You Only List Twice

KKR tries to float again.
Economist StaffAugust 1, 2008

THE original barbarians at the gate still want admission to polite society. Kohlberg Kravis Roberts (KKR), the buy-out firm which notoriously laid siege to RJR Nabisco in 1988, first tried to list on the stockmarket last year. That plan was scuppered by the credit crunch. Conditions remain dire: debt markets are closed, making big buy-outs almost impossible, and shares in Blackstone, a rival, have flopped since its perfectly timed flotation last year. Despite this, Henry Kravis and his cousin and co-founder, George Roberts, are determined to try again.

Why remains something of a mystery. After all, KKR’s core business is predicated on the idea that being quoted is a disadvantage. KKR does not need capital, generates enough cash to pay junior employees handsomely and is famous enough not to need the extra profile a listing can bring.

One theory is that the two-stage flotation process will solve a headache: KKR Private Equity Investors (KPE), a Dutch vehicle which invests mainly in KKR buy-outs. KPE’s shares have collapsed, and until the announcement of KKR’s plans on July 27th, traded at less than half of their net asset value. Under the plan, KKR will first merge with KPE, giving its investors 21% of the combined entity and contingent rights that give some protection if the shares trade below net asset value after three years. The new company will then list in New York.

KKR doubtless believes that KPE’s assets are cheap but simply restructuring their ownership is unlikely to convince investors. They are worried that the boom-era deals will lose money and that the buy-out industry, which is now far more crowded than in the past, will suffer an extended period of poor returns. The combined company will still be highly exposed to these factors. Deals struck at the peak of the market comprise about a quarter of KKR’s private-equity assets under management, while the company’s efforts to diversify have yet to make much of an impact. After the deal was announced, KPE’s share price implied a market capitalisation of $10 billion-13 billion for the combined company, depending on the treatment of the contingent rights. This is far below KKR’s indicative range of $16 billion-19 billion.

Sceptics argue that there are two other reasons for the float, both of which should raise red flags. First, KKR, desperate to diversify, wants a currency with which to buy other firms (in a delicious twist the firm hopes to expand into public equities). Second, 32 years after the firm’s founding, existing shareholders want to sell out. There is probably a strong element of truth to these claims. KKR says its main shareholders are unlikely to sell, but they are subject only to a 180-day lock-up period.

KKR could make a case that a listing will help turn an entrepreneurial partnership into a business built to last. But to do so convincingly it will have to start behaving like a high-quality public company. That means providing meaningful disclosure about its portfolio, including its debt levels. A prospectus has yet to be issued, but on a conference call with KPE investors Mr Kravis and Mr Roberts appeared more comfortable promoting their firm than engaging in serious discussion about it.

Looking to the long term also means preparing for the exit of the two founders, who are both 64. An independent board has been promised, but they will still control the firm. KKR has thrived as a secretive autocracy. To be a successful public company these are precisely the qualities it will have to abandon.