Kravis opens window of opportunity

Since late March, when Steve Schwarzman’s Blackstone unveiled plans to go public, one of the biggest questions in the booming private equity world was whether Kohlberg Kravis Roberts, its main rival, would follow suit.

The answer from Henry Kravis, the 63-year-old Oklahoman who pioneered leveraged buy-outs in the 1980s, came late on Tuesday evening, as most Wall Street bankers and lawyers were preparing their barbecues for Independence Day.

KKR aims to raise up to $1.25bn on the New York Stock Exchange, a filing with US regulators revealed, giving public market investors their first chance to invest in the firm that inspired the bestselling book Barbarians At The Gate.

Blackstone listed on the NYSE last month, raising $7.8bn and allowing its founders to reap a combined pay-out of $2.6bn.

Like Blackstone, KKR is floating as a limited partnership – meaning it will sell units, not shares, and there will be less stringent corporate governance rules.

In addition, this structure means the group will be taxed at a lower rate than traditional public companies, unless legislation introduced last month by Max Baucus and Charles Grassley of the Senate Finance Committee is enacted.

But two key differences between the Blackstone and KKR models emerged out of Tuesday’s filing.

For one, Mr Kravis and co-founder George Roberts will not be selling down their stakes in the IPO – at least not initially – and the size of the offering is much smaller than Blackstone’s.

Second, unlike Blackstone, KKR has decided to allow a majority of independent directors to sit on the company’s board, though Mr Kravis and Mr Roberts will retain a strong grip on control.

KKR had been considering a stock market listing for many months, while Blackstone was ploughing ahead with its own IPO.

But in the private equity industry, KKR was considered a less natural candidate to go public than its rival, which is more diversified because of its strong real estate and hedge fund businesses in addition to its core buy-out division.

More than $40bn of KKR’s $53bn of assets under management are dedicated to its private equity division: as a “pure play” on global buy-outs with the potential for highly volatile earnings, there were concerns that KKR might not be as palatable for a broad group of stock market investors.

By June, Mr Kravis and Mr Roberts had brushed those worries aside when it became apparent that investor demand for chunks of the most successful private equity groups was so strong, from the Middle East and Europe as well as from US institutions.

Within KKR, it became clear the window for a stock market listing was wide open, but that it might soon close.

Rising interest rates and more expensive borrowing costs mean the buy-out boom may not last forever.

Since the start of 2007, KKR has been the most active and aggressive private equity group in the world, with pending transactions worth more than $140bn, according to the SEC filing, resulting in the deployment of $11.4bn in equity.

KKR’s largest transaction was the $45bn buy-out of TXU, the Texas-based energy group, announced in February alongside TPG.

That deal remains the largest leveraged buy-out ever in the US, though it was eclipsed in size last Saturday when the Ontario Teachers’ Pension Plan, together with Providence Equity Partners and Madison Dearborn, agreed to buy BCE, parent of Bell Canada, for $49bn including debt.

As KKR has sought ever-larger takeovers, the pressure on it to become a more well-rounded financial services company have become significant.

For example, KKR recently started developing a capital markets business to help it syndicate some of the debt and equity cheques it writes to pay for its largest deals – and that division is likely to be bolstered after the IPO.

In its prospectus, KKR also says the flotation will help it strengthen its brand.

One big decision that the co-founders of KKR had to make on their path to the filing was a matter of political judgement.

In mid-June, just as Blackstone was gearing up for its IPO, Senators Baucus and Grassley introduced a bill that would tax private equity groups listing as partnerships at a higher rate than is currently the case.

While the hit for Blackstone would only come in 2012, because it had already filed for an IPO, the effect on KKR would be immediate.

People close to the KKR offering say Mr Kravis and Mr Roberts took a wait-and-see approach to the political challenge.

Since it remains unclear whether the bill has enough support in Congress to be enacted, they decided to move forward with the partnership structure, while reserving the right to change KKR’s status to a traditional corporation if necessary.

In deciding not to cash in their stakes, KKR’s founders also hoped to minimise negative publicity in Washington surrounding Blackstone’s IPO.

Despite the July 4 filing, Mr Kravis might find it hard to complete the IPO without attracting too much attention.

source:www.ft.com