor says.

What is KKR’s outlook on the deal market?

Pete Stavros: We’re not real big into predicting where the markets are going. But from an industry standpoint, I would say things are getting better.

You’ve got a couple things happening. Credit markets are in a much stronger position. The syndicated debt markets are back. We priced our debt in [healthcare analytics firm] Cotiviti [recapitalized in February] at some of the tightest pricing we’ve seen in years. That helps.

The second thing is the bid-ask spread has already been closing. It closed the quickest in public markets, which is where we got some take-privates done. We got some carve-outs done out of public companies, which had seen their stock prices adjust and so came to realistic expectations on selling divisions.

$176bn

KKR’s PE assets under management

In the private markets, we’re seeing the bid-ask spread closing. So I would say I’m definitely bullish on the next couple of years relative to where we were in 2023. We’re focused on linear deployment, so for us 2023 was just a regular year. We got our US deployment budget accomplished through two carve-outs [Accuris, Simon & Schuster], two take-privates [Chase Corp, Circor] and one sponsor-to-sponsor trade [Groundworks].

Nate Taylor: I agree. Maybe to underscore it, I’d say the year’s off to a pretty quick start for us. In the first three months, we already signed more than $4 billion of equity deployment.

It has been more tepid, but we’ve got a playbook to get capital to work. We’re watching the bigger market turn back on and [are] well-positioned to take advantage of it.

How have you navigated the dislocation?

NT: We’re big believers in the benefits of process. The reason we have the approach we’ve taken, and the reason we keep refining it and rolling it out around the globe, is it helps us stay disciplined with respect to the principles we believe correlate with long-term investing success.

One of those is staying active in all markets. Through the decades, investors have proven the ability to call a cycle is difficult, and it’s hard to create differentiated performance from that. So we take it out of our process and make sure we stay active in both torrid markets and those that are slower. You can see it in practice. In 2020, when almost all of our competition shut down, we stayed active during covid and put capital to work at a greater pace than anybody we competed with. And we’re glad we did it.

“At some point, it’s going to become normal for all workers to participate in value creation, not just the C-suite”

Pete Stavros

In the post-covid bull market, we stayed steady, whereas others rushed ahead and put capital to work oftentimes in higher-growth, sometimes tech-oriented businesses – today, they look like they may have over-deployed.

And last year, when things were harder to get done, we found ways through different channels to stay active. That approach is an important part of the success we’ve had and the success we intend to sustain.

If investing accelerates, will KKR increase its pace?

PS: We definitely won’t do that. We don’t lean in and lean out. The power in an approach like this is the discipline. If you’re going to let go of it when things are hotter, there’s no point to the effort to begin with.

When things are hot – and there’s more to do and credit markets are more robust – that’s exactly when you want to have your bar a bit higher and be more selective. Pick the things you really love.

But the harder part is what Nate once said, “being brave when everyone’s afraid,” because there’s not much to buy in a time of dislocation. Counterintuitively, you have to find the things you like most out of a smaller selection set. That’s the tricky part, and it takes a lot of emotional control.

NT: I agree it’s hardest when the market seizes up because there’s just not as much to choose from. That’s where the ability to look elsewhere, whether it’s public-to-privates, carve-outs or dislocations, is important. That’s where we’ve differentiated ourselves. It’s one thing to say we’re committed to deploying rateably, it’s another to actually have enough relationships across enough industries and enough shared history to search somewhere else to gin up dealflow.

‘This co-heads stuff is hard’

The evident camaraderie between Pete Stavros and Nate Taylor may have something to do with their heartland origins.

Stavros was raised in a blue-collar family in the Chicago suburbs. His father, he says, was a union man who “didn’t begrudge being a construction worker,” but felt he “couldn’t get ahead on his wages” and “didn’t have a voice” in his company.

It was his dad who inspired in Stavros a passion for employee ownership. When he went to Harvard Business School, he made it his focus, publishing a paper on employee stock ownership plans with Josh Lerner.

Taylor was born in Nashville and grew up in southeast Tennessee. “It was not a business family and certainly not a finance family,” he says, with his father working as a local attorney.

His decision to go to the Northeast for a post-secondary education took Taylor a “world away” from his roots, he says, exposing him to a “new set of ideas.” At this point, neither Stavros nor Taylor dreamed they would become private equity professionals.

Upon graduating from Harvard, Stavros’s first job was at Salomon Brothers, which introduced him to Vestar Capital Partners. He went on to work at GTCR. Taylor was recruited from Dartmouth College by Bain & Company and later transferred to Bain Capital, which also sent him to Stanford Graduate School of Business.

Stavros and Taylor rose to become deal quarterbacks at their respective firms. In 2005, “within weeks of each other,” Stavros says, they joined KKR as principals.

In the years that followed, Stavros and Taylor took on multiple roles. Their evolving work relationship benefited from their “Middle America orientation,” Taylor says, which imparted “similar values,” including a love of family. “Neither one of us were incubated in the world of finance.”

Stavros was head of industrials investing, and Taylor, head of consumer investing, when in 2019 they were named co-heads of KKR’s Americas private equity platform. Four years later, they were appointed co-heads of global private equity. When shouldering the heavy responsibilities, good chemistry comes in handy. “This co-heads stuff is hard,” Stavros says. “It makes a difference that we genuinely like each other.”

Camaraderie was perhaps especially key in the challenging market of the past two years. “Working with someone that I trust,” Stavros says, is crucial “in those scary times, when Nate and I are on the phone at one in the morning batting around tough decisions. I think we help each other get through those more difficult moments.”

How key was having dry powder going into the downturn?

PS: If you take our 2021 fund, some peers had spent all the money for their comparable funds within a couple of years. For that vintage fund, we’re getting exposure to 2024-2025, when interest rates have gone up, multiples have come down and, in some cases, operating earnings have come down. It’s just a more interesting time to invest.

So our vintage fund relative to its peer set will have a more diversified set of exposures to different vintages. That’s really the core idea and what’s behind the notion of linear deployment.

It’s not that we’re so brilliant. If you go back four fund vintages ago, we made this mistake. We spent the money in our 2006 fund too quickly, we had excess exposure to the pre-recession years, not enough exposure to the post-recession years – when both multiples were lower and operating earnings were down – and that hurt us.

One of the benefits of KKR having been around for decades is we’ve made mistakes and we’ve learned from them, which is where this whole linear deployment emphasis came from.

Will exits be slower than deals to bounce back?

NT: We have an ability to not only deploy but also monetize in all types of markets. If you take our Americas strategy as an example, we have managed to return more capital than we have called in each of the last 10 years.

This is driven by the portfolio construction approach we take – no one vintage or industry will ever dominate our funds, therefore we should always have a selection of assets ready for exit. All of that was on display in 2023 and year-to-date in 2024. We’ve used public markets, trade sales and exits to other sponsors to deliver a healthy flow of liquidity to our LPs. We’re well-positioned to continue that for the remainder of the year.

PS: In our experience, there are two ways we can assure ourselves of exit paths. The first is everything Nate described. The second is to be selling a high-quality company, which comes down to selectivity on the entry and successful value creation during ownership. We see this time and time again – great businesses have multiple options in the end. Our sale of RBmedia last year [to HIG Capital] was a good example.

850,000

Number of employees in KKR’s portfolio companies

The way we think about it is once we’ve achieved 80 percent of what we set out to do with a company, as long as the markets are reasonable we start to move toward an exit. We’re not trying to find the perfect time to sell.

From an industry standpoint, deal and exit activity would typically go together as things get better. It’s all the same M&A market. That said, there was over-deployment in 2021-22 – at high valuations – that could lead to a disproportionate share of invested capital not being ready for exit.

How has your portfolio fared in the past two years?

NT: One of the ways we diversify is across vintage, another is across sector. We have seven industry verticals in the US and around the globe where we’ve built out the leadership and the playbooks from a value-creation perspective.

It allows us to get capital put to work in a variety of industries. When one sector might be especially unapproachable, we have the ability to go somewhere else. That has made our portfolio more resilient as we’ve navigated the cycle and all the ups and downs.

Something that may be underappreciated in the cost of this boom-bust cycle. Deployment is not just a lack of dry powder, but also the fact that you often anchor yourself with portfolios needing more attention. The problems almost compound as you’re dealing with a troubled portfolio, which keeps you from deploying at a time that’s compelling.

We find ourselves in the exact opposite situation. In addition to the dry powder we’ve got, we have a cleaner bill of health than most, which is giving us the flexibility to keep leaning in, to keep building upon the portfolio.

Fowl markets

Beware portfolio companies bearing unexpected gifts, particularly those that live on farms.

No, despite the luggage tag, this is not Pete Stavros in a previous life. The bird was given to him by the employees of CHI Overhead Doors (exited by KKR in 2022) in gratitude for the employee ownership plan that feathered their nests.

How have you managed deal financing challenges?

PS: Our capital markets group makes us more efficient and effective as investors. They are in the market every day, so they’re just better as capital markets professionals than we are, as investors, at delivering the best terms and creating real value for us and our companies. They also take an enormous amount of work off our plates.

So did the debt markets hold us back from doing deals? No – in large part because of our capital markets team.

NT: The reason we’re so comprehensive about the way we get things financed is not just cost, it’s also flexibility. It’s making sure we’ve built our capital structures to be durable.
We’re religious about flexibility within capital structures. We almost never take the last dollar of debt financing, so that in periods of volatility our businesses can weather the storm.

There will be exogenous shocks to the system but if you’ve got the right capital structure, the right management team, the right processes, as Pete likes to say, “you can make your own luck.” You can control the agenda inside of your portfolio and put yourself in a position – even when times are more volatile – to drive an outcome independent of that.

What is meant by your being named global co-heads?

PS: It’s meant to be a fundamental shift, not just a title change. Our focus in the next few years is to do something we don’t think any private equity firm is doing effectively, which is to bring together three different regions of the world in an integrated way.

It’s going from collaboration to integration, where we are genuinely working to help each other across the regions make better investment decisions and drive our portfolio forward.

That ranges from a US team with experience in a particular sector helping a team in Europe or Asia get a deal done to an Asian team helping a US portfolio company drive growth in the region. We intend to leverage the best of our culture and bring it to bear across all our different products across all three regions. In the last five or six years, we’ve doubled our AUM in global private equity. It has been a critical growth driver for the firm. We expect that to continue. We’ve got big aspirations for what private equity can become over time and we’re not done.

“We have managed to return more capital than we have called in each of the last 10 years”

Nate Taylor

NT: One of our big agendas as Americas co-heads was to get vertical teams working together more collaboratively, to integrate them. That’s driven success in this part of the business. The idea is to take a similar approach across the globe.

There’s depth vertically in the US and just so many more transactions. We can build expertise in industrials or software. But the depth our country teams have we could never replicate sitting here in the US. If you marry those two things – intellectual property from the vertical teams with the local knowledge and relationships of our country teams – that’s a powerful formula.

How do you go about strategy diversification?

PS: We’re looking for products where there are true synergies, where being in a market makes us smarter and better investors. There’s a million directions we could go but that’s the filter.

Examples would be in technology growth and healthcare growth, where we’re seeing innovation in tech trends upstream in a way we wouldn’t if we were just flagship fund investors. With our mid-market strategy, we’re seeing companies earlier in their evolution. With our impact fund, we’re at the bleeding edge of what’s happening in sustainability.

NT: These ideas were on the drawing board for an extended period of time and they’re built organically because we see a big market opportunity where we have a right to win.

Our newest strategy focused on the mid-market, which we call Ascendant, was something that Pete as industrials lead began cultivating a decade ago. It was apparent there was a gap in our ability to chase interesting opportunities in smaller companies where we could still use our relationships, executive advisers, CEO candidates and value-creation playbooks. It’s a good example of how we attack things. It’s a compelling strategy and additive to our holistic approach to finding opportunities across strategies and geographies.

What drives KKR’s commitment to employee ownership?

PS: We’ve done this now over the last 15 years. By year-end, we’re hoping to have nearly 70 companies with broad-based employee ownership plans. Well over 100,000 workers are involved, with the potential to create more than $5 billion of wealth for people who would not normally participate in those earnings.

“We don’t lean in and lean out. The power in an approach like this is the discipline”

Pete Stavros

We want to see this get more scope. That’s why we’re a founding member of Ownership Works, that’s why we’re vocal about it. We think this could be good for workers, good for investors, good for communities and good for the economy if it was a more common way of operating. It’s an embodiment of our culture. Every single employee at KKR has stock. It’s not just something we’re promoting at our portfolio companies or through Ownership Works, it’s core to the firm Henry Kravis and George Roberts created.

NT: When we talk about value-creation playbooks, this is probably the best example of a playbook rolled out. We decided to share it outside of the firm because it’s important to making people’s lives better, closing the income inequality gap, reminding the world that private equity is a force for good. If you’re in this business to transact, to buy and sell things, this might not hold much appeal. If you’re in this business to build companies – which is how KKR some 50 years ago was oriented and how we continue to run the private equity business – it makes all the sense in the world.

Do you expect the concept to spread across PE?

PS: This is going to be the future not just of private equity but in how corporate America is run. At some point, it’s going to become normal for all workers to participate in value creation, not just the C-suite.

It’s about so much more than stock ownership. It’s about employee engagement, teaching financial literacy, giving workers a voice in their daily work, in decisions. It’s about having them being more informed, being a part of owners meetings where they understand the business plan and where the company is headed and how they’re doing.

When all of those things happen together – when people have a stake in the outcome – that’s when folks feel included and respected and that’s when cultures change.

‘It’s just the beginning’

KKR expects to raise more than $300bn in the period 2024-26.

KKR seeks to surpass $1 trillion of assets under management over the next five years, senior executives said at its investor day on April 10, writes Carmela Mendoza.

The firm plans to raise capital across 30 investment solutions and three flagship strategies – North America private equity, Asia PE and global infrastructure – over the next 12-18 months, said Eric Mogelof, global head of KKR client solutions. Mogelof added that 2024 will be a better fundraising year than 2023, with the “denominator impact starting to subside. We’re seeing an opening up of alternative budgets… That’s good for the industry and that’s good for us.

“Second, we are hearing from LPs that they are inundated with GPs in the market. Some GPs have overdeployed in ’21 and ’22, and then they’re back to the market a lot sooner than many of the LPs had anticipated. At the same time, we’re hearing from those LPs that they want to reduce the number of GPs with whom they work, and they want more from those GPs,” he said.

26%

KKR’s PE IRR since inception

To address the demand for alternatives, the firm has built out its fundraising and distribution team globally to more than 280 people as of end 2023. The massive and untapped private wealth channel is a key priority for the firm.

KKR’s K-Series products are designed to access the accredited investor or below, give individual investors direct access to dealflow, and have a single layer of fees, according to Mogelof. K-Series AUM reached over $9 billion as of April 1.

“Investors in the market, institutional investors, have been the only ones historically that have been able to access private equity and to use this as a tool in their portfolio,” Alisa Wood, a partner in the firm’s private equity business, said. “What we’re trying to do with K-Series is change that [and] allow for individual investors – in many cases, for the first time – to be able to access the same type of private equity returns that their larger institutional brethren have been able to take advantage of for many, many decades.”

The firm has created two private equity-focused vehicles: K-PEC, which centers on US investors at the accredited investor level; and K-PRIME, which is for international investors. “We think we’re really at the beginning of this. It’s just the beginning. There’s a lot more to come,” said Wood.