KKR CEOs Say It’s a Sellers’ Market for Dealmaking

please welcome to the stage KKR co-presidents Joseph Bay and Scott Nuttall and Bloomberg executive editor Jason Kelly [Music] a smattering of applause for you now we got a WoW now we got a WoW well guys thank you for joining us to kick off this conference thanks to Peter and Eric for teeing it all up we're gonna go down memory lane in a few minutes but I want to just start in the present with state of deal-making seller's market or a buyers market right now Scott I'll start with you I'd say globally on the whole it's a seller's market I'd say you know we're late cycle in the u.s. in particular and if you look at our activity especially in the private equity side we've been net sellers especially in the u.s. in Europe mm-hmm and Joe you're buying so where banks some were you buying well I think as Scott said in this kind of market where we're late cycle you got to be really disciplined on how you deploy capital I think on average we're probably more like one and a half to two dollars of exits for every dollar of investment in the past several years so clearly trying to take advantage of this high valuation environment in terms of where we're buying I think some of the more compelling opportunities is really where there's complexity that's really where you get the best values where firms like ours I think with the operational capabilities can really bring more value to the table so corporate carve-outs has been a big theme for us whether that's in Japan or Korea or the recent deal we did with you and Lieber for their spreads business I think the other area we're spending a lot of time in terms of new investments is really using our existing portfolio companies as platforms from investment so internet brands buying WebMD would be a good example and competition for deals what's the what's the state there who were the competitors and and how fierce it is is it out there what - the competition is significant it's both financial buyers and strategic buyers but to Joe's point you gotta you've got to have an angle you've got to have an advantage we have used our existing portfolio companies in a number of situations and been able to act like a strategic buyer by investing more in companies we already control so we can extract synergies and act like a strategic buyer to Joe's point we're really buying complexity and selling simplicity so some of these large corporate carve-outs are incredibly complex you've got to really stand up an entire new enterprise to be able to carve out a big segment of a large company that takes a significant amount of resource so you've got to be able to lean in where you know others are not and the public markets today really like the simple stories and so it's in this complexity that we've been able to find value right so one of the underlying themes or overarching themes I should say of this conferences this year is partnership and we very notably wanted you guys to take it off in part because you're relatively new and your current seed Cisco presents and Kochi of operating oxfords but I want to take you back to 1996 an analyst class I believe of to correct who we're both sitting here on this couch you show up at 9 West 57th Street expecting what what do you what do you see when you get to to KKR 22 years ago well it's other than you see this guy well I joined first six weeks eight weeks before me so he calls himself the more senior at the time yeah good twins there's a little bit of that going on look at being the the industry was small it wasn't even referred to as an industry back then okay Kara I don't know we had 40 or 50 employees to your point we were the two analysts hired in New York in 96 and in those days their day years we didn't hire anybody yeah and we were investing finishing investing our 1993 fund which was 1.9 billion dollars so we were a you know small firm focused entirely on private equity just in the u.s. so quite a bit different than where we are today today we're 21 offices around the world then we were - and we've grown from 40 or 50 people to 1200 around the world significant changes so why'd you join Joe what was the pitch you know my story in terms of coming to care was probably a little more complicated than Scott's I was right about to start up at HBS so I had moved up to Harvard I was in the dorm and I got a call from two weeks literally before classes started this was late summer and a headhunter called me and said Kate Kara's looking to hire one or two analysts in New York this year you'd be crazy not to go down and meet Henry Kravis which is absolutely right so I jumped in my car drove down spent the entire day in New York met all the partners in New York got on a plane and met George and the my partners in on the west coast and it was really about the people I mean they were doing doing obviously very interesting investments but more than the deals it was really more the people you met it's a mentorship and apprenticeship in private equity and I thought it was the perfect place really to learn how to invest do you guys like each other from the beginning are you skeptical you spent 20 hours with each other offices were right next to each other you know a deal would come in the firm it was one of the two of us were working on it right so we know we've been close friends from the beginning and so what was involved in being in an analyst at KKR in 99 just whatever was coming at you yeah we were both you know we were all generalists back in those days there weren't enough of us I think we had you know 15 or so totaling on the investment team so it was what was involved as an opportunity came in who's less busy yeah would be the one to take it on right and then take it all the way through oftentimes through ownership and then ultimately managing it as a portfolio company right and way less structure then like we have very structured investment committees now portfolio management committees but back in 1996 it was a small partnership you know you're asked to look at a company over the weekend and Monday you walk in Henry Kravis his office and you talk about the company why you like it why I don't like it but that was really the learning environment back then yeah and those days the investment committee is you'd walk into Henry's office call George and that was your investment committee it was okay a little bit different than it is now but we're look we've always been a small family firm so Henry and George your first cousins I say that Joe comes from the Korean branch of the Nuttall family I know we've all been together for a very long time well let's talk about that because that is something distinct I think it is utterly unique about KKR in the sense that there is literally a blood relation between the two founders who are still there how do you you can't replicate that exactly without some very strange science so how do you replicate the ethos of that between the two of you well I'd say look we've been together since we were 24 years old Joe and I in terms of working our families kind of have grown up together and so we've spent most of our working lives kind of side by side and both inside the office and outside and it's gonna be before too long we'll have been at the firm half our lives so Henry George has been together since they were four when we've been together since we were 24 so you're right you can't replicate it but you know we've been through it through a lot together and I'd say would the two of them as well I mean the four of us are able to work seamlessly together because we've been together over two decades right I would say you know personal chemistry you know what Henry and George have role modeled for the firm over the last 42 years is really that effective leadership as partners together at the top and I think Scott and I have very complementary skills actually in terms of how we how we invest how we manage well we've learned each other styles over 22 years working together and that's really what delivers the efficiency and the seamless leadership I think all right so break it down for us how does it work day to day you know there's always a question on Wall Street it feels like which sort of falls in and out of love with the idea of codes right yeah and some people say you never work it's obviously always should work so how does it work between you guys just day-to-day how do you split it up well we decided to take a major minor approach we have a lot of ground to cover we manage nearly 200 billion dollars for third parties we've got a large balance sheet that we manage for the firm so it was impossible and didn't make a lot of sense for us both to do everything all the time so we've taken a major minor approach there's a number of businesses that I major on and Joe's the minor and vice-versa so that anybody in the firm of thing get to one of us they've in effect been they've been able to get an answer but that's how we've kind of broken down things and the majors are things that we've historically both focused on or built and the minor bit less though and you know it all has worked because we both worked across all different parts of the firm over time so Joe your majors are so my majors are our global private equity business our growth investment platforms and real assets so infrastructure energy and real estate Scott so I've got corporate and real estate credit our capital markets business our capital raising activities our balance sheet and kind of corporate development and strategy mm-hmm and where we overlap is really on the internal functions so legal compliance reports up to both of us HR finance etc and so how does it work with the founders what's what's the day-to-day with them because those guys are definitely around well the biggest change I think since this announcement was made last July they used to have five direct reports Scott and I being two of those and today we they have two direct reports with all the people now reporting up to us but that's really the change in it it's been evolutionary in our firm it wasn't a one-time decision and there was a radical change in our organization it was really simplifying from five people that reporting to Henry George did the two of us granted Joe's point before the announcement last July he and I together had 2/3 of the firm's activities already for reporting into the two of us so it's a change but it's not a radical change right and you know look we're talking amongst the four of us all the time email gets used a lot and you know every Monday afternoon we've got a standing to our call to go through everything going on in the firm right I did as a preview I've got an interview coming later this week with George Roberts who did mention to me as we were taping that uh with some glee that he liked saying to people you know that's a great question why don't you ask Joe and Scott that question so it seems like he he takes advantage of this at that point in every - I would imagine yes it's working quite well right so let's go back to the to the state of the world if we can you know Joe you talked about some of the areas that that you're focused on we talked about private equity valuations a little bit some of the areas that you are overseeing probably could be considered more expansion of of efforts real assets where the opportunities there specifically maybe in real assets and infrastructure if you will sure you know I think the exciting part of KKR is we've been around for 42 years but outside of our private equity business many of our newer platforms have been around for 10 to 12 years and real assets has clearly falls into that category you know infrastructure is one of our most exciting areas I think for future growth it's obviously an enormous asset class it's under invested globally in infrastructure and it's where long term patient capital can really make a difference so we started that business a little over 10 years ago with a billion dollar fund one fun - it's 3 billion dollars and we're well on our way to a six to seven billion dollar fund 3 at this point so we're scaling these businesses to similar size quite frankly - some of the funds we have now in private equity mhm same thing in real estate we're a little bit earlier there in terms of the development of that business we have a u.s. real estate equities business on fun - we saw our first fund in Europe we're investing we'll be starting our business in Asia in the coming 12 months for real estate it's still early days and state of real estate at this point I mean similar to what you guys were describing in terms of valuations with private equity where are we in the commercial and residential real estate cycle listen I think you need to be very careful again at this point in the cycle I think a lot of the big real estate deals you're hearing about are not opportunistic real estate they're more core real estate or core plus our focus today in the marketplace on the equity side is really around opportunistic you know more private equity style returns real estate and these are billion to two billion dollar funds so they're not too big we have the ability to be very very opportunistic and disciplined you know and real estate still local right so it's hard to generalize by market or asset class but it's really you know doing the hard work to find that unique value and just staying with you for site infrastructure I feel like we've been talking about for years we've been talking about at higher volume for the last couple years given what's come from the US government in terms of hopes and dreams about rebuilding US infrastructure how real is that pun intended and are there places where you feel like you're able to invest it really depends our infrastructure product is a global problem so we are actually probably more invested in Europe today than we are in the US Europe is further along that curve around privatization of infrastructure assets around public partnerships with private governments as well and deregulation like in the UK so we've seen more activity coming out of Europe in the past five years in infrastructure than the u.s. in the US I think a big focus is really around the midstream space I think with the MLP market still on its back there's a real gap in the market for capital for midstream assets and that's really in the last two to three years where we've been leaning in quite aggressively so Scot you have one of your responsibilities over the past few years has been being involved in the IPO talking to public investors the public investor has not shall we say embraced private equity as and as they publicly traded ask that class maybe as much as you would have hoped why is that well I think it's a few things one it's it's it's still relatively young as a space in the public markets and so until five six years ago there were only a few of us that were publicly traded so it wasn't a really a space it's now emerging as one and I think people are still getting up the curve as to what the business is and how it operates so there's an education aspect to it I think a second thing that is you know clear as the business models are a bit different you know we make money sure from the for the fee aspect which is Marcus used to in terms of traditional asset managers but carried interest is a relatively new concept in the public markets and I think the markets to your point have struggled with how to value it how to assess it over the long term you know what kind of multiple do you put on it and that's been a big question and so there's been you know a pretty low multiple put on on that part of the earnings stream and I think people are waiting you know what will happen you know when the markets pull back a bit what happens to that carry line over time but I think you know from our standpoint one of the biggest contributing factors is just the size of the buyer universe so all of us came public as publicly traded partnerships which means we issue a k1 you know as a tax reporting matter and that limits the buyer universe so by our estimates sixty seventy percent of the buying universe cannot buy a publicly traded partnership right so we attended to as a result focus on a pretty small group of investors with a relatively new story in the public markets we announced recently that we're actually in the process of converting from PT P to a c-corporation for that reason to expand the buyer universe so I think it's on us to continue to perform and tell our story but our hope is that with this conversion we'll find a broader audience and how big of a deal did as someone who's been in private equity for a long time Jo how big of a deal did that feel like I mean to the average person they're like okay like the sellers are mildly interesting but it isn't to the c-corp yes Mallinson it's something we've been talking about for a really long time you know our goal as a company and for our employees is really to do everything we can to make sure we are as successful 10 20 years down the road as we possibly can be and having the right fundamental owners of our business having the right corporate structure so that we could have more flexibility in terms of issuing stock preferred securities the ways to finance our own business over time you know C Corp has a lot of advantages in that way so I think internally there was a tremendous amount of support to do that do you guys expect that the rest of the industry will now follow I don't know I think I think that the firms are different I think we tend to I'll get painted with a similar brush but we are quite different is by journalists we're very simple people we need your explanation but we you know we as a firm have just a bit of a different business model again because we have our balance sheet right which is a big part of our institution we have a capital markets business which is a bit different so we'll see I think you know we'll we'll see how these stocks perform over the long term but to Joe's point this isn't about where we trade in July or through the rest of this year even it's about can we find a set of investors that are more aligned with our thought process around long really long term value creation and compounding so let me ask you about the fundraising on the private side because that as you mentioned falls into your bucket as a major what's the biggest Woori on the minds of your institutional limited partners at this point well I think for the most part the biggest focus is that you know a lot of them especially in pension plan world have a seven or eight percent return target and if they look across the vast majority of what they've been investing in over the last five to ten years that has not been generating those kinds of returns so the real question for them is how do they reach to get incremental return and hit their overall targets but do so with being cognizant of the fact that we're late cycle certainly in the u.s. maybe more mid cycle in Europe and not take risk at the wrong time and so a lot of the discussion is around wow you know how do I get that incremental return without regret and that's really been the question return without regret exact story of private equity exactly and so you know what we're seeing everywhere is you know a lot of folks are increasing their allocation to alternatives because that has generated more than the target and then it's a question of well how do you leg into it and that the definition of alternatives has continued to expand there's also an element of there's been so much return of capital in our industry as many people have been leaning into these valuations to exit so there's this reinvestment concern that many pension funds have in sovereigns have they're getting more capital back than they're deploying in many cases in the alternative space that's another big theme in focus is they want to do more with fewer firms right I think what we had probably 10 15 years ago is a diversification so there was some plans that were invested in 200 different you know GPS and now what they're saying is ok I've now bought the index inadvertently and in an alternatives in private equity in particular you know you want to be top quartile and so now what we're seeing is more of a focus they're trying to do you know more investing with fewer players which means you know broader and larger mandates and how much leverage does that give them on fee negotiations with you guys how are you seeing fees trend well we've you know we've had a big effort around what we're calling strategic partnerships where we're very happy if someone's prepared to give us large-scale capital 3 5 3 4 or 5 billion dollars over a long period of time recycling we're very happy to talk to them about you know discounted economics because for us having that line of sight for 20 to 30 years which is the duration of some of these long-term partnerships is significant and it funds a number of our different businesses so I'd say if it's just sighs there's a little bit of discussion around economics but it's really duration duration and Brad so we haven't talked at all yet about Asia image in the u.s. we've mentioned Europe a bit you've spent a lot of time there that was your previous your most recent assignment before here was was running that how hit where does Asia stand in kind of the KKR mindset at this point in terms of opportunity and that sort of buying selling balance sure I think it's a little more balanced in Asia in terms of buying and selling it's probably 1 for 1 in terms of deployment versus monetization and it's hard to generalize about Asia given it's a massive geography with a lot of different dynamics going on but if you take a big step back it is probably the fastest growing part of our private equity business today in terms of AUM in terms of deal activity and in terms of our own organizational build we have eight offices now in Asia and we're the largest private equity investor in the region today you know some of the really compelling trends I think you know people always talk about you know the really exciting growth in China India Indonesia some of the big domestic emerging economies which we absolutely are excited about but some of the less understood opportunities I think are really perhaps in North Asia in Korean Japan probably among the cheapest valuations among the Chur economies today massive conglomerate and family groups that are shedding on core assets for the first time and in our business the ability to really drive fundamental operational improvement margin improvement in these companies because their non core subsidiaries of large parent companies so Japan for us is one of our top priorities globally in terms of the buyout market where we're seeing cheaper valuations lower cost funding financing for deals a lot less competition than in Western markets and quite frankly much more significant operational improvement potential and the businesses that we're buying one thing I wanted to make sure we talked about before we run out of time is you've got a couple different avenues that you can pursue within KKR to understand global economics and maybe just as important global politics so Henry McVeigh giving you sort of the macroeconomic and in cases microeconomic perspective as well as David Petraeus who can give you probably as good a read as anyone on shall we say hot spots around the world geopolitics what are you hearing from them as all of us read headlines every day about what's going on in the world and how is it affecting the way you deploy capital well I'll let me take McVeigh and you can talk about geopolitics a bit I'd say in terms of what Henry McVeigh's group does it helps us in the first instance make sure we're reading the signals that we're getting so we have a large portfolio around the world I'd say before Henry and the team got there we did an okay job using the data but we do a much better job now translating the information we get out of our portfolio companies it's kind of forward-looking metrics as to where the world's going so what's an insight that you've gleaned from him of late well I'd say one of the things that the team has built is kind of these GDP predictor models which have turned out kind of back testing have been quite accurate because we have a lot of good data that we're able to kind of feed into a model that tells us where we think the world is going and for example we've been able to back test that and you know test against when do we expect a recession to happen the United States and that is not the next 24 12 months but sometime in the next 24 you know the readings start to get that you know we're gonna see something now our expectation it's more of a modest pullback than what we saw last go-around so maybe more like a 2001 type feel to it and as opposed to the financial crisis but it does tell us things like that as to when we expect that maybe we're gonna see a bit of a dip in the US economy and we're able to use that around the world that would be one example right geopolitics Jeff I think with both David Petraeus and Henry McVeigh to a certain degree it's also around issues like trade just obviously in the press every day now and I think Henry's been and David have been incredibly helpful in really guiding our teams at high level to say you know avoid areas where you're dependent on global trade for growth so you know we're leaning into big domestic economy's domestic populations big domestic consumption stories whether that's Mexico whether that's Indonesia China India versus companies that are highly dependent on global trade for growth and you know that's an insight that both have really brought to the table in different ways you know with our strategic trading partners in Asia but also in some of the more I would say frontier markets for us you know David Petraeus in particular we invested in a cable company in Serbia several years back we had never invested in Serbia before and really getting comfortable with the politics the governance in that country the political risk in that country was a critical part of getting us comfortable making that first move to that country so a far cry from 1996 for you boys are gray right yeah thanks so much for helping us kick it off thanks rad Nuttall joe bay thank you thank you [Applause] [Music]

Channel: Bloomberg Markets and Finance

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Id: rY8Q_u7Rag8

Length: 25min 43sec (1543 seconds)

Published: Tue Jun 05 2018