KKK & Company is a $200 billion private equity fund. Henry Kravis and George Roberts are the co-founders of the company, who popularized the leveraged buyout of companies in the 1970s and 80s and became the face of Wall Street’s conquest of corporate America (ref Forbes). For years they’ve been known as “the barbarians,” from the bestselling book that chronicled their $25 billion takeover of RJR Nabisco. Today, 30 years after their exploits began, they are extolling a very different approach. Kravis says, “You can’t buy a company and strip out all the costs. It’s not a sustainable business model. If you’re not putting money back in to come up with new products, new plants and new ways of doing business in new geographics, you’ll die eventually.” Roberts continues, “The businesses that have owners that care about them and management that cares about them are going to outperform.” What a change in attitude – fortunately, in the right direction! KKK popularized the leveraged buyout in the 1970s and 80s. Now, 30 years later, they are embracing a fundamental shift. The reason – ? No longer a “clubby partnership,” KKK is now a publicly-traded corporation, with half of its investments and dealmakers living abroad. Kravis and Roberts are now responsible for 114 companies around the globe that generate $123 billion in annual sales and employ 753,000 people. KKK and competitors like Blackstone and Apollo have now entered the era of public equity and are trying to put on their white hats. KKK’s first buyout funds, 1976-1986, returned from 4-17 times the money; since 2002, no KKK buyout fund has returned more than 2.4 times the money. The financial and operational maneuvers that buyout firms pioneered are now basic blocking and tackling for corporate CFOs. Roberts says of the leveraged buyout game, “There’s no art in it anymore. What’s relevant is what you’re going to do with the business.” What a difference in perspective 30 years makes – but a welcome change, indeed.
Gardner Denver, founded in 1859, is a manufacturer of industrial machinery. In recent years, sales from its oil pumps and compressors have declined as has its share price on the NYSE. In 2012, opportunistic financiers (a hedge fund) demanded change. Management was reshuffled, the sale of the company was arranged, and the buyer made the purchase for $3.9 billion. So, one could assume the usual private equity scenario: shuttered plants, downsized employees and pawned-off assets. But that didn’t happen in this instance. Instead, $325 million was invested to update equipment, make plants safer and improve operations (ref Forbes). New funding allowed the company to expand into the medical and environmental sectors; its 6,400 workforce increased by 5%; revenue rose by 15%; and operating cash flow increased by 54%. When Gardner Denver returned to the NYSE 2 years ago, each employee was given stock equivalent to 40% of annual base pay. And the people who made that happen were: Kravis and Roberts – the new owners. What an excellent change in perspective – we’ll look forward to hedge funds and other equity funds taking up the challenge.