Doc’s Prescription: KKR’s Co-CEO’s George Roberts and Henry Kravis pass the torch
Last week, George Roberts and Henry Kravis gave up their positions as co-chief executive officers of KKR & Co. In 1976, Messrs. Kravis and Roberts, who are first cousins, founded KKR along with Jerome Kohlberg, who died in 2015.
Roberts and Kravis were early pioneers in the buyout industry. KKR and other leveraged buyout firms initiated financial transactions, using some equity and a substantial amount of debt to acquire the targets of their acquisitions. Upon taking ownership, buyout firms, for the most part, prudently cut costs and focused their efforts on building up the most promising divisions of the acquired companies.
KKR contributed to the evolution of global finance. When I came to Wall Street in 1969, there were primarily two types of financial institutions – investment banks and commercial banks. The investment banks employed only a few hundred people, and commercial banks could operate only in one state. Today, investment banks have thousands of employees around the globe. Commercial banks operate in every state and throughout the world.
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The following are representative of the incredible innovations over the past 50 years: exchange traded funds, asset-backed securities, mortgage-backed securities, master limited partnerships and real estate investment trusts.
The success of America’s business enterprises in recent decades stems in part from the aggressive actions of buyout firms. Many companies were old-boy networks where executives enjoyed the perks of their positions rather than running the business for the benefit of their shareholders. Shareholders, the theoretical owners of the business, had little influence over management. Buyout firms instilled business discipline forcing companies to divest of divisions not central to the company’s core competency and reduced extraneous expenses. Main Street and Wall Street are interdependent, not adversaries.
KKR has become a global investment company, managing alternative asset classes such as private equity, energy, infrastructure, real-estate credit and hedge funds through strategic partners. The firm has completed more than 280 private equity investments in portfolio companies with approximately $545 billion of total enterprise value as of June 30, 2017.
In 2014, Roberts conducted an interview that highlighted KKR’s vision. He said, “We see our balance sheet as a key differentiator, giving us the ability to align our interest with our fund investors, develop new investment strategies and support existing ones, and enter into strategic transactions on our own behalf. When you partner with KKR, you benefit from the breadth and expertise of the entire firm. KKR’s investment partners have decades of financial and operational experience, broad industry expertise, insight into global macro and geopolitical trends, and a powerful network of global relationships.”
On balance, private equity firms, such as KKR, have overcome the stigma of just buying businesses, breaking them into pieces, and callously selling the parts.
Today, private equity firms focus much more on achieving long-term results by providing the following:
1. Inserting needed cash to fuel growth,
2. Providing valuable talent to supplement in-house corporate expertise, and
3. Implementing management incentives for achieving financial goals.
Private equity companies have improved the rate of return of corporate America. One study from Boston Consulting Group showed that two-thirds of private equity deals resulted in at least 20 percent annual growth for the purchased company, with nearly half realizing 50 percent annual profits or better.
I worked on Wall Street since 1969 and had the honor of meeting many of the financial leaders of our era, George Roberts, Henry Kravis, Larry Fink (founder of Blackrock), Steve Schwarzman (founder of Blackstone), and Paul Singer (founder of Elliott Management). On balance, all these men have proven to be incredibly talented financial engineers. Their innovations have more than compensated for America’s loss status in manufacturing.
Sarasota resident Ernest “Doc” Werlin spent 35 years in fixed income as a trader and corporate bond salesman, including time as a partner at MorganStanley in charge of corporate bond trading. Send suggestions and comments to ernestwerlin@gmail.com.