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By JENNY ANDERSON and MICHAEL J. de la MERCED
Published: July 4, 2007
Kohlberg Kravis Roberts & Company, the buyout firm immortalized in "Barbarians at the Gate," is jumping on the public offering bandwagon.
[imga=left]http://graphics8.nytimes.com/images/2007/07/04/business/04kkr.190.jpg[/imga]
Less than two weeks after the Blackstone Group, its archrival, started trading as a public company, Kohlberg Kravis filed documents late yesterday to raise $1.25 billion.
Deals to take private equity and hedge funds public are now happening at a frenzied pace, suggesting that these funds might see a limited window in which to gain access to the public markets.
The outlook for private equity firms has worsened over the last month, with leading members of the Congressional tax-writing committees introducing legislation to raise taxes significantly on private equity managers. The Congressional broadside attack was accompanied by a marked deterioration in the debt markets, with the cancellation or repricing of several prominent bond sales, reflecting investors' concern about the risk inherent in those instruments. The boom in buyouts has been largely fueled by the availability of cheap credit.
And yet hardly a day has passed without another hedge fund or private equity firm announcing that it would go public. The Fortress Investment Group blazed the path in February, followed by Blackstone. Last week, GLG Partners, one of London's leading hedge funds, announced that it would go public through a complex reverse merger. On Monday, the Och-Ziff Capital Management Group, a $27 billion hedge fund, announced that it would sell units to the public.
Founded in 1976 by three Bear Stearns alumni, including the cousins Henry R. Kravis and George Roberts, Kohlberg Kravis is credited with creating the leveraged buyout, where public companies, often seen as undervalued by investors, are bought with cash and a large amount of borrowed money. Private equity firms then make changes to the companies — like replacing management or selling divisions — before selling them or taking them public again, reaping profits along the way.
Kohlberg Kravis's most famous buyout, the takeover of RJR Nabisco, was chronicled in the book and movie "Barbarians at the Gate."
Kohlberg Kravis did not disclose how many units it would sell or their potential price, making it impossible to determine its value. Blackstone sold 133.3 million units at $31. Its stock closed yesterday at $29.72, valuing the company at $32 billion.
But the prospectus Kohlberg Kravis filed with the Securities and Exchange Commission shed some light on the normally secretive firm. Kohlberg Kravis has $53.4 billion under management, with $44.1 billion in private equity funds and $9.3 billion in credit funds, which invest in debt instruments like bonds or mortgages. Since its inception in 1976 until March 31, its 10 private equity funds have delivered to investors 2.7 times the amount of capital committed with an internal rate of return of 20.2 percent, net of fees. The S.& P. 500-stock index had a gross internal rate of return of 13.6 percent for the same period.
The 31-year-old firm has 399 employees, with 139 investment professionals. It earned $1.1 billion in profit in 2006 on net revenue of $4.4 billion and paid income taxes of $4.2 million. (Individuals have to pay capital gains taxes on their share of the profits.)
In contrast, Blackstone is 22 years old and had $78.7 billion under management as of March 1. It has 770 employees, 60 senior managing directors and 340 investor/adviser professionals. Its corporate private equity funds had an annualized internal rate of return of 22.6 percent, net of fees, since its inception. It earned $2.3 billion in 2006 and paid taxes of $31.9 million. Like Kohlberg Kravis, its partners have to pay capital gains on their share of the profits.
After Blackstone's offering, Stephen A. Schwarzman, the chairman and chief executive, cashed out $677 million and retained a 24 percent stake worth about $7.5 billion. Peter G. Peterson, his co-founder, cashed out $1.9 billion. He has said he will put that in a charitable trust.
The existing owners of Kohlberg Kravis will not cash out any shares but will invest the proceeds into the business, according to the public filing. The proceeds will be used to build new businesses around the globe, reduce dependence on third parties like pension funds and endowments for financing and give the firm a currency — its stock — for acquisitions.
Kohlberg Kravis has long been one of the most aggressive private equity firms, and this year has been no exception. The firm announced 11 deals in 2007 with a combined value of $121.1 billion, more than any of its rivals, according to data from Dealogic. It is one of three firms that have agreed to pay $45 billion for TXU, the Texas energy giant, in what is the largest leveraged buyout in the United States.
But the firm's boldness in striking a series of large deals may come back to haunt it. Two of its recent targets — U.S. Foodservice and Dollar General — have postponed or repriced bond offerings meant to fuel their buyouts after resistance from investors tired of the lenient repayment terms attached to that debt. And analysts have speculated that another Kohlberg Kravis target, the First Data Corporation, may also be forced to scale back its debt offering.
Investors will be sure to weigh the different levels of diversification among the funds coming public. Blackstone and Fortress have real estate operations, private equity and hedge funds, while Kohlberg Kravis is more of a pure-play private equity firm with some debt operations.
The firm is trying to diversify its business mix, expanding into public market investments and building a capital markets business to take over some of the activities Wall Street firms now perform. It has filed for a broker-dealer license.
Yet these companies would be worth less if any of the legislation in Congress is passed. In mid-June, the Democratic and Republican leaders of the Senate Finance Committee introduced legislation to tax publicly traded partnerships engaged in investment management activities as corporations. They are currently taxed as partnerships, which means they pay no corporate-level tax but owners pay taxes on their profits.
A week later, Democratic leaders of the House Ways and Means Committee, where tax legislation originates, introduced a bill that would greatly raise taxes on private equity firms by changing the tax treatment of the bulk of compensation from capital gains, at 15 percent, to ordinary income, at 35 percent.
Competition between Kohlberg Kravis and Blackstone continues. Minutes after the filing, late on the eve of a holiday, Blackstone said it was acquiring Hilton Hotels in a deal valued at $26 billion.
Published: July 4, 2007
Kohlberg Kravis Roberts & Company, the buyout firm immortalized in "Barbarians at the Gate," is jumping on the public offering bandwagon.
[imga=left]http://graphics8.nytimes.com/images/2007/07/04/business/04kkr.190.jpg[/imga]
Less than two weeks after the Blackstone Group, its archrival, started trading as a public company, Kohlberg Kravis filed documents late yesterday to raise $1.25 billion.
Deals to take private equity and hedge funds public are now happening at a frenzied pace, suggesting that these funds might see a limited window in which to gain access to the public markets.
The outlook for private equity firms has worsened over the last month, with leading members of the Congressional tax-writing committees introducing legislation to raise taxes significantly on private equity managers. The Congressional broadside attack was accompanied by a marked deterioration in the debt markets, with the cancellation or repricing of several prominent bond sales, reflecting investors' concern about the risk inherent in those instruments. The boom in buyouts has been largely fueled by the availability of cheap credit.
And yet hardly a day has passed without another hedge fund or private equity firm announcing that it would go public. The Fortress Investment Group blazed the path in February, followed by Blackstone. Last week, GLG Partners, one of London's leading hedge funds, announced that it would go public through a complex reverse merger. On Monday, the Och-Ziff Capital Management Group, a $27 billion hedge fund, announced that it would sell units to the public.
Founded in 1976 by three Bear Stearns alumni, including the cousins Henry R. Kravis and George Roberts, Kohlberg Kravis is credited with creating the leveraged buyout, where public companies, often seen as undervalued by investors, are bought with cash and a large amount of borrowed money. Private equity firms then make changes to the companies — like replacing management or selling divisions — before selling them or taking them public again, reaping profits along the way.
Kohlberg Kravis's most famous buyout, the takeover of RJR Nabisco, was chronicled in the book and movie "Barbarians at the Gate."
Kohlberg Kravis did not disclose how many units it would sell or their potential price, making it impossible to determine its value. Blackstone sold 133.3 million units at $31. Its stock closed yesterday at $29.72, valuing the company at $32 billion.
But the prospectus Kohlberg Kravis filed with the Securities and Exchange Commission shed some light on the normally secretive firm. Kohlberg Kravis has $53.4 billion under management, with $44.1 billion in private equity funds and $9.3 billion in credit funds, which invest in debt instruments like bonds or mortgages. Since its inception in 1976 until March 31, its 10 private equity funds have delivered to investors 2.7 times the amount of capital committed with an internal rate of return of 20.2 percent, net of fees. The S.& P. 500-stock index had a gross internal rate of return of 13.6 percent for the same period.
The 31-year-old firm has 399 employees, with 139 investment professionals. It earned $1.1 billion in profit in 2006 on net revenue of $4.4 billion and paid income taxes of $4.2 million. (Individuals have to pay capital gains taxes on their share of the profits.)
In contrast, Blackstone is 22 years old and had $78.7 billion under management as of March 1. It has 770 employees, 60 senior managing directors and 340 investor/adviser professionals. Its corporate private equity funds had an annualized internal rate of return of 22.6 percent, net of fees, since its inception. It earned $2.3 billion in 2006 and paid taxes of $31.9 million. Like Kohlberg Kravis, its partners have to pay capital gains on their share of the profits.
After Blackstone's offering, Stephen A. Schwarzman, the chairman and chief executive, cashed out $677 million and retained a 24 percent stake worth about $7.5 billion. Peter G. Peterson, his co-founder, cashed out $1.9 billion. He has said he will put that in a charitable trust.
The existing owners of Kohlberg Kravis will not cash out any shares but will invest the proceeds into the business, according to the public filing. The proceeds will be used to build new businesses around the globe, reduce dependence on third parties like pension funds and endowments for financing and give the firm a currency — its stock — for acquisitions.
Kohlberg Kravis has long been one of the most aggressive private equity firms, and this year has been no exception. The firm announced 11 deals in 2007 with a combined value of $121.1 billion, more than any of its rivals, according to data from Dealogic. It is one of three firms that have agreed to pay $45 billion for TXU, the Texas energy giant, in what is the largest leveraged buyout in the United States.
But the firm's boldness in striking a series of large deals may come back to haunt it. Two of its recent targets — U.S. Foodservice and Dollar General — have postponed or repriced bond offerings meant to fuel their buyouts after resistance from investors tired of the lenient repayment terms attached to that debt. And analysts have speculated that another Kohlberg Kravis target, the First Data Corporation, may also be forced to scale back its debt offering.
Investors will be sure to weigh the different levels of diversification among the funds coming public. Blackstone and Fortress have real estate operations, private equity and hedge funds, while Kohlberg Kravis is more of a pure-play private equity firm with some debt operations.
The firm is trying to diversify its business mix, expanding into public market investments and building a capital markets business to take over some of the activities Wall Street firms now perform. It has filed for a broker-dealer license.
Yet these companies would be worth less if any of the legislation in Congress is passed. In mid-June, the Democratic and Republican leaders of the Senate Finance Committee introduced legislation to tax publicly traded partnerships engaged in investment management activities as corporations. They are currently taxed as partnerships, which means they pay no corporate-level tax but owners pay taxes on their profits.
A week later, Democratic leaders of the House Ways and Means Committee, where tax legislation originates, introduced a bill that would greatly raise taxes on private equity firms by changing the tax treatment of the bulk of compensation from capital gains, at 15 percent, to ordinary income, at 35 percent.
Competition between Kohlberg Kravis and Blackstone continues. Minutes after the filing, late on the eve of a holiday, Blackstone said it was acquiring Hilton Hotels in a deal valued at $26 billion.
