The New York Times
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July 28, 2008

After Delay, KKR Finds a Way to Go Public

By ANDREW ROSS SORKIN

Kohlberg Kravis Roberts, the storied private equity firm, is again preparing to become a public company on the New York Stock Exchange, the firm said Sunday.

The listing comes more than a year after Kohlberg Kravis originally announced plans to go public. Those plans were delayed as the credit market and the economy worsened.

The new plan, which would value the firm at $12 billion to $15 billion, is part of a complex deal in which Kohlberg Kravis will buy its publicly traded affiliate, KKR Private Equity Investors, which is listed on the Euronext in Amsterdam, for as much as $3.9 billion.

The deal amounts to a backdoor way for Kohlberg Kravis to become a publicly traded company without formally selling new shares in the firm. After the deal is completed, 21 percent of the firm’s shares will be sold on the open market while 79 percent of the shares will remain in the hands of the firm’s executives.

Kohlberg Kravis, which was founded in 1976 and whose takeover of RJR Nabisco was chronicled in the book “Barbarians at the Gate,” is trying to expand its business beyond private equity to become a much broader asset manager, with investments in hedge funds, real estate, infrastructure and fixed income.

“For K.K.R., this transaction provides us with additional capital for our business,” Henry R. Kravis and George Roberts, the cousins who founded the firm, said Sunday in a statement. “Moving forward with a public listing will allow K.K.R. to do what we do best — grow companies around the world and produce solid returns for our investors from a larger platform and a deeper capital base.”

The firm had sought to go public last summer, as the private equity boom was cresting. But after Blackstone Group’s public offering was derided by investors — its shares have fallen 50 percent since they began trading — Kohlberg Kravis delayed its debut. Other private equity firms, like Carlyle Group and Texas Pacific Group, had been studying plans for offerings but shelved them because of market conditions.

Kohlberg Kravis is widely credited with helping to create the model for leveraged buyouts, in which 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, which has had an annual rate of return of 26 percent since its inception, owns controlling stakes in private companies as varied as Toys “R” Us and TXU.

Of course, the great paradox of private equity firms’ pursuit of public offerings has not been lost on investors, with some questioning whether the firms are undermining the very model that they have said makes their investments so successful. Firms like Blackstone and Kohlberg Kravis have said that they will benefit by being public because they can use the currency of their shares to expand their business and attract and retain executives.

Kohlberg Kravis, still run by Mr. Kravis and Mr. Roberts, has been aggressively expanding over the last year in anticipation of its public listing, which will use the symbol KKR. Just last week, the firm hired William Sonneborn, former president and chief operating officer of the investment firm TCW, to help it develop its asset management business.

Prior to that, George Bilicic, the former head of Lazard’s global power and energy investment banking, was brought in to start an infrastructure fund. The firm also hired Ken Mehlman, the former chairman of the Republican National Committee, as its head of global public affairs, and hired its longtime outside lawyer, David J. Sorkin of Simpson Thacher & Bartlett, as general counsel.

It also hired a chief human resources officer and a chief information officer. In all, the firm, based in New York, has 500 employees, with nearly 100 being hired within the last year.

Kohlberg Kravis’s offering will differ from Blackstone’s. Unlike Blackstone’s offering, which allowed some longtime partners to reap immediate gains, no one at Kohlberg Kravis will be taking any money out of the firm. Its executives will have a six- to eight-year vesting period compared with three to four years at Blackstone.

Kohlberg Kravis’s acquisition of its European affiliate requires approval of more than 50 percent of shareholders. Once Kohlberg Kravis is public, it is expected to be controlled by an independent board; Blackstone’s board is controlled by insiders.

Under the terms of the deal with KKR Private Equity Investors its shareholders will exchange their shares, which closed at $10.50 on Friday, for Kohlberg Kravis shares.

Kohlberg Kravis executives say the firm should be valued at 10 to 12 times 2009 earnings, estimated at $1.2 billion.