COMPANY
Our Business
KKR’s investment activities are conducted through three key global business segments: Private Equity, Asset Management and Infrastructure. In turn, these business segments are supported by a global platform with sophisticated capabilities in communications, compliance, finance, human resources, information technology, legal, public affairs, risk management and tax.
Global Private Equity Group
Overview
We are a leading global alternative asset manager founded in 1976, with offices in New York, Menlo Park, San Francisco, Houston, Washington, D.C., London, Paris, Hong Kong, Beijing, Tokyo, Mumbai, Dubai and Sydney. We sponsor and manage funds that make investments worldwide in private equity and debt transactions on behalf of third-party investors and our firm.
Our private equity business involves sponsoring and managing a group of investment funds that make primarily control-oriented investments in connection with leveraged buyouts and build-ups and other similar investment opportunities. These funds, which we refer to as our “private equity funds,” currently consist of:
- A number of “traditional private equity funds” that have a finite life and investment period. These funds include the KKR 1996 Fund, the KKR European Fund, the KKR Millennium Fund, the KKR European Fund II, the KKR 2006 Fund, the KKR Asian Fund and the KKR European Fund III
- KKR Private Equity Investors, L.P. (“KPE”) which is a Guernsey limited partnership listed on Euronext Amsterdam which has a perpetual existence and investment period. KPE seeks to create long-term value by participating predominantly in private equity investments identified by KKR. KPE is governed by its general partner’s board of directors, which is required to have a majority of independent directors, and makes its investments as the sole limited partner of another Guernsey limited partnership, KKR PEI Investments, L.P.
Since 1976 and through December 31, 2008, KKR has raised 14 traditional private equity funds with approximately $59.4 billion of capital commitments. The firm has also developed innovative private equity products that have allowed a broader base of investors to participate in KKR transactions and have, in turn, increased the amount of capital available to the firm to commit to transactions.
Although we also sponsor and manage credit strategy funds that may invest a portion of their capital in equity investments, including private equity, we do not consider these funds an integral part of our private equity business.
Private Equity Approach
Our approach to making private equity investments focuses on generating attractive returns by selecting high-quality investments that may be made at attractive prices, applying rigorous standards of due diligence, implementing strategic and operational changes that drive value creation in our portfolio companies, carefully monitoring investments and developing informed exit strategies. We believe that we have achieved a leading position in the private equity industry by applying a disciplined investment approach and by building strong partnerships with highly motivated management teams who put their own capital at risk. When making private equity investments, we seek out companies with strong business franchises, attractive growth prospects, defensible market positions and the ability to generate attractive returns. We do not participate in ‘‘hostile’’ transactions that are not supported by a target company’s board of directors.
When a company is under review as a potential addition to the KKR portfolio, the KKR industry team, KKR Capstone team, KKR’s Senior Advisors, KKR’s dedicated talent management team and a public affairs team conduct a comprehensive due diligence review. This review encompasses not only the financial and operational condition of the potential investment, but also the company’s management team, the industry in which it competes, the cyclical and secular forces acting within the industry, macroeconomic developments likely to impact the company and relevant environmental, social, regulatory and governance issues. All of these components are closely examined and care¬fully evaluated. During the due diligence phase, KKR focuses on a company’s past and present performance, as well as on future growth and development. Before KKR invests in a company, we devote significant time and resources to understanding the opportunities for opera¬tional improvement and risks the company could face, quantifying both, and developing an action plan for real value enhancement and risk mitigation.
Sourcing and Selecting Private Equity Investments
We are frequently introduced to private equity opportunities through our network of contacts in the business and financial communities. We also proactively pursue business development strategies that are designed to generate deals internally based on the depth of our industry knowledge and our reputation as a leading financial sponsor.
To enhance our ability to identify and consummate private equity investments, we have organized our private equity professionals in industry-specific teams that focus on the industry sectors in which we are most active. Industry teams work together across our offices to share ideas and identify potential acquisition candidates. Former operating executives have recently joined our firm to augment our industry teams and lend an additional operating perspective to our investment analyses. We believe that our industry-specific expertise assists us in identifying suitable market opportunities and helps us as we work with company managers to develop value-creating strategies.
Due Diligence and the Investment Decision
In connection with our private equity investments, we conduct a detailed due diligence analysis. The objective of the due diligence process is to identify attractive investment opportunities based on the facts and circumstances surrounding an investment and to prepare a framework that may be used from the date of an acquisition to drive operational achievement and value creation. When conducting due diligence, our investment teams and professional advisors evaluate a number of important business, financial, tax, accounting, environmental and legal issues in order to determine whether an investment is suitable. We spend a significant amount of time meeting with a company’s management and operating personnel, visiting plants and facilities and speaking with customers and suppliers in order to understand the opportunities and risks associated with an investment proposal. Our due diligence practices are monitored by our private equity investment committee and often provide insights for creating value once an investment is made in a portfolio company. Regulatory and stakeholder screening is part and parcel of KKR’s investment due diligence process. Early assess¬ment of ESG issues can help in two ways. First, it can identify risks that can materially impact company value. Second, it can uncover potential areas of improvement that can enhance the success of an investment. Therefore, for new investments and significant transactions involving a portfolio company, KKR’s global public affairs team assesses regulatory and stakeholder issues, including regulatory approvals required to complete the investment, labor and employee relations issues, the company’s envi¬ronmental footprint and performance, the company’s involvement in local communities and future regulatory and legislative trends likely to impact the company and industry, among other factors. KKR’s approach is to identify regulatory and stakeholder issues that may affect potential investments and portfolio companies’ value and to develop effective approaches to managing those issues. In today’s environment, the firm recognizes that this approach to stakeholder issues is a business necessity, but it also understands that it is the right thing to do.
Investment Process
Building a Successful Business
Once an investment is made in a portfolio company, we and our operating consultants closely monitor the company’s performance with the objective of driving growth, enhancing profitability and optimizing long-term value for shareholders. We work closely with management teams to define strategic priorities and develop operating budgets, and we encourage our portfolio companies to invest for future competitiveness, improve operating efficiencies, make strategic acquisitions and incentivize employees by giving them ownership in the business. We establish clear monitoring guidelines to measure a portfolio company’s performance and frequently meet with members of management to review the company's financial and operating results and strategic priorities. Our investment teams and portfolio company managers appear before our portfolio management committee at regular intervals to report on their progress and to discuss potential areas of concern and proposed solutions for addressing issues that may arise.
Around the world, governments are reforming laws and regulations impacting financial services, health care, energy and other areas. Many of these proposed changes may well have a material impact on KKR and the companies in which we invest. We work with portfolio company management teams to assess these trends, ensuring that they under¬stand them, engage where appropriate with policymakers and are positioned to fully comply, and where possible, benefit for doing so. Oversight of these issues is built into the rigorous KKR portfolio management process.
KKR has also identified and engaged best-in-class advisors who can help portfolio companies forecast trends, resolve stakeholder disputes and, when relevant, engage with the public or key stakeholders. For example, former Congressman Richard Gephardt is an advisor to KKR and several KKR portfolio companies on labor issues. Through many years in the U.S. Congress, Congressman Gephardt developed close working relationships with many leaders and participants in the U.S. labor movement. He is convinced that collaborative engagement and creative “win-win” approaches are the right approach to labor-management relations and assists KKR portfolio companies to develop and implement these efforts. As with KKR’s approach to new investments, the goal is to provide portfolio companies with a competitive advantage and to help them avoid material harm.
In addition, KKR became a signatory of the United Nations Principles for Responsible Investment (UN PRI) in 2008. While the firm has long considered environmen¬tal, social and governance issues as part of its investments, becoming a signatory to the UN PRI is part of a more conscious, systematic and comprehensive approach to incorporate these issues into all aspects of KKR’s invest¬ment process going forward.
Exiting Investments
Because we approach our private equity investments with the goal of creating value over the long-term rather than realizing short-term gains through rapid dispositions, we generally hold portfolio companies for a number of years. When we decide to exit an investment, our objective is to structure the exit in a manner that optimizes returns for stakeholders and minimizes the impact that the exit may have on the portfolio company. We believe that our ability to successfully realize investments is attributable in part to the strength and discipline of our portfolio management committee and our longstanding relationships with corporate buyers and members of the investment banking and investing communities.
Case Study
For an example of the benefits that we believe result from our investment approach, please see the case study of our investment in the Willis Group as well as the case studies at the end of our 2008 Annual Review detailing our comprehensive approach to value creation.
Management of Our Private Equity Business in the United Kingdom
We provide management services to our private equity funds pursuant to management agreements. The services we provide include advising the general partners of our private equity funds with respect to origination, investigation, structuring, financing, acquisition, monitoring and disposition of investments. With respect to investments made by our private equity funds in the U.K. and Europe, we are assisted in the provision of management services by our wholly owned subsidiary Kohlberg Kravis Roberts & Co. Limited, an English limited company, which we refer to as our "U.K. subsidiary."
Our U.K. subsidiary is authorized by the Financial Services Authority in the U.K. (“FSA”) pursuant to the Financial Services and Markets Act 2000 (“FSMA”) and has permission to engage in a number of corporate finance activities regulated under the FSMA, including advising and arranging deals in relation to certain types of investments. The following Members of our firm are based in our London office, leading the team of investment professionals that work for our U.K. subsidiary: Johannes P. Huth, Jacques Garaialde, Reinhard Gorenflos, Oliver Haarmann, Dominic P. Murphy, John L. Pfeffer and Brian Carroll. For more detailed biographies of these individuals and our other senior executives in the U.K., please click here.
.Asset Management Group
In December 2008, KKR Asset Management (“KAM”) was launched to consolidate the credit investing business that KKR started in 2004 into a platform that allows for scaled growth, as well as the future addition of new market-based asset classes. KKR believes that the experi¬ence of our people, global platform, collaborative culture, and ability to source, research and diligence different investments create a unique competitive advantage. This advantage allows the firm to capitalize on investment opportunities throughout a company’s capital structure.
In 2004, KKR actively began pursuing corporate credit investments as a separate asset class. The firm now manages across the spectrum of corporate credit invest¬ments – senior secured term loans, high yield, debtor-in-possession financing, mezzanine and structured credit. The assets under management initially consisted of a publicly-traded permanent capital vehicle, KKR Financial Holdings LLC (KFN), launched in July 2004, several private investment funds and structured finance vehicles. During 2008, KKR launched a separately managed account platform to manage the assets of individual investors in a manner tailored to their specific investment objectives, needs and risk objectives. KAM also offers fund structures for investors that do not meet the minimum size require¬ments for separately managed accounts.
As of December 31, 2008, KAM had assets under management of $13.2 billion focused on credit, including $12.4 billion in separately managed accounts, private funds and structured finance vehicles and approximately $800.0 million at KFN. Please find more information about KAM under the Asset Management section of our website.
Global Infrastructure Group
KKR recognizes the increasingly important role that infrastructure plays in the growth of both developed and developing countries. The global investment demand for infrastructure is enormous, with studies estimating a need for more than $3.0 trillion in annual infrastructure projects. We believe that the global infrastructure market provides an opportunity for our unique combination of investment, operational improvement and regulatory and stakeholder management experience and skills. In May 2008, we announced plans to launch a dedicated initia¬tive to invest in infrastructure assets on a global basis.
The launch of the Global Infrastructure Group was a natural outgrowth of KKR’s expertise in managing investments in large, complex and regulated businesses – including Dayton Power & Light, International Transmission Company, Oncor Electric Delivery and Texas Genco – and the firm’s record of driving operational improvements in a wide range of industries. We believe that infrastructure presents an opportunity to generate attractive risk-adjusted returns through both income and capital appreciation and to create significant value for communities around the world.
KKR’s infrastructure investment strategy focuses on utilities, energy and transportation assets, and also includes communications, social infrastructure and infra¬structure-related assets. Investments will be considered globally with a focus on North America and Europe and positions of significant influence in companies will be sought to insure the ability to drive value creation in the investment. Please find more information about our Global Infrastructure Group under the Infrastructure section of our website.
KKR Capital Markets
KKR Capital Markets (“KCM”) works closely with and advises all of KKR’s investment businesses, including private equity, infrastructure and asset management. As an integrated part of KKR, KCM plays an important role in the investment process and is a central provider of current market intelligence to the firm and its portfolio compa¬nies, clients, partners and executives globally. KCM operates under broker dealer licenses in the U.S., U.K., Canada, Japan, Dubai and a number of Western European countries, and has com¬mitted long-term funding that allows it to underwrite transactions for KKR and its portfolio companies.
KCM’s activities complement the firm’s traditional capital raising capabilities and the services provided to KKR by investment banks. Much of its work builds on the natural sourcing abilities of the firm and the intellectual capital and relationships of its people. KCM’s activities have increased significance for our value creation process, as they facilitate the sourcing of capital from both traditional and non-traditional sources and allow KKR professionals to take greater control over capital formation and the manner in which our investments are structured and exited.
Client and Partner Group
KKR’s Client and Partner Group (“CPG”) manages investor relations and capital activities with partners and clients of KKR. Working on a global basis, the executives in CPG serve as the conduit of information between the firm and KKR investors, making the full capabilities of KKR available to address investors’ needs and meet their particular investment goals.
The core of CPG is a group of relationship managers, who become investors' solutions providers across the full range of KKR products, including Private Equity, Asset Management and Infrastructure. Relationship managers maintain close contact with investors, addressing investor inquiries, organizing investor meetings and conferences, responding to investor requests and sourcing new investor relationships.
Supporting the relationship managers are KKR product specialists, who are available to provide specialized consulting on particular KKR products and customized product delivery; a globally integrated support team, with 24-hour data and information availability for investors; and KCM, with the ability to provide direct product delivery capability to investors interested in direct equity and debt investing. CPG team members have access to the entire firm to help address client and partner issues and develop advice and solutions.
KKR’s approach to investor relations is premised on honest, direct, frequent communication with investors and best-in-class solutions and idea-driven distribution capa¬bilities. The firm’s integrated approach, which leverages all KKR executives and resources globally, has allowed the firm to become a trusted advisor to a wide range of organi¬zations. KKR’s partners and clients include public and private pension funds, endowments, charitable organiza¬tions, corporations, family offices, sovereign wealth funds, investment consultants, insurance companies, financial institutions, government entities, mutual funds, fund of funds and hedge funds, among others.
*This report presents information with respect to our fiscal year ended December 31, 2008, and such information has not been updated to reflect facts, events, or figures after that date.
