I'm currently reading Merchants of Debt, a business biography detailing private equity firm Kohlberg Kravis Roberts' meteoric rise to the top of the leveraged buyout (LBO) universe. As I read, I can't help noticing that KKR and Warren Buffett, chairman of ultra-successful Berkshire Hathaway
Gadzooks! Did I just compare the ultra-cautious Buffett to KKR, a certified Barbarian at the Gate? Before you throw your copy of Security Analysis at me, let me explain.
I scratch my own back
Both Buffett and KKR hire great managers, then get the heck out of the way. As a result, managers are free to run their own shows. This could be a recipe for disaster under certain circumstances, but Buffett and KKR mitigate this by working with great managers, and making sure all parties' interests are aligned.
Buffett has partnered with many hall-of-fame managers, including legends like Harvey Golub of American Express
In addition to hiring well, Buffett and KKR both know how to share the wealth. KKR managers almost always put up their own money to invest in the equity of the acquisition company, on the same terms as KKR. Thus, their fates are entwined. If the company does well, those managers could make five or 10 times their money -- a huge, multimillion-dollar incentive. Managers whose financial well-being is on the line rarely have trouble making the tough decisions necessary to make money.
Buyer of first choice
Many company founders view Buffett as the buyer of first choice, because they know he'll treat them and their employees right. I was surprised to learn that many executives view KKR similarly.
Like Berkshire, KKR has a strong brand name. As the premier LBO firm, many company executives are happy to be bought out by the most prestigious private equity company, rather than a two-bit corporate raider or midlevel LBO shop.
In the rough-and-tumble 1980s, many CEOs viewed KKR as a "white knight," because KKR typically left management teams intact and let them get in on the riches. When KKR made a pitch to company executives to do an LBO, it could refer to other managers who were happy to be running their own shows, and grateful that KKR had made them rich. In fact, this was one of the key reasons KKR won the RJR Nabisco bidding war. In addition, being the buyer of first choice means that KKR and Buffett can often pay more reasonable acquisition multiples.
Competitive buying advantage
In addition to their sterling reputations as buyers, both Berkshire and KKR have acquisition war chests that few can rival. Throughout its existence, KKR has purposely pushed the bar on raising greater amounts of funds, and undertaking ever-larger LBOs. The larger the LBO, the fewer competitors capable of making competing bids.
For example, KKR's current pending deals include the $29 billion buyout of First Data
The bottom line
Although they operate on opposite ends of the capital-structure spectrum, I found the similarities between KKR and Berkshire intriguing. Like both firms, Fools should actively seek to invest in companies led by managers with great track records. They should also make sure those managers have hefty incentives, as fellow owners, to create wealth for all shareholders.
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool's disclosure policy avoids barbaric behavior.