KKR plan to go public is expected
KKR & Co., the private equity firm run by Henry Kravis and George Roberts, plans to go public in a transaction that may value it at as much as $15 billion, according to two people familiar with the matter.
The firm will buy KKR Private Equity Investors, its publicly traded leveraged-buyout fund in Amsterdam, using new shares that will list on the New York Stock Exchange after the purchase is completed in the fourth quarter, said the people, who asked not to be identified before an official announcement. KKR, which is based in New York, won’t sell shares in an initial public offering.
KKR’s non-traditional route to going public comes amid the worst market for initial public offerings in four years and after debt funding for buyouts dried up. The firm wants publicly traded stock to pay for acquisitions and to retain employees, the sources said. The plan may be announced as early as today, according to the two people. KKR spokesman David Lilly declined to comment.
“It’s clear that the deal is coming in that manner because the U.S. equity markets are so difficult, particularly for anyone doing leveraged transactions,” said Dan Veru, who helps manage $2.8 billion at Palisade Capital Management in Fort Lee, N.J. “That’s ultimately how they’re going to get the best valuation.”
KKR forecasts it will post a profit of about $1.2 billion in 2009, the people said. KKR expects investors to value the company at 10 to 12 times earnings, or between $12 billion and $15 billion, they said.
Blackstone Group, manager of the world’s largest buyout fund, raised $4.75 billion in an IPO in June 2007, just before the leveraged-buyout market collapsed. The stock, which has dropped 45% since the offering, trades at 13 times estimated 2009 earnings.
KKR Private Equity has a market capitalization of $2.1 billion, a drop of 58% since it raised $5 billion in May 2006. The stock, which sold for $25, now trades at $10.50, less than half the book value of its assets, according to data compiled by Bloomberg.
The fund invests in KKR deals, meaning that Kravis and Roberts probably plan to scoop up assets at a discount to book value.
After buying the Amsterdam unit, shareholders of KKR Private Equity will own 21% of the combined firm, with KKR executives and employees holding 79%, according to the people. The KKR-held shares will vest over six to eight years, they said.
“It’s complicated but creative to use the permanent capital that’s already out there,” said Benjamin Phillips, managing director of strategic analysis at Putnam Lovell, a unit of Jefferies Group Inc. in New York. “They are using a security that already has a defined price so they have a little more control about how they’ll go public rather than have to go out and find shareholders that they might find it difficult to find.”
Kravis and Roberts, both 64, filed for an IPO in New York more than a year ago. The cousins, who started the firm in 1976 with their Bear Stearns Cos. colleague Jerome Kohlberg, put the plan on hold as stock markets dropped and credit dried up. Kohlberg hasn’t been with the firm since 1987, when he left to start his own firm, Kohlberg & Co.
Announced private equity deals dropped more than 70% to $163.1 billion in the year through July 25 from the same period in 2007, Bloomberg data show. Banks are reluctant to fund leveraged buyouts after the subprime mortgage crisis triggered more than $466 billion in write-downs and losses among the world’s largest financial institutions.
“You can’t get bank debt right now, and KKR or any other private equity firm can’t get the returns they’re looking for without bank debt,” said Palisade’s Veru. “They require more equity investment than leverage.”
KKR managed $53.4 billion of assets as of June 30, 2007, according to filings with the U.S. Securities and Exchange Commission. Blackstone oversees $113.5 billion, and Washington- based Carlyle Group has about $81 billion under management.
KKR’s Millennium Fund, which it finished raising in 2002, returned an average of 41% a year to investors, according to KKR’s July IPO filing. KKR’s funds have returned an average of 29% to investors.
