If you thought that the private equity craze had peaked with the recent IPO of Blackstone Group (NYSE:BX), think again, Fool.
Never one to be outdone, legendary hardball investor Henry Kravis and his partners have filed to take their private equity (PE) shop, KKR, to the public markets. The firm, one of the elders of private equity, has been busy this year working out several blockbuster acquisitions, including deals for TXU (NYSE:TXU) and First Data (NYSE:FDC).
The leveraged buyout business that Kravis and his partners helped to shape has seen several major market cycles over the years, including the current hot peak. Over the past several years, investors bitten by the tech-burst bug and unusually low interest rates dove headfirst into private equity in search of lower overall portfolio volatility and outsized returns. KKR, one of the biggest kids in the private-equity sandbox, benefited greatly from the rising popularity of the asset class, raising assets under management from $18.3 billion in 2002 to a current total of $53.4 billion.
So is the KKR IPO just an attempt to cash out at the peak in the market and dump shares on the unsuspecting public? Not necessarily. KKR's partners aren't selling their own shares in the IPO. Instead, they want to plow the capital back into the firm's operations, bulking up its footprint in European and Asian markets.
"KKR wants to massively build out the firm to do all portions of a deal," said Rick Rickertsen, managing partner at Pine Creek Partners and the author of Buyout, in a Fool interview. "It does send a message that KKR really is looking to build the next Goldman Sachs (NYSE:GS) or Morgan Stanley (NYSE:MS), not just a private equity firm per se."
It's too soon to get a handle on the investment potential for the offering. However, KKR will likely debut at a discount to Blackstone's current market cap of $34 billion. KKR posted net income of $1.1 billion in 2006, while Blackstone posted a cool $2.3 billion.
Unlike most firms Fools deal with, KKR will not be providing earnings guidance. Private equity firms invest large chunks into essentially illiquid securities, hoping to eventually get higher returns from large dividends, M&A, and public offerings. Thanks to the inherently volatile nature of KKR's business model, any attempts at providing earnings guidance would be a total crapshoot.
Another sticking point Fools should consider before getting too greedy on this deal: taxation. The Senate recently introduced legislation that could drastically alter the tax structure of the traditional private equity model. This legislation bears close monitoring by those who are seriously considering investing their dollars with Henry Kravis.
Despite all this, private equity is still a hot category, and the KKR deal will likely attract lots of interested investors. As seen with the Blackstone and Fortress Investment Group (NYSE:FIG) IPOs, however the returns can be volatile. Investors should definitely do their homework before jumping in with the sharpest of sharks.
For further Foolishness:
- Blackstone Almighty
- The Fortress IPO: Opening the Drawbridge to Hedge Funds
- It's Good to Be Blackstone
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked No. 1,656 out of more than 50,000 investors in Motley Fool CAPS. The Motley Fool has a disclosure policy.
