News & Analysis

Kravis, Black tout non-LBO strategies

KKR co-founder Henry Kravis has said firms in today’s tough financial climate have to ‘think outside the box’ and adapt strategies to capitalise on current market opportunities or risk being ‘left out’. He was echoed by Apollo chief Leon Black, who likened big take-privates to the extinct dodo bird.

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Private equity titans of industry traded sound bytes at a Berlin conference this week, emphasising that the private equity model must change with the times but is by no means dead.

“Ours is not just a business model, it’s a discipline,” Kohlberg Kravis Roberts co-founder Henry Kravis said, according to media reports. “All of us will have to adapt. We have to change the way we do business. If we don’t, we simply will be left out.”

We have to change the way we do business.

Henry Kravis

Similar to the message he gave at the World Economic Forum in Davos last week, Kravis said private equity firms can take advantage of current market distress by investing in other areas such as infrastructure, corporate lending, mezzanine and distressed debt. He also highlighted private equity’s potential to recapitalise struggling banks alongside the US government, a Shinsei Bank-like opportunity set that was also being touted in New York last week by J Christopher Flowers.

 “You have to think creatively, you have to think out of the box about our business and recalibrate it,” Kravis said. “You have to accept the fact transactions going forward will be smaller and there will be far less leverage.”

Leon Black, co-founder of Apollo Global Management, was less forgiving in his analysis. “The big public-to-privates are gone in the way of the dodo,” he said, noting Apollo will use at least half of its recently closed $14.8 billion fund to purchase distressed credit products like senior loans.

The big public-to-privates are gone in the way of the dodo.

Leon Black

Black made similar remarks at a conference in New York last week, also noting that he and his partners are spending roughly 60 percent of their time “playing defense” and tending to the current portfolio.

Portfolio management factored heavily into Kravis’ speech in Berlin, as well. The New York Times reported that Kravis began his remarks by saying there are four crucial questions for private equity firms today:

  1. Can we continue to manage our portfolios effectively?
  2. Can we raise capital and do deals in this environment?
  3. Does our business model still apply?
  4. Can we earn the trust and support of the public, our shareholders and governments?

The public perception issue was also raised at a separate conference in New York last week by KKR advisor George Fisher. The industry has an image crisis and needs to do a better job of explaining the benefits it brings to the business world, Fisher said.

“People have at best a neutral and at worst a negative impression of what we do,” he said. “We have a massive PR problem.”