July 28 (Bloomberg) -- Henry Kravis is taking KKR & Co. public and moving into real estate and stock funds as he tries to catch up with Stephen Schwarzman's Blackstone Group LP, the world's largest private-equity firm.

KKR, co-founded by Kravis in 1976, relied on leveraged buyouts for 95 percent of profit last year, compared with 29 percent for Blackstone. That has left the New York-based firm more vulnerable to the collapse of the LBO market, where announced deals fell more than 70 percent to $163.1 billion this year through July 25 from the same period in 2007, data compiled by Bloomberg show.

Blackstone's initial public offering in June 2007 garnered $684 million for Schwarzman, while Kravis and co-founder George Roberts won't get a cash payout as part of the planned New York listing that KKR disclosed yesterday. Blackstone's IPO gave the firm stock to make acquisitions and attract new executives. It was the first private-equity company to eclipse $100 billion in assets, helped by expansion into real estate and hedge funds.

``It's the continued morphing of private equity into other businesses,'' said Paul Schaye, managing director of New York- based Chestnut Hill Partners, which helps private-equity funds identify investments.

KKR said yesterday it will go public through the bailout of the Amsterdam-listed buyout fund it created in May 2006. New shares used to buy KKR Private Equity Investors LP, which has dropped 44 percent since inception, will trade on the New York Stock Exchange when the deal is completed by yearend.

LBO Pioneers

Kravis had sought to quickly follow Blackstone, filing for an IPO of as much as $1.25 billion on July 3, 2007. The offering stalled as the LBO market collapsed within weeks, triggered by record U.S. subprime mortgage faults that brought credit markets to a standstill.

Kravis and co-founder Roberts, both 64, aren't accustomed to chasing rivals. They started the firm as Kohlberg Kravis Roberts & Co. with their Bear Stearns Cos. colleague Jerome Kohlberg, who left in 1987 to start Kohlberg & Co.

They were LBO pioneers, making their name with deals such as the takeover of RJR Nabisco Inc. in 1989 for $30 billion including debt, which at the time was the biggest buyout to be completed. The firm's investments today range from Alliance Boots, the British chain of drugstores, to HCA Inc., the U.S. hospital operator.

``Whatever it is they want to do with public stock, they really want to get going on,'' said Steven Kaplan, a finance professor at the University of Chicago Graduate School of Business.

Moving Past Buyouts

Schwarzman, 61, has taken the lead by moving faster to expand. In January, Blackstone agreed to buy GSO Capital Partners LP, a hedge-fund manager that focuses on distressed assets, in a cash and stock deal for as much as $930 million. Blackstone's hedge-fund business oversees $56.6 billion, its biggest unit by assets. It has $26.3 billion in real estate funds.

Today, the firm said it will buy a minority interest in Bayview Asset Management LP, which manages a $2 billion fund that buys mortgage loans and mortgage-backed securities.

Blackstone, founded by Schwarzman and Peter G. Peterson in 1985, has assets under management of $113.5 billion, while KKR has $60.8 billion. Washington-based Carlyle Group, which has expanded overseas into markets including the Middle East and Latin America, has about $81 billion.

KKR Expansion

Schwarzman and Kravis have collaborated on LBOs including Nielsen Co. and Sungard Data Systems Inc. While they speak regularly, Kravis wasn't among the more than 300 guests who attended the 60th birthday party Schwarzman threw for himself in February 2007.

In their main LBO businesses, KKR still is on top when it comes to profits for investors. Blackstone said when it went public its private-equity funds had returned an average of 23 percent to investors, net of fees. KKR said today in an investor presentation it had annual returns of 26 percent.

KKR is also pursuing its own expansion. The firm has created a capital-markets business to help finance its own deals, a function Blackstone hasn't developed. KKR earlier this month said it would hire William Sonneborn from TCW Group Inc. to head its asset-management business.

``We want to expand our unique business model,'' co-founder Roberts said on a conference call today with investors, citing initiatives to invest in real estate, public equities and infrastructure projects.

KKR may have learned lessons from Blackstone's public- market adventures. Blackstone's IPO was at the peak of the LBO boom, and the shares have lost 45 percent of their value since. KKR executives aren't selling any shares and most of their holdings will vest over six to eight years, KKR said. Kravis said on the call that every employee of KKR will own stock in the firm.

``We're not cashing out or selling any equity as part of this transaction,'' Kravis said. ``This is different from any other alternative-asset IPOs. We're long-term investors.''

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net;

Last Updated: July 28, 2008 14:42 EDT