Kravis Says Era of `Quick Flip' Buyout Profits `Largely Over'
Kravis Says Era of `Quick Flip' Buyout Profits `Largely Over'
By Simon Clark
Feb. 22 (Bloomberg) -- The era of ``quick flip'' profits forbuyout firms is ``largely over'' because increasing competitionmakes it difficult to find undervalued companies, said HenryKravis, co-founder of Kohlberg Kravis Roberts & Co. The proliferation of buyout firms in the past 20 years andnew competition from hedge funds is putting pressure on managersto boost performance in an industry that bought $180 billion ofcompanies last year, Kravis said at a conference in Frankfurt. ``The challenges we face today are the direct result of ourpast successes,'' said Kravis, 61, who helped start New York-based KKR, the world's biggest buyout firm, in 1976. Buyout firms acquire companies with a combination of loansand money raised from investors such as pension funds andinsurers, and hold the assets for as long as 15 years. BlackstoneGroup LP, manager of the world's biggest independent buyout fund,and other shareholders took less than a year to earn an $803million payout from the initial public offering of chemicalsmaker Celanese Corp. in January. KKR took 13 years to make $7.2 billion from an investment inthe Safeway Inc. supermarket chain, according to KKR investmentrecords. ``We only make money if we improve the operations of thenewly acquired company,'' Kravis said in his speech at theconference. ``It's harder to find that hidden jewel.''
Hedge Funds
Hedge funds, which typically buy and sell securities ratherthan entire companies, are becoming competitors as clients pourmoney into the investment pools. Hedge funds attracted a recordnet $27 billion from investors in the fourth quarter, accordingto Chicago-based Hedge Fund Research Inc. Boston-based Highfields Capital Management LP on Feb. 15made a $3.25 billion cash bid for Circuit City Stores Inc., thesecond-biggest U.S. electronics retailer. ``Hedge funds are not set up to build value in companiesover the long term,'' Kravis said. ``Anybody can own a company;just pay enough and you'll own it.'' KKR and three other buyout firms outbid a group of hedgefunds in July to buy Texas Genco Holdings Inc. for $3.65 billion. It was the largest purchase of power plants by a non-utilitysince the U.S. electric industry began deregulating a decade ago.
Quick Buck
Buyout firms have been turning some quick profits. KKR andtwo partners will share a $200 million dividend following the$1.12 billion IPO of PanAmSat Holding Corp., a Securities andExchange Commission filing in January showed. KKR agreed to buythe satellite operator in April. Permira Advisers Ltd., manager of Europe's biggest buyoutfund, will profit from the 1.18 billion-euro ($1.39 billion) IPOof shares in Premiere, Germany's only pay-television broadcaster.London-based Permira, creditor banks and managers bought Premierefor 220 million euros in 2003. To keep earning returns that beat public markets, buyoutfirms need to focus on working with the best management teams andlooking for new opportunities, Kravis said. The financier said he would have been ``very skeptical'' ifhe had been told in the 1980s that KKR would invest in Germany.Today, the firm owns German companies that employ 58,000 people,he said. Kravis declined to say where the firm will invest next,though he said there were no plans to open an office in Asia. KKRhas offices in New York, Menlo Park, California, and London. ``If I told you, I'd have even more competition,'' Kravis said in an interview at the Frankfurt conference.
By Simon Clark
Feb. 22 (Bloomberg) -- The era of ``quick flip'' profits forbuyout firms is ``largely over'' because increasing competitionmakes it difficult to find undervalued companies, said HenryKravis, co-founder of Kohlberg Kravis Roberts & Co. The proliferation of buyout firms in the past 20 years andnew competition from hedge funds is putting pressure on managersto boost performance in an industry that bought $180 billion ofcompanies last year, Kravis said at a conference in Frankfurt. ``The challenges we face today are the direct result of ourpast successes,'' said Kravis, 61, who helped start New York-based KKR, the world's biggest buyout firm, in 1976. Buyout firms acquire companies with a combination of loansand money raised from investors such as pension funds andinsurers, and hold the assets for as long as 15 years. BlackstoneGroup LP, manager of the world's biggest independent buyout fund,and other shareholders took less than a year to earn an $803million payout from the initial public offering of chemicalsmaker Celanese Corp. in January. KKR took 13 years to make $7.2 billion from an investment inthe Safeway Inc. supermarket chain, according to KKR investmentrecords. ``We only make money if we improve the operations of thenewly acquired company,'' Kravis said in his speech at theconference. ``It's harder to find that hidden jewel.''
Hedge Funds
Hedge funds, which typically buy and sell securities ratherthan entire companies, are becoming competitors as clients pourmoney into the investment pools. Hedge funds attracted a recordnet $27 billion from investors in the fourth quarter, accordingto Chicago-based Hedge Fund Research Inc. Boston-based Highfields Capital Management LP on Feb. 15made a $3.25 billion cash bid for Circuit City Stores Inc., thesecond-biggest U.S. electronics retailer. ``Hedge funds are not set up to build value in companiesover the long term,'' Kravis said. ``Anybody can own a company;just pay enough and you'll own it.'' KKR and three other buyout firms outbid a group of hedgefunds in July to buy Texas Genco Holdings Inc. for $3.65 billion. It was the largest purchase of power plants by a non-utilitysince the U.S. electric industry began deregulating a decade ago.
Quick Buck
Buyout firms have been turning some quick profits. KKR andtwo partners will share a $200 million dividend following the$1.12 billion IPO of PanAmSat Holding Corp., a Securities andExchange Commission filing in January showed. KKR agreed to buythe satellite operator in April. Permira Advisers Ltd., manager of Europe's biggest buyoutfund, will profit from the 1.18 billion-euro ($1.39 billion) IPOof shares in Premiere, Germany's only pay-television broadcaster.London-based Permira, creditor banks and managers bought Premierefor 220 million euros in 2003. To keep earning returns that beat public markets, buyoutfirms need to focus on working with the best management teams andlooking for new opportunities, Kravis said. The financier said he would have been ``very skeptical'' ifhe had been told in the 1980s that KKR would invest in Germany.Today, the firm owns German companies that employ 58,000 people,he said. Kravis declined to say where the firm will invest next,though he said there were no plans to open an office in Asia. KKRhas offices in New York, Menlo Park, California, and London. ``If I told you, I'd have even more competition,'' Kravis said in an interview at the Frankfurt conference.
