Kohlberg Kravis Roberts co-founder Henry Kravis struck a bullish tone in a speech in Monaco this week, dismissing talk of a “hard landing” in Asia, suggesting that the American consumer was regaining confidence and highlighting the opportunities for the industry in light of the problems in the banking sector.
“There's probably no better time than now to be making investments,” Kravis told the crowd of fund managers and high net worth investors at the event, which was hosted by the Monaco Venture Capital & Private Equity Association. “Interest rates are very low, there's not a lot of capital… So if you have capital, there's a real opportunity. If you pick the right industries and do the right things and and make companies better, I promise you, you'll be pleasantly surprised.”
However, Kravis said, the biggest potential threat to all this is the sovereign debt crisis in Europe. “My concern is: do the governments have the will and the backbone to do what's needed?” All politicians want to be re-elected, he pointed out – so the imminent elections in France and Germany could complicate matters. But he says he is “more optimistic than some… I do not expect a complete collapse – unless there's a run on one of the major banks.” He argues that Europe's biggest problem is that some of the banks are under-capitalised – and in many cases (like Unicredito in Italy) have “missed the window” to raise money cheaply.
He was much more bullish on China, however, following a recent visit. “I went out there thinking they were going to have a hard landing… But I came away after meeting with government people, banking heads and some corporate CEOs thinking: hard landing, soft landing – why any landing at all? I think they'll continue on.” With 37 percent of global growth expected to come from Asia this year, he believes there are huge opportunities as Chinese savers start to become spenders – although this will only happen when the government provides more of a safety net, he said.
As for the US, Kravis said KKR's ownership of First Data, which processes about 50 percent of credit card transactions at point of sale, gave him a great insight into consumer spending. In recent months, he said, people had started using credit cards more, after cutting down at the start of the downturn. But although the number of transactions is up, the amount spent is broadly flat. “That means one of two things: either they're feeling better and are willing to take on more debt. Or they're run out of money.”
Kravis also said that private equity was a very different world these days. “Today the idea of financial engineering is long over.” He recalled the acquisition of Safeway, the US supermarket chain, where KKR put up $120 million of equity for a $5.6 billion deal. “Those days were nice, but they're gone… These days you put up a dollar of equity and borrow maybe a dollar of debt, maybe two”.
But that doesn't mean you can't make great returns, he said, as long as you “pick the right companies, take the long view and remember that our job begins on the day we buy the company. I always say: don't congratulate us on buying a company, any fool can [do that]. Congratulate us when we've done something to make it a better business – that is growing better, has better margins, is better positioned globally – and you're ready to return more money to your investors than they paid in.”
KKR lost sight of this in the late 1990s, he admitted. But the key to its recovery was the introduction of 100-day plans- and the revival of Capstone, its in-house consulting unit, which had been in abeyance since the original team went in-house at Safeway. “Shame on us, we didn't recreate it.” The role of Capstone in working with management teams on 100-day plans and establishing solid metrics (all too rare in business, in Kravis' view) has been critical to KKR's subsequent success, he believes. (Click HERE for PEI's in-depth look at Capstone's work at another KKR investment, Dollar General).
And while KKR has now diversified hugely away from its original remit, Kravis says he's still very positive about private equity. “Private equity will continue to play an important role in the corporate world. The banks are pulling back.. So we're playing a very important role in filling that gap.”