Barbarians on the Sofa

Has Henry Kravis gone soft?

Henry Kravis 

Tuesday afternoon, KKR, the original private equity firm, followed the example of its rival, the Blackstone Group, and filed for an initial public offering. If the deal goes through, it would make KKR founders Henry Kravis and George Roberts even more preposterously rich than they already are and be the latest in a long string of triumphs for Kravis. But the IPO would also reinforce the change in the 63-year-old Kravis’ image. Once he was the world’s greatest financier, the original leveraged-buyout artist; now he’s a me-too artist.

Kohlberg, Kravis, Roberts & Co. essentially invented the private equity industry in the late 1970s. Using some cash and a lot of borrowed money, KKR snapped up moribund industrial firms, retailers, and consumer-products companies, aligned the interests of top executives and owners, whipped the firms into shape, and sold them off—reaping huge profits for KKR’s happy few partners and their investors, many of which were public-employee pension funds. As the go-go 1980s hurtled along, the deals got big—KKR’s first billion-dollar deal came in 1984—and then unfathomably huge. In 1989, KKR completed the astonishing $31.4 billion RJR-Nabisco deal, which remains the iconic financial transaction of the second half of the 20th century.

Kravis and his crew of cuff-linked swashbucklers struck fear into the hearts of managers. The threat of being bought out encouraged publicly held companies to restructure themselves pre-emptively—cutting jobs and riding herd on costs—lest they fall prey. As a result, KKR’s influence spread far beyond the companies it acquired and managed. KKR was so successful and disruptive that Harvard Business School professor Michael Jensen concluded in 1989that publicly held corporations could soon be an endangered species. The firm’s activities spawned a slew of best-selling books: Merchants of Debt,   The Money Machine, and of course Barbarians at the Gate, which was turned into a 1993 movie. (Jonathan Pryce played Kravis, although I think Chris Cooper might have made a better match.) KKR was private equity, and it reaped all the financial and social rewards that accrue to a savvy first mover.

But there was nothing proprietary about the idea of using debt to buy public companies. And KKR’s gaudy success spawned a host of imitators in the 1980s and 1990s, including the Carlyle Group and Blackstone. KKR had to spend a portion of the early 1990s licking its wounds from the near blowup of RJR-Nabisco and was generally conservative about innovation, which left the door open to aggressive upstarts. In the early 1990s, firms like the Carlyle Group, Blackstone, and Apollo set up real estate funds as KKR avoided what would become a massive, highly profitable sector. Nor was KKR a major participant in the dot-com and venture-capital-fueled market of the late 1990s. (In December 1999, KKR committed to invest $100 million in Internet provider CAIS, which filed for bankruptcy in the fall of 2001.)

In this decade, with interest rates low and funding plentiful, private equity has expanded rapidly as both a financial and cultural force. While KKR has been prospering and growing, it is now just one of a dozen or so massive players, several of which now enjoy much-higher public profiles. These days, emerging markets are where the action is. KKR has completed transactions in India and Singapore, and this spring sealed its first small deal in China. By contrast, Blackstone sold a chunk of itself to the Chinese government, and politically wired Carlyle has several funds dedicated to Asia and offices in mainland China. Its portfolio includes several Chinese companies. Cerberus (where ex-Treasury Secretary John Snow works) has assumed the industrial statesman role KKR held in the 1980s by acquiring Chrysler and leading the charge to reform labor relations in the auto industry.

KKR is still doing deals—and big ones at that. But it no longer defines the industry the way it did in the 1980s—and the way Blackstone just did with its IPO. KKR, which made its fortune as a lone wolf, has been frequently participating in so-called “club deals,” in which private equity firms band together to acquire companies, and thus reduce risk—U.S. Food Service and hospital chain HCA are two examples. KKR’s proposed takeover of Texas utility TXU earlier this year broke the record for the world’s largest deal, with an impressive $46.7 billion price tag. But KKR is undertaking this deal in conjunction with Texas Pacific. And according to the Bureau of Labor Statistics’ handy inflation indicator, it’s still much smaller in real terms than the RJR-Nabisco deal was. (And even that record didn’t last. Last week’s proposed buyout of Canadian telephone company BCE, which is being led by the pension funds of Canadian civil servants and two U.S. private equity firms, is bigger.)

There’s nothing wrong with being a second mover in an incredibly profitable industry like private equity. Virtually every businessperson in America would gladly swap places with Kravis. But the books written about the events that define this financial era won’t be about Henry Kravis and KKR. They’ll be about guys with even bigger appetites for risk, such as Steve Schwarzman and hedge-fund managers. Get ready for Vulgarians at the Gate.