I'm sorry to disappoint you -- that isn't the title of a new reality show in which you could end up becoming a member (as they are known) of the legendary buyout firm. There are no partnership points in play here; however, you could soon have the opportunity to become a KKR shareholder.
Things are going to work as follows: KKR will merge with KKR Private Equity (KPE), a fund that owns interests in KKR's investments and is traded in Amsterdam. KKR Private Equity shareholders will end up owning 21% of the merged entity, which will be listed on the New York Stock Exchange before the end of the year.
In a nod to its "helpers", Kravis and Co. are wisely spreading the fee wealth around, with no fewer than four advisors: Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) on behalf of KKR, Citigroup (NYSE:C) on behalf of KPE, and Lazard (NYSE:LAZ), independent directors for KPE.
Is Henry Kravis getting senile?
Why go public at a time when the shares of competitors Blackstone Group (NYSE:BX) and Fortress Investment Group (NYSE:FIG) have been battered? Not to mention that buyout activity has essentially ground to a halt for lack of financing.
Actually, the plan looks pretty clever, enabling KKR to kill two birds with one stock offering: First, the firm takes a decisive step toward ensuring the firm's continuity; second, it addresses the issue of KPE's despondent share price, something which had apparently been irking KKR's top brass.
KKR Private Equity closed on Friday at €10.50 ($16.46) – a 55% decline with respect to the closing price on its first day of trading two years ago, and a 26% discount to the fund's net asset value. Perhaps KKR's principals view this as an extreme buying opportunity.
More importantly, though, KKR wants to cement the firm's future by sharing equity below its most senior ranks. The top partners aren't cashing out as there is no cash inflow, only an exchange of shares. Furthermore, they won't be able to sell their shares for a period of six to eight years. This differentiates KKR's approach from the June 2007 initial public offering of archrival Blackstone.
Governance looks good, but what about other risks?
From these early indications, I'm impressed by Kravis and Roberts' choices, which look shareholder-friendly and forward-thinking -- qualities that aren't in oversupply on Wall Street. Even if governance standards are high, however, owning KKR shares could presents other risks.
The firm's Achilles' heel (or its strength, depending on how you look at it) is its dependency on private equity. Both of its publicly traded competitors manage hedge and real-estate funds in addition to doing leveraged buyouts.
Although KKR has begun to address this, it could come back to haunt the firm and its shareholders sooner rather than later. KKR was one of the most aggressive acquirers in the private equity boom years of 2006 and 2007. Spurred on by absurdly cheap financing, they did some of the largest deals, including the acquisitions of transaction processor First Data and Texas utility TXU.
As the excesses of the credit bubble work themselves out, investors should consider whether there are any time bombs among KKR's portfolio companies – deals that were done at too high a price with too much debt that could yet come undone.
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