KKR’s Kravis: Don’t Worry, We’re Experienced

In May 2006, KKR raised $5 billion in an initial public offering in Amsterdam, more than three times what it expected. The successful offering gave the New York-based firm a permanent base of money to invest in deals. Now, two years later, it give us a lens into just how difficult the buyout business has suddenly become.

KKR Private Equity Investors, the Amsterdam-listed public company that invests in KKR funds and deals, announced feeble results this morning. It reduced the value of seven of its holdings, including European chipmaker NXP by 25%, German broadcaster ProSieben by 27%, and struggling German car-repair company ATU by more than 80%. Its rate of return for 2007 was negative 0.1%. In the fourth quarter, KKR fund’s net asset value fell by about $290 million. KPE, as it’s known, is now trading at a roughly 38% discount to its net asset value.

But if there’s one thing that Henry Kravis wants you to take away from the firm’s weak earnings results out of its publicly traded European investment vehicle, it is this: “KKR has been in business for 32 years across many economic cycles and market disruptions and we have steadily invested capital and generated strong returns for our investors throughout all periods.”

At least a half-dozen times throughout his 20-minute prepared speech on this morning’s call, Kravis mentioned that the firm has been in business for 32 years and performed well through all economic cycles. Not a group that normally trumpets its returns, Kravis reminded investors that the firm has generated 20% net returns over those 32 years and all 14 of its private-equity funds have handily outperformed the stock market. (KKR Trivia: Kravis pointed out that the only year failed to generate positive returns was in 1989, when it made its storied purchase of RJR Nabisco.)

Kravis took investors through a very clear explanation of the credit crunch (listen here) and how how in these illiquid times banks are hesitant to make any large loans to new transactions. While hedge funds and mutual funds have expressed some interest in financing new private-equity transactions. He said that “given the current supply demand imbalance and the market will take some months to stabilize.”

So will KKR be able to finance transactions in this environment? “The answer is in some situations yes and in some situations is no,” said Kravis. “While our track record and ls relationship with lenders gives us unique access to capital in the current market the capital is not nearly as plentiful as it was a year ago and the cost is much higher.”

Kravis highlighted Oct. 2007 as an example of a month in which it was able to put money to work. He boasted that in that month the firm announced $6.9 billion in transactions in total enterprise value of new private equity activity. The firm paid $1.4 billion deal for Turkish shipping firm UN Ro-Ro Isletmeleri financed with local Turkey and Greek banks; $2.3 billion for Northgate, in which it directly placed themselves a mezzanine portion of the capital structure with a group of private investors; and a $1.25 billion note it purchased in Legg Mason, a highly structured minority investment. “It’s possible to get deals done in this environment; it just takes more work and a lot of creativity,” said Kravis.

As for the KPE stock – which is down more than 35% since its IPO – Kravis expressed extreme disappointment. “This implies that we at KKR have seriously lost our way,” said Kravis. “Well the people have not changed, the process has not changed and we believe that the results will speak for themselves just as they have” . . . “for the past 32 years.”