The LBO Meets Main Street

Private-equity funds, once the exclusive domain of large institutions and wealthy individuals, are going mainstream. Getting into a leveraged buyout isn't quite as simple as purchasing a CD at the local bank -- but it's getting there. An increasing number of private equity firms are issuing stock in their funds on major exchanges, making it possible for individual investors to purchase shares on the open market.

The latest evidence of the trend emerged on Tuesday, amid word that private-equity giant Kohlberg Kravis Roberts plans to raise as much as $5 billion in an initial public offering for one of its investment funds. The size of the offering came as a surprise, since it was more than three times as large as the $1.5 billion KKR had previously indicated it was planning to raise. KKR isn't known for doing things on a small scale, of course. Its record-breaking buyout of RJR Nabisco in the late '80s is still the largest LBO. It cost $25 billion, plus more than $6 billion in debt.

The firm's new investment fund, to be known as KKR Private Equity Investors, will trade on the Euronext exchange, based in Amsterdam. It's expected to begin trading later this month. Financial firms are tapping overseas exchanges for some of their investment funds, in part because disclosure requirements often aren't as strict as they are in the U. S. The investment banks handling the deal are Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS). Officials for New York-based KKR declined to comment.


 Private-equity firms have tapped the public markets before. KKR itself has launched KKR Financial (KFN), an NYSE-listed real estate investment trust, or REIT (see BW Online, 3/1/06, "KKR Hedges Its Bets"). Other private equity players such as Apollo (AINV) are publicly traded, too. Apollo has a market cap of about $1.18 billion. While that isn't in league with the public fund that KKR has in mind, it has been an active player in the business, with investments in more than 50 companies since it went public in 2004.

The sharp increase in the amount of money KKR plans to raise underscores that, increasingly, private-equity firms and public investors need each other. For buyout firms, the easy targets of old -- small to mid-size businesses in need of a turnaround -- have been picked off. So the firms are looking at larger and larger deals, especially as top-notch executives have grown weary of the scrutiny they face at public companies (see BW, 2/27/06, "Going Private"). In the most recent development, on May 1 a group of investors led by Aramark's chairman and chief executive made an offer to take the food service provider private for $5.8 billion.

To compete for these larger deals, private equity investors need more and more cash. "They're casting the net for more dollars," says analyst Richard Peterson, who covers IPOs and M&A for Thomson Financial.


  At the same time, investors are loaded with cash and skittish about conventional investments. Private-equity firms can still be sources of huge returns. Blackstone made a killing with the buyout, turnaround, and IPO of chemical company Celanse (CE) in 2004 and early 2005 (see BW, 3/14/05, "Don't Blink -- You'll Miss the IPO").

Convergence is a central theme in technology, as the computer and media worlds meld on the Internet. Now, investors are dismantling boundaries too, as the world of finance enters its own period of convergence. Private equity players and hedge funds are entering each others businesses. And both of them are opening their doors to public investors.

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