KKR Aims for a $10-Billion Buyout Fund

Kohlberg Kravis Roberts & Co. is aiming to amass as much as $10 billion for a major corporate buyout fund, tapping institutional investors’ hunger for returns that can beat the stock market in coming years, according to people familiar with the plans.

For KKR, which established its reputation as a corporate raider with the $33-billion leveraged buyout of RJR Nabisco in 1988, the prospective fund would surpass another being raised by Thomas H. Lee & Co. of more than $6 billion.

KKR, which has invested $13.5 billion of equity in more than 80 transactions since its founding in 1976, would gain as much as $25 billion in purchasing power with the new fund.

The New York-based firm has “the manpower, the horsepower and the brainpower to manage that much,” said rival Thomas H. Lee, founder of the Boston-based buyout firm that bears his name. “I highly recommend them to everyone.”

Buyout firms overall are on track to raise a record amount this year. Two other well-known firms, Hicks, Muse, Tate & Furst Inc. and Forstmann Little & Co., are also collecting funds of around $5 billion each.

The previous full-year record for buyout dollars raised was 1998’s $57.2 billion, says the newsletter Private Equity Analyst.

Buyout funds raise equity capital from big investors, then use borrowing power to leverage that sum and invest in private firms or take public companies private, generally with management’s help.

They usually target public companies whose stocks are unappreciated by Wall Street. The central idea: Buy assets cheap, improve the business’ operations, and--often--sell off parts at attractive prices.

The privatized businesses often are eventually taken public again or sold.

Annual returns for buyout funds averaged 19.3% over the last 20 years, according to Venture Economics, a Newark, N.J.-based research firm. KKR ranks among the top performers, said Jesse Reyes, director of Venture Economics.

But buyout funds’ results have generally lagged the spectacular performance of the U.S. stock market since 1996. Now, however, many institutional investors are flocking to buyout funds, betting that they can produce better returns than what the struggling public stock market can achieve.

The California Public Employees Retirement System, the biggest U.S. public pension fund, voted Tuesday to shift a portion of its money from U.S. and international stocks into private equity funds, saying that “alternative investments” will outperform stocks.

Still, a fund as big as $10 billion could be too large to show the results expected of smaller private equity investments, Reyes said.

“You could be diversifying away your returns,” he said.

KKR has focused much of its attention on Europe in recent months and is now raising as much as $3.5 billion to invest there.

In North America, KKR’s biggest transaction so far this year was its $550-million purchase of one-fifth of DPL, owner of an Ohio utility.

More recently, KKR has joined with Accel Partners, a Silicon Valley venture capital firm, to make technology and Internet investments.