Barbarians at the gate! Kohlberg Kravis Roberts & Co. became an icon of vulture capitalism in the 1980s after its $25 billion leveraged buyout of RJR. So when the U.S. firm dispatched partner Edward A. Gilhuly to London to set up a full-time European operation five years ago, it looked as if the Old World's tranquil private-equity business would soon get some rock-'em-sock-'em dealmaking.
Not so fast. By the end of 1999, a year after his arrival, Gilhuly had done only two deals, totaling less than $900 million -- a ripple in the $30 billion European private-equity ocean that year. Instead of chasing deals, he concentrated on recruiting European experts who could navigate the political, regulatory, and financial complications of cross-border transactions. "Doing business in Europe is more complex" than in the U.S., Gilhuly says. "But if you can do it well, not many people will be able to compete with you."
Now, Gilhuly, 44, is proving his thesis with a vengeance. KKR has become one of Europe's hottest shops, with more than $15 billion in deals in the past two years, including the region's biggest-ever private-equity deal, the $5.9 billion buyout of French electric equipment company Legrand in 2002. Gilhuly and his team have zeroed in on just a few industries -- financial services, retailing, and chemicals -- where they look for companies in need of a tune-up.
Of course, what really matters to private-equity investors is making a profitable exit. While most of KKR's European investments are too recent to assess, early results look encouraging. Wincor Nixdorf International, German manufacturer of automated teller machines and cash registers that was one of Gilhuly's first acquisitions, in 1999, has upped profits more than 50% since then and was taken public on May 20. KKR has reaped a threefold return on its initial $209 million investment. Worldwide, KKR says it holds investments an average of five to seven years, with returns averaging more than 20% a year, and expects to match that record in Europe.
An old KKR hand, Gilhuly joined the firm straight out of Stanford Business School in 1986 and logged 12 years in San Francisco and Silicon Valley before heading to London. But Europe presented new challenges. Junk bonds, a favorite KKR financing tool, are not easy to sell in Europe. And buyout firms, especially U.S. heavyweights such as KKR, often meet political resistance when they bid for high-profile European businesses. That's why KKR has often teamed up with local investors, as on the Legrand deal, where it paired with a leading French group, Wendel Investissement.
Gilhuly's job isn't getting any easier. Rival U.S. buyout firms all have substantial European operations now. And with the five-year mark approaching on several early investments, he'll be under pressure to make successful exits soon. That doesn't leave much time for his hobbies -- tennis, skiing, and collecting contemporary art. Hey, even barbarians need a break sometimes.