Kohlberg Kravis Roberts yesterday announced plans, first mooted a year ago, to list the firm. Its positive reception underlined the advantage of being forced to shelve its original listing document to spend 12 months watching quoted private equity’s fortunes – and indeed the dismal progress of its own Euronext-listed fund – from the sidelines.
If you missed the news yesterday, here’s a recap. KKR is planning a New York listing, while nimbly side-stepping the choppy equity markets and using a merger with its already quoted vehicle KKR Private Equity Investors (KPE). It is not raising additional finance and its equity owners are not selling out.
From the moment KKR told the world it was dusting down its year-old plans to go public, it focused on promoting the benefits of the deal to shareholders in KPE, which was priced at a dismal €10.50 a unit last Friday – 50 percent below the issue price after two years.
Coming to the story ignorant of KKR’s long-term plan to go public, you might momentarily have thought the move was entirely for the benefit of those blighted KPE investors. And in a way it was. So keen is KKR to appease the unit holders that it has given them a vote on the merger, even though KPE shares are non-voting.
The deal should end the “widespread frustration” within KKR at the fund’s performance. Not to mention any pain the unit holders feel. KKR’s post-merger listing on the New York Stock Exchange should offer liquidity sorely lacking in the relative backwaters Euronext Amsterdam. It will also come with insurance: if the value of the KPE units does not hit KKR’s evaluation of net asset value within three years, then the partners in KKR will make good the shortfall out of their own pockets.
Bending over backwards is the phrase that springs to mind. And the performance of the fund’s unit price reflected that: up 40 percent on Friday’s price. KKR are looking like the good guys before anyone even remembers they are listing the firm.
Therein lies the second big win, and this is the one for keeps. The firm, which in its 32-year history has made billions from taking businesses private, has finally followed its rival The Blackstone Group on to the public stage.
But unlike Blackstone, they are not taking any money off the table. They are coming out as the market hits rock-bottom, demonstrating they are all about long-term value creation. Investors in KKR the firm will be trading up as the buyout market recovers. And by doubling down on the firm’s investments through the KPE acquisition they can claim to be tightening the alignment of interests between the firm and its investors.
The only question is why KKR is just offering a deferred price-match to NAV and not a hefty premium to take KPE out? Until a better offer comes along the question is perhaps rhetoric, but the answer lies somewhere closer to home: for all this deal is about crystallising value for KPE shareholders, it also – finally – creates a mechanism for the firm’s equity holders, especially co-founders Henry Kravis and George Roberts, to realise their own worth in the partnership.
The firm was at pains to stress the 180 day lock-ups and a senior executive at the firm was adamant the leadership of the partnership was not changing any day soon. Nonetheless a firm of KKR’s size needs to plan for the future, and with a quoted stock they now have a currency to pay for it.