KKR exits first US distressed deal

Kohlberg Kravis Roberts recently announced the sale of its first US distressed for control investment in Oriental Trading Company, a mail-order toy business, and will double its money as it works to raise its first dedicated fund for special situations.

KKR announced last week it agreed to sell the company to Warren Buffett’s Berkshire Hathaway, which will pay $500 million, sources confirmed. KKR bought Oriental Trading Company out of bankruptcy last year.

Oriental Trading Company had a strong management team that just “needed some time and space” to put their plans into practice and get the company back on its feet, according to Jamie Weinstein, KKR’s co-head of special situations investing.

“[This was] a very high quality business with a solid management team, high free cash flow and double digit EBITDA margins,” Weinstein said. 

We're active in North America, Europe, Asia Pacific; the majority of new opportunities right now are in or correlated to Europe. Jamie Weinstein

“The company had been crawling with third party advisors for quite a while,” Weinstein said, including through the bankruptcy process. Oriental Trading Company entered bankruptcy in 2010, at which time it was majority owned by The Carlyle Group.

“What the team needed was space and time and support from the board and not lots more people crawling over the business. We set up the right incentives with the management team up front, agreed with them on the plan and gave them space to execute, which they hadn’t had in years,” Weinstein said. The company is led by chief executive officer and president Sam Taylor.

Oriental Trading Company had been owned by Brentwood Associates, which sold it to The Carlyle Group in 2006. The company was KKR’s first US-based distressed deal. The team, which consists of about 35 people, has offices in New York, London and San Francisco.

The firm invests in distressed companies using capital from a $2 billion pool made up of a combination of separate accounts and other internal vehicles within KKR. While Weinstein did not comment on KKR’s fundraising plans, Scott Nuttall, global head of capital and asset management, said during the firm’s third quarter earnings call last month that KKR was working to raise its first-ever dedicated fund for special situations. Nuttall said the special situations group generated a 17 to 18 percent non-annualised internal rate of return for the year.

“The special situations business, we are in the process of raising capital for that strategy right now in a dedicated fund format,” Nuttall said during the call. “We feel quite good about the performance there.”

Distressed opportunities abound in Europe, Weinstein said, as capital markets continue to struggle, credit is limited and businesses need options. Opportunities in the US have slowed because the capital markets have strengthened, he said.

“We’re active in North America, Europe and Asia Pacific; the majority of new opportunities right now are in or correlated to Europe,” Weinstein said. “There’s clearly a recession going on in the eurozone.”

KKR formed its first distressed investment team in 2010, led by Weinstein and Nathaniel Zilkha. The team is housed within KKR Asset Management, KKR’s $16 billion credit platform created in 2004 that is led by Bill Sonneborn and Fred Goltz.