KKR’s Botched IPO Spotlights Buyout Firms’ Decline: David Pauly

Henry Kravis’s messed-up effort to take KKR & Co. public turns out to be a humorous sideshow compared with the leveraged-buyout mogul’s real problems.

Shares of KKR, run by Kravis and his cousin George Roberts, finally will trade on a U.S. exchange Thursday, three years later than the New York-based firm intended.

KKR hopes that moving its listing to the more liquid New York Stock Exchange from Amsterdam will be followed by a public offering of about $500 million.

Investors may not be willing to buy, considering the outlook for buyout firms. In the first half of 2010, the announced value of LBOs -- which are accomplished by piling debt on acquired companies -- was more than 90 percent lower than in the same period of 2007, according to Bloomberg data.

Credit got tight during the recent recession. Today, huge budget deficits in countries from the U.S. to Greece have stigmatized debt. And America’s Congress is threatening to raise income taxes on partners of buyout firms.

The $43 billion buyout of power producer TXU Corp. in 2007 by KKR and others mimics Kravis’s infamous buyout of RJR Nabisco in the late 1980s. KKR has slashed the value of its investment in TXU, now called Energy Futures Holdings Corp., by 70 percent.

KKR is reducing its reliance on LBOs by investing in the production of natural gas from shale and coal beds. The firm also invests in leveraged loans, junk bonds and distressed assets.

Sour Markets

Arch LBO rival Blackstone Group LP, which managed to go public in 2007 before the global economy tanked, has also branched out from its core business, investing some of its money in real estate and hedge funds, neither of which is prospering.

Real estate can’t get out of the recession. Hedge funds, which manage $1.67 trillion, lost 2.79 percent in the second quarter, according to Hedge Fund Research, and are conserving capital like white-shoe money managers of old.

KKR’s attempt to go public was botched from the beginning. Blackstone beat it to the punch, with its co-founders Stephen Schwarzman and Peter G. Peterson taking in a combined $2.6 billion. KKR could do no better than merge with a publicly held affiliate abroad.

Investing in any new offering by KKR or another LBO firm would be utter speculation.

You Never Know

Revenue and profit of the firms are volatile by nature. Fees extracted from acquired companies are steady but gains and losses from investments aren’t.

KKR, for instance, reports profit of $2.4 billion in 2007 and $6.9 billion in 2009 -- with a loss of $13.1 billion in between.

Share prices follow the same pattern. Blackstone’s stock went from the initial price of $31 to $38 and down to $3.55 by early 2009. It closed yesterday at $10.31. KKR’s Amsterdam stock has bounced between $25.01 and $1.93, closing yesterday at $10.

While KKR promises to pay shareholders quarterly dividends, new owners of the stock would get little else. They have no influence with management. Even if the company succeeds with a $500 million new stock offering, KKR insiders would still own 65 percent of the stock.

Public stockholders don’t even get a vote on the managing partner who controls the firm. The managing partner now is plural, Kravis and Roberts, both of whom are 66.

Kravis may deserve credit for pressing on with his public offering plans. A New York market will give his insiders a better chance to convert their holdings to cash. Another leading LBO firm, Apollo Global Management LLC, is also planning a public offering.

Let any buyer beware.

(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.

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