Looking back, Henry Kravis seems to have had his career carved out from the beginning.
Born in Oklahoma in 1944 into an oil business family, Kravis majored in economics and later received an MBA from Columbia University. He was described as an ambitious student, with pronounced leadership talent that he demonstrated at an early age in student groups and on the football field.
"I was in awe of his courage," remembered Michael Douglas, a future Hollywood star, who befriended Kravis while they both attended a prep school in Massachusetts. He told Barron’s Magazine in 2014 that Kravis was a boy with “gracious manners that belied a tough-as-steel interior”.¹
In the late 1960s, Kravis joined Bear Stearns’ corporate finance department. Together with his cousin George Roberts and their boss Jerome Kohlberg, the group perfected what were then called bootstrap acquisitions. They would seek undervalued businesses with unrealised profit potential or under-monetised assets, secure capital for their expansion and sell the companies after a few years for a profit. To finance purchases, they used minimal equity investment and relied heavily on borrowed funds. Known today as leveraged buyouts, these deals would eventually become a mainstay in corporate finance and, in particular, a foundation on which the private equity industry was built.
The trio made a string of successful deals in the late 1960s and early 1970s which propelled Kravis’ profile at Bear Stearns. The acquisition of Vapor Corp., makers of door-opening systems for mass-transit networks, for example, produced a 12-times return in six years. Rockwell division Incom, which made gears and filters, was even more profitable, resulting in a 22-times return.² At just 30, Kravis was made a partner at the firm.
However, owing to diverging views on the future of leveraged acquisitions (in addition to the alienating “eat-what-you-kill” culture that Kravis disliked), the trio left investment banking at Bear Stearns to open their own shop, KKR, in 1976. They invested $120,000 of their combined savings to get the venture off the ground.
The ambition of Kravis, Kohlberg and Roberts was to create a firm that would fundamentally change the way businesses were bought, managed and sold. They engineered a unique debt architecture, consisting of bank loans and junior debt. The firm would typically invest up to 10% of the acquisition price from its own funds and borrow the rest. This setup became the prototype for most future leveraged buyouts.
In addition to the then-cutting edge financing framework, much of the KKR’s early success can be attributed to Kravis’ dealmaking talents. He is said to possess a remarkable ability for identifying undervalued assets and strategically deploying capital.
As a result, it didn’t take long before Kravis and partners made a name for themselves. They were responsible for some of the largest leveraged buyouts in the period, including the highly publicised acquisition of RJR Nabisco in 1989, which propelled KKR into the media spotlight.
In the following decades, KKR invested in hundreds of companies across industries, many of them household names, including First Data, Duracell and Safeway. It moved away from financial engineering by setting up a consultancy that supports portfolio companies to uncover efficiencies and operational improvements. In 2002, they expanded into credit and capital markets businesses and later diversified further with infrastructure and energy strategies.
A typical business model of private equity firms includes sharing profits between fund managers (general partners) and fund investors (limited partners). After investors receive back their initial capital and the preferred return, all the following proceeds are typically split 80:20. The 20% that go to general partners is known as “carried interest” and it was thought up by Kravis.
In an interview with Bloomberg, he explained how he came up with the idea. “George’s [Roberts] father and my father were in the oil-and-gas business, and in those days there was something called a third for a quarter. If I had a lease and wanted to drill a well, I would go to the money person and say that I’ll put up 25 percent of the cost, they’ll put up 75 percent, and they’re going to get a two-thirds interest and I’m going to get a one-third interest for my 25 percent. We thought 20 is close enough to 25.”³
When people ask Kravis what he thinks was instrumental in the firm's success, he always highlights one specific element—the company culture of teamwork. “We can invest anywhere in the capital structure, whether it be through the debt stack from bank loans all the way through special situations. But we are one firm and we work closely together to create this right solution,” he told the audience at the KKR Investor Day in 2018. “You rarely hear anybody at KKR use the words 'me' or 'I'. “Nobody is raising their hands to say, 'That is my idea. That is my deal.' It is a team effort.”⁴
Kravis also sees curiosity as one of the key trait of a successful investor. “No one in my mind can be a great investor unless you’re curious, and that means thinking about how to connect the dots,” he said at an event organised by Goldman Sachs a couple of years ago.⁵ He believes that curiosity is also what makes people better stewards of other’s money. Without curiosity, “you’re basically doing something that’s already been done by someone else”.
It’s impossible to imagine KKR’s success without Kravis' strategic prowess and transformative deal-making. The firm has gone from its creative beginnings to a global conglomerate with offices in 17 countries, managing more than $510 billion in assets across strategies, including private equity, credit and infrastructure. Since its inception, KKR raised over 40 funds with a net IRR of 18.8% as of the end of Q1 2023. For comparison, over the same period, the S&P 500 index generated 11.8%.⁶
Kravis, together with Roberts, appointed a new pair of CEOs in 2021 but he still actively shapes KKR’s strategy as executive co-chairman. He also remains a keen observer of today’s economic landscape and more specifically of the industry he helped to build.
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* Past performance is no guarantee of future returns.
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