Henry Kravis, co-founder of private equity giant Kohlberg Kravis Roberts & Co, said the company was seeking alternative investment opportunities instead of buyouts, as it waits out the credit crisis, including distressed debt, mezzanine financing and infrastructure.
‘You have to accept the fact that transactions will be smaller and have far less leverage — that’s a fact,’ Kravis told the private equity industry’s biggest conference ‘SuperReturn’. ‘That means all of us have to adapt. We have to change the way we’ll do business. If we don’t, we’ll be left out.’
Pointing to the alternative investments, Kravis said: ‘We have to make our capital go further.’
Kravis said that with more than US$400bn committed capital sitting on the sidelines in the private equity industry, there was also a role for it to play alongside governments in shoring up financial institutions or investing in infrastructure.
Founded in 1976, KKR rose to prominence during the debt-fueled leveraged buyout craze of the 1980s. It has investments in numerous household names such as toy retailer Toys R Us, Sealy mattress maker, pharmacy chain Alliance Boots and budget retailer Dollar General.
The credit crisis hit the private equity industry hard. It is reliant on access to debt to strike large leveraged buyouts and as the economy contracts, firms have instead been focused on keeping their portfolio companies above water while seeking alternative investments to buyouts.
Kravis predicted a long and protracted slowdown ahead and said the financial system ‘must begin to work properly and the credit markets must open up’.
However, he said ‘one ray of sunshine’ was the substantial level of new investment grade debt issued in the United States over the last few weeks without a government guarantee — the first time in many months. He also pointed to high yield debt issued without a government guarantee and commercial paper rolling over without a government guarantee.
‘That was very important,’ Kravis said. ‘It is another indication that maybe things are starting to get better.’
Corporate debt has enjoyed an eight-week rally as investors shifted out of stocks for high-yielding corporate debt. US corporate bond spreads are at their tightest levels in months.
KKR has previously announced plans to go public through a complex transaction that involves merging with its Amsterdam-listed affiliate, KKR Private Equity Investors LP. It recently delayed those plans to this year, from 2008. Kravis declined to comment on progress on the listing.