KKR pioneered the private equity business: Here are its hits and misses

KKR announced the end of an era Monday with co-founders Henry Kravis and George Roberts saying they were stepping back immediately to allow co-presidents Scott Nuttall and Joseph Bae to become co-CEOs.

The KKR co-founders, along with original partner Jerome Kohlberg — who left the firm in 1987 and died in 2015 — are credited with inventing leveraged buyouts in the 1960s and 1970s.

KKR bought businesses by making small down payments and having the companies they acquired borrow most of the rest of the purchase price — making the companies responsible for repayment. The acquired companies would claim the money they borrowed as depreciation — operating expenses — and their tax rates would fall dramatically.

First, they bought companies through LBOs for Bear Stearns and then launched their own firm.

“This was something the KKR guys discovered. It was really driven by tax benefits,” John Canning, who formed private equity firm Madison Dearborn, said in this reporter’s book, “The Buyout of America.” Canning funded many of the first Kohlberg deals as a First Chicago lender.

By the early 1990s, LBO firms  had rebranded themselves as private equity firms. This came after Michael Douglas portrayed a corporate-raiding character modeled on Kravis in the movie Wall Street.

KKR also expanded into new areas, including technology and infrastructure investing — and it also grew globally, especially in Asia.

KKR has gone from its creative beginnings to having completed private equity transactions worth $655 billion of enterprise value, according to the firm. Presently, it owns companies ranging from 1-800-Contacts, Gibson Guitars and US Foods to hospital biller Envision Healthcare.

A KKR spokesperson said of the Kravis and Roberts: “They started the business to make companies better than when they found them, while at the same time giving KKR’s investors a good return.”

The firm is one of the country’s biggest private employers through the businesses it owns likely overseeing more than one million workers.

So, what have been some of its biggest hits and misses?

Hits:

• KKR in 2018 invested $400 million for a stake in AppLovin, a software maker for mobile gaming apps, at a $2 billion valuation. AppLovin went public this year and presently has a $33 billion valuation. KKR has made more than $6 billion.
• KKR in 1986 invested only $132 million of equity in a highly levered $4.3 billion buyout of supermarket chain Safeway. After 17 years, KKR made more than $7 billion.
• The co-founders when working for Bear Stearns in 1972 bought Vapor Corp., makers of door-opening systems for mass-transit networks. They put down $4.4 million, and would produce a 12 times return in six years. A 1975 buyout of Rockwell division Incom, which made gears and filters, resulted in a 22 times return.
• KKR raised its first infrastructure fund in 2011 attracting $1 billion. This year, it raised a $14 billion infrastructure fund greatly increasing the firm’s reach and profits.

Misses:

• KKR in 1986 bought RJR Nabisco for $30 billion in a deal that was chronicled in the book and movie “Barbarians at the Gate.” KKR eventually traded half its shares in RJR for Borden Inc. and much of what Borden became went bankrupt.
• KKR in 2007 co-led the biggest LBO of all time, a $45 billion buyout of Dallas utility TXU. KKR lost about $4 billion when the business went bankrupt seven years later.
• KKR was one of the lead investors in the $6.6 billion 2005 leveraged buyout of Toys R Us. The chain liquidated in 2017 and after a public outcry KKR contributed $10 million to a severance fund for workers.