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What’s up, everyone? Today, we’re talking about the pioneers of the LBO: KKR, and what they did become a success.
Listen to the full episode about KKR on the “Funds that Won” podcast by Lincoln Archibald.
The Humble Beginnings of KKR
KKR (Kohlberg Kravis Roberts) started with three former Bear Stearns employees—Jerome Kohlberg, Henry Kravis, and George Roberts—and a modest $120,000. In 1976, they launched their private equity fund, aiming to revolutionize the investment world.
Their first significant achievement was raising $31 million, which they quickly deployed into private equity strategies. But what truly set them apart was their pioneering use of the Leverage Buyout (LBO) strategy, which has since become a staple in private equity.
Revolutionizing Private Equity with LBOs
One year after its inception, KKR made headlines by acquiring a $26 billion company with only $1.7 million down—just 6% of the purchase price! While using debt to facilitate transactions wasn’t new, KKR’s aggressive use of leverage was groundbreaking.
LBOs allow investors to use borrowed money to acquire a company, putting down only a small amount of equity. This strategy can significantly amplify returns, but it also introduces more risk due to the debt obligations.
Landmark Deals and Successes
KKR’s LBO strategy led to several high-profile deals. Their investment in Safeway yielded a staggering 56x equity multiple. However, their most famous (and controversial) deal was the 1988 acquisition of RJR Nabisco.
RJR Nabisco, a major player in the tobacco and food industries, had plateaued. When CEO Ross Johnson’s lavish spending and failed product launches attracted criticism, KKR stepped in. The acquisition sparked a bidding war, with KKR ultimately winning the deal. Unfortunately, the company’s post-LBO decline meant the ROI for investors wasn’t as strong as expected. This deal has become infamous for its "corporate raider" mentality, where a firm buys, sells, and potentially dismantles a company.
Expanding Beyond LBOs: KKR’s Move into Private Credit
It wasn’t until 2004, nearly 30 years after mastering the LBO, that KKR expanded into another asset class: private credit. As Lincoln Archibald noted in his podcast, "Establish yourself as an expert in your niche before you try to move on to different strategies." KKR’s long-term focus on LBOs allowed them to build a solid foundation before diversifying their portfolio.
KKR Goes Public: The IPO and Its Impact
In 2010, KKR took another bold step by going public. But why would a private equity firm choose to IPO? Going public offers greater exposure to potential investors and introduces employee incentives like stock plans, which can be valuable for attracting and retaining top talent.
Conclusion: The Legacy of KKR in Private Equity
KKR’s pioneering use of the LBO strategy transformed private equity, and their methodical approach to growth has made them one of the most successful firms in the industry. By focusing on their niche for decades before expanding, KKR set a powerful example for other firms.
Hopefully, you learned something new about the pioneers of the LBO: KKR! For a deeper dive, listen to the full “Funds that Won” podcast episode here.
If you’re interested in starting your own private equity fund, visit Fund Launch!
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
