KKR’s New Venture Opts for an Initial Public Offering

A pioneer in the world of private equity investing, Kohlberg Kravis Roberts & Co., is turning to the public for its latest venture.

KKR, a specialist in management buyouts since 1976, said Monday it would seek to sell as much as $750 million of stock to raise capital for a new “business development company,” to be called KKR BDC Inc.

Credit Suisse First Boston and J.P. Morgan Chase & Co. will underwrite the initial public offering, on the heels of a similar deal from KKR rival Apollo Management, whose Apollo Investment Corp. went public last week in a $930-million IPO.

“This is a new trend,” said Tom Taulli, a corporate finance instructor at USC’s Marshall School of Business. “Now that KKR, the big kahuna of private equity investing is doing it, probably everyone else will follow.”

KKR, which is based in New York and also has offices in Menlo Park, Calif., and London, has completed more than 110 transactions involving more than $117 billion of total financing since its founding by Jerome Kohlberg, Henry Kravis and George Roberts in 1976.

In its buyout funds, KKR typically has purchased companies in partnership with management, using loans to leverage the capital invested. The goal usually is to improve the businesses and sell them at a profit years later, either to other companies or via stock offerings.

Its most famous deal was the purchase of RJR Nabisco in 1989.

Cousins Kravis and Roberts have run the firm, whose current portfolio includes baby products maker Evenflo Co. and packaging maker Owens-Illinois Inc., since Kohlberg left in 1987.

The new fund primarily will buy debt and equity securities of private companies, but it won’t invest in any of the portfolio companies of KKR or its affiliates, the IPO prospectus said.

Instead, the new fund will focus on deals that don’t fit KKR’s criteria.

For example, equity investments too small for KKR’s private equity funds might be candidates for KKR BDC. Typically, KKR invests at least $150 million in any deal, Taulli said. KKR has done an average of four deals per year, but in 2003 alone it considered more than 500 possible investments.

KKR appears to be seizing on an improving market for IPOs, analysts said.

Thirty-four companies have gone public this year, versus four at the same point in 2003, according to Renaissance Capital’s website IPOhome.com. Those firms have raised $7.3 million, versus $1 million a year earlier, and the stocks, through last week, have gained an average of 16% from their pre-trading offer prices.

Apollo Investment, a New York-based fund controlled by Leon Black’s private equity firm, eased 6 cents in Monday’s trading to close at $15.19 on Nasdaq. The company went public at $15 a share on April 5.

KKR historically has catered to institutional investors such as pension funds, banks and university endowments, whereas all investors, including individuals, would be able to put in bids to buy the new fund at its IPO price, or buy it once it begins trading.

Although the IPO would make KKR’s investing expertise available to Main Street, the deal carries risk, Taulli said.

For starters, KKR has never run this type of fund before. Impatient investors might get disappointed with the early returns in funds such as KKR BDC and Apollo Investment, Taulli said, especially if initial deals go sour.

“The public’s expectations might not be in sync with the world of private equity,” which tends to have a long time horizon, he said.