The Heat Is Turned Up For Private Equity Firms
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Going forward, the political heat may be turned up on private equity firms.
A founding partner of Kohlberg Kravis Roberts & Co., Henry Kravis, told a group in the city yesterday that Chinese and Middle Eastern investors seeking partners in buying American companies are approaching his firm. “It makes political sense,” Mr. Kravis said, acknowledging the political obstacles that such buyers might otherwise face.
That won’t sit well with the new protectionist sentiment in Congress, and may further alarm those concerned about possible excesses developing in the leveraged buyout world. Fears of a blowup in the sector, however, are misplaced, according to Mr. Kravis.
“Private equity is here to stay. There will be some hiccups along the way, and the Golden Age won’t last forever, but the bubble is not going to burst,” Mr. Kravis, who was the keynote speaker at the opening lunch of the Committee of 100’s 16th annual conference yesterday at the Waldorf Astoria Hotel, said.
As Mr. Kravis describes it, the rapid securitization of bank loans to a “vast array of buyers all over the world looking for yield” dilutes the impact from one deal going sour. American and European banks, meanwhile, are in the best shape they’ve been in for many years, according to Mr. Kravis. Also, the amount of leverage in deals has gone down over time.
The Committee of 100 is an organization founded by high-profile Chinese-Americans, including architect I.M. Pei, cellist Yo-Yo Ma, and Yahoo co-founder Jerry Yang, dedicated to improving communications between America and China. This year’s conference focuses on the opportunities and challenges of investing in China.
Mr. Kravis described KKR as having changed strategies in the late 1990s after a series of mistakes, such as a $500 million loss on Regal Cinema. Among the new tactics was to go global. Expansion beyond America was thought necessary not just to search for investments, but also to help KKR’s portfolio companies develop new growth opportunities.
Not surprisingly, China is one of the countries the firm targeted, even though it presents numerous hurdles for private equity investors. According to Mr. Kravis, China is awash with liquidity and therefore does not need outside money. Also, the country has a shortage of seasoned managers. Mr. Kravis described acquisition financing in China as underdeveloped and hampered by rigid foreign exchange controls and antiquated domestic banking regulations.
Another negative for firms like KKR is that China is characterized by a great number of small, fragmented companies; it is consequently hard to put a large amount of money to work. Finally, there is still a lack of transparency in China. As a result, deals take a lot of time to research.
Notwithstanding these issues, KKR is combing the provinces looking for deals. “It’s like antiquing,” Mr. Kravis said. “The further from the financial centers, the better. China is the way the U.S. was in the 1960s and 1970s.”
KKR has partnered with small entrepreneurial firms, such as a cement company in which it invested $150 million, and it has looked at privatizations of some government-owned companies. There are also an increasing number of cross-border transactions generated by Chinese companies interested in expanding to outside markets. Traditional private equity transactions are as yet few and far between.
“China is adopting regulations highlighting sustainable growth,” Mr. Kravis said. “Government officials are becoming more progressive and seeing what private equity firms can bring to underdeveloped inefficient companies.
“We hope that China will open up and improve their financial markets. Not having good rule of law is a problem. It affects valuations. But it’s getting better.”
Mr. Kravis may not be anxious about excess borrowings by the private equity community, but he shared other concerns. “I’m worried the U.S. may move towards being like Europe, where we protect what we have and become complacent,” he said. “We have to continue to be the most creative, dynamic, technologically innovative people. We have to look forward.”
