KKR co-CEO Henry Kravis at Fortune's Brainstorm Tech | Fortune

for those who don't know Henri is people talk about pioneers in different industries a lot it's a word that gets thrown around Henri definitely deserves it he co-founded KKR Kohlberg Kravis Robertson company back in 1976 still co-ceo with his cousin George Roberts and Henry let's get to the really important stuff first which is two weeks ago Donald Trump said you would make a really good Treasury secretary for him he all said Carl Icahn a Jack Welch Icahn says it's too early in the morning Welch in comment do you want the job if there's a president Trump yeah that was scary when he said that so is that a no or that and I'll think about it in the administration will leave it that was scary fair enough fair enough Henry what I want to start you know a lot of this conference is going to talk about disruption technological disruption in established industries you know you think Airbnb in hotels or ubers and taxis industries that weren't considered tech industries originally KKR is history even though you also invest in tech there's a lot of these different industries you invest in energy you invest in retail industrial along the lines when you're looking at a prospective deal how do you kind of how do you try to look at the disruption that's coming from down below to make sure that you're saying not buying a taxi company four years ago that's going to get absolutely destroyed right well one of the things that I always like to ask the team to put in their presentation to the to our investment committee is what can go wrong what disrupter is out there that can make a make this company either obsolete or change its its operations dramatically so where we go about it is we have a number of senior advisors first of all so we've got people like Shantanu Narayen from Adobe we've got the CEO of Suzanne we have the CEO of Shutterfly we have others that are advisors to KKR number one number two we got an office and a very important office where George Roberts and others are in our hotel group is out of Menlo Park so we're there I spend a fair amount of time out there personally because I think it's really important and so you can't go into any of these businesses any investment anywhere in the world today and assume that things are going to be the same at the Business Council a few months ago John Chambers and I were on a panel together and he said to the audience which are all these large companies CEOs he said that I'm willing to make a bet that in 10 years 40% of your companies won't be here and he went on to say that he said they no longer put together five-year plans because they're obsolete after a year or two so they've moved now two to one in two-year plans well we're the same way we look at a company and we say more importantly what could this company become if we were able to add technology if we were able to partner with another with another company so for example one of the things that that I like to encourage you know young companies to do is think about companies like KKR with a vast portfolio companies that we have we've got over a hundred companies in a lot of different industries we have over two hundred and twenty billion in revenue and if you think about can you start to scale your business much faster by tying in with somebody like akki that has this let's call it for now the offline kind of business the answer is yes so an example of that would be first Adam a company called clover we started in the valley it's a nandroid point of sale tablet company terrific software and we said why don't you come and be part of a first ad of which we own and that made a lot of sense to them because here overnight they had six million customers where they could start to roll this out so they just rolled out of many right mini mobile ones if they started with a larger one and now they have gone to the they went to mid-size and now they've gone to a very small one as well you brought up first data let me ask the first data and I think I'm correct in saying this is the largest single equity investment KKR is got right now in terms of amount of cash que quieras put in you invested originally and then kind of doubled down last summer I'm wondering you know when we spoke last summer about it when you made the investment I asked about a possible IPO bringing it back the public markets you said not yet we're worrying about other things it's been a year you've gotten some other things done is that something's out on the horizon well all I'll say is stay tuned you know these things okay stay tuned you know next year should I stay tuned in two years I have there's a lot on the TV and I don't know what to just stay tuned and you know you know you might might be surprised what you're going to learn fair enough so no no the company's doing fine uh KKR has some you know like first day it has some big tech companies you guys have done kind of as traditional KKR deals you know leveraged buyouts traditional private equity deals you also lately have done a bunch of growth equity investing in the tech space I'm looking at my list your Sonos Fotolia FanDuel summin summin biotech as well so I guess my first question is why are you dipping down and are you concerned at all you guys didn't but back in 99 2000 some big buyout firms started doing quasi venture deals and it didn't go well for them well let's let's first start with the fact that private equity today has changed dramatically most people think of private equity as you go in and you buy a hundred percent of the company and you lever it up and hopefully in five years you pay it off enough debt the company's growing somewhat and you make some money today private equity is a totally different business today private equity firms like us will invest up and down the capital structure we're not focused just on buying companies but we want to be a solutions provider and we are solutions to provider to lots of different kinds of companies so that's on on one hand on the other hand the let's look back to the period 1999-2000 that you mentioned which is a time when there was a tech bubble it was the internet bubble at time and let me many of you were around then many of you will probably involve with it or were investing but my own experience was I come out to the valley I'd spend time talking to these people and I said Tomi your business plan and their business plan was very interesting their business plan was to go public and I said that's not a business plan that's that is a means to raise some capital give me your business plan well mr. Krebs you don't you don't get it you don't understand so it's all about eyeballs and I said well I don't get it because I don't understand how you turn eyeballs into cash flow and and so forth that's what blew up fast forward 15 years we have a totally different environment today number one technology has changed for the better tremendously in the last 15 years number two the teams that are running these businesses and by the way most of these businesses today that are that are young company they're real companies they're real not cash flow positive usually not not cash flow pause most of them are not cashflow positive real business with real business plans with a mission statement they're hiring terrific people and they're able to build a a good business now if we're talking about valuations that's a different subject what does it I wonder does it does it concern you think and it's hard to say because I know that your deals and you think they're good deals because they're yours and none of them have blown up yet but do you think on the whole that these deals are going for too high too high price yours TP geez everybody else is in that kind of growth equity special first of all we're were a minor player in this space TVG and other private equity firms are really minor players in the scheme of things we typically will invest in some of these technology or technology related companies in the CD round they're more growth equity that they're starting to show sales they're ramping up and then what I like to say to people you know you can raise money anywhere there's money everywhere today whether it's from venture capital firms from hedge funds from private equity firms all the way up to the elytis and tiro priced today and that is in part what has driven these valuations you've gotten you know nobody would have thought three years ago that the tiro prices and the Wellington's and infidelities of the world would be playing in that space but they are because they got plenty of capital interest rates or you know we're very very low and as a result they are perpetuating this this valuation question I like to ask folks and this is without doing any due diligence on them but I think there's a hundred or so of these so-called unicorn companies these billion dollar-plus privately held tech companies if you were to put them in a bucket at the current at their current prices or where they were last round would you personally invest in it as a weird index would you buy it well you know what's really hard I can't tell you and I don't think anybody can tell you who the winners and the losers will be in each industry what what strikes me though as I look at these and I say well what you're pricing these on you're pricing them in large part on that one or two or three of these are going to be winners I don't buy the fact that they're necessarily will be three winners at the prices that your value in the companies there'll be one winner who knows what it is so let's assume you've got something at a billion dollars today no cash flow from it really a concept it's a great concept it can scale but you've got three of these people there's probably more downside then there is upside there but one of them will probably be a winner because the industries in which most of them operate in are scalable industries are you I'm there's been talk about KKR raising a specific tech kind of growth equity fund you guys are currently making most of these deals off your balance sheet is that going to happen is that fun coming we have nothing on the on the horizon right now we've got a fairly large balance sheet which is different than most private equity firms and we have a different model our model and the way we went public is I think you know Dan was too to take KKR the partnership and merge that into a company that was already public traded on the amsterdam exchange which we have started which was an investor like a limited partner in all of the investments that we made at KKR so we knew what these companies were that were they've invested in we also managed that money at pool of capital and we had gone public at 25 dollars a share with KKR private equity investors and it was trading down to $2 a share it was during the crisis we said let's take a cake AR and merge that into K PE and what we'll have as a balance sheet and that balance sheet what that gave us was a five billion dollar in round number balance sheet in our own companies so what we've been able to do with that balance sheet is buy some other companies by having the stock it's a way for us to put money in and raise additional capital to to put our own seed capital in and the big difference is if you have a fund you typically are going to get 20% of the profits whereas it's our own money it's our balance sheet of the shareholders money I should say we are 100 percent ok I asked a private equity nerdery question here which is if you've got your tech team with your folks in Menlo Park spending some of their time sourcing deals that are going to be invested off of kcra's balance sheet as opposed to the fund the main fund if I'm a limited partner in the fund am i annoyed that I'm paying man kind of helping to pay their salaries to make investments that I'm never going to get a piece of no because it's not that's not what our funds are set up for if our phones were set up if it's large enough it goes into a fund the fund comes first way before the balance sheet any Co investments where they're actually paying is the they come ahead of the balance balance she's the last place that it will go you talked about your IPO you guys went public at this point about five years ago right at this point about a half years ago five and a half there's a lot of companies today including some folks probably here in this room who have very successful private companies that don't want to take them public there I think the word would be scared of doing it and becoming a public company CEO you've obviously had been in the markets for a while you had been on the boards lots of public companies brought companies public taking the private but I'm curious did you learn anything did anything surprise you when you went from running a successful pride we held company to becoming a public seat publicly traded CEO you know most people say why did you go public well we went public because it gave us permanent capital it gave us a large pool of capital that we wouldn't have otherwise and that's been really critical because it's enabled us to start a number of new business very hard to go out and raise a first-time fund I don't care who you are or what your record might be if it's the first time fun it's difficult so this way we've been able to use the balance sheet and the money we've got as a result of going public and seeding our real estate business seeding our oil and gas business using it for our growth equity that we've just been talking about so it's given us a real advantage we feel to continue to grow the business I'm not unhappy one bit that we went public there am i and I say to people look if you think that we're going to be able to tell you that cake our what our earnings will be next quarter it's impossible for us because we have to mark to market every quarter we're buying different things we're selling different things we're going into different businesses etc very hard to do so we say you want to own our stock it's a pretty good investment the way to play participate in all phases of private equity and it's a way for you also to look at private equity in a long term basis most people forget then that that private equity is really a long-term game this is not a hedge fund we're not in the hedge fund business we're a lot of your rivals are in the hedge fund business so we don't have a hedge fund a cake era we have a fund of funds which invest in different hedge funds but cater itself is not in the hedge fund business so our average holding period and it would be true whether it's in growth capital whether it's in private equity is seven and a half years so we just look at things totally differently than than most companies do do you think are the fear and as he said you have a different kind of company obviously had a much longer track record you know it been around what 30 years before guys went public or over that yep 30 years do you think that the concerns of privately held tech CEOs about going public are those legitimate concerns who do you think those are jitters folks should just get over look I'm not going to tell any company they should go public if they have a reason to go public and they need to raise capital and it's a way for them to raise capital or they want the stock to use to be able to buy other companies if you've got a good company you can continue in the environment we're in you can raise a lot of money as all of you know so you don't have to go public I would tell most companies wait until you have to go public because then you don't have the scrutiny of the quarter two quarter earnings I think the worst thing to happen to corporate America are quarterly earnings because you end up making a lot of very short-term decisions when in reality you should be making long-term decisions I'm curious how much of a technologist do you think you are and when I don't I don't mean somebody who's sitting there coding all day but in other words you know I'm trying to get a sense for you I've been told by folks who work for you that you're very even on kind of growth equity investments very hands on do you I mean I guess I'll ask them this way do you ever play on Twitter do you ever go on Facebook when you something like FanDuel you guys invested in do you have a FanDuel account have you been betting on games I don't have any of those but and I love all that I love the gadgets tonight and I buy them all and use them and do I have a Facebook and I do I'm not on it do I have a Twitter account yes I'm not on it but I have like a lot of Twitter yeah that's what I have it and and I really do care and you know I don't think the CEO of any company if they're going to be putting money to work you know can't be putting a lot of money work without least knowing the fundamentals of it I'm I'm not a technologist by any stretch you're invest invest with iconic which is kind of a quasi family office it basically they make a lot of tech investments in the valley gives tell me that relationship why are you and what why do you personally have a relationship there why is that important for you well number one it gives me a very good overview of what's happening the valley there and that's really important not only in the valley in other parts of the states and divest makaan he's a friend of mine who runs it he helps me in a number of ways he helps k-karen a number way and vice-versa we help him so I spend time with their people for example talking about culture and how important culture is at KKR and how we set our culture to a you know on day one 39 years ago and encouraging him to to think about it they have an unbelievable Network which we can then plug into I'm on an advisory board that he has which doesn't quite frankly have only they they meet once a year so I missed the last meeting so that's how involved that I've sort of been but I see I see divest a lot I talk to him a lot I talk to his people a lot and it's really a way it's a window on on technology for us do you talked about culture when you're looking at a company and you're doing due diligence whether it's a tech company or anything else you can look at the financials and you can look at the projections you can look at the product and you can talk to customer and you can do all that you just mentioned culture so this is a kind of vague question but so take it where you will how do you get a sense of if the culture at that company is one that is going to help the company continued to grow in a positive way or if there's some serious trouble spots that you can't see when you're just looking through the books well it's going to be true at any company it doesn't matter whether it's a long-established company you know I've been doing this since 1969 first through Bear Stearns and when we started the private equity industry or what even in industry was private investing became an industry and what what I've continued to do so you can read people you get you get to read them you find out for example if you take a walk through a plant with the CEO of the company you find out whether there's a labor issue in the company just by the mere fact that there's a no one's talking to the CEO I can go through plants and everybody's saying hi how are you and he's telling no one with knowing people by name it makes a huge difference I tell her people get out of the office get out from behind the computer because the computer is not going to tell you everything you need to know the only way you're going to find out what you need to know is go out there and really walk the aisles of the bin so our culture is one of inclusiveness very important and the thing that when we started KKR George Roberts my cousin and my partner in this effort and Jerry Kohlberg and I sat down and said we do not want to have a culture like we had at Bear Sterns where we came from and that culture at Bear Sterns was very much a neat which you kill people were only paid on what they produced period and so literally I would lock and I was a partner at the firm I literally would lock my door at night and lock my desk and we said look what that didn't that's not us that's not what we want so we set up a culture on day one and I would tell any young company whatever it is define your culture as soon as you possibly can because otherwise your operations will define you and that will define your culture grab hold of it take what you make the culture whatever it is in our case it's very much one of inclusion everyone at the firm is paid on every single transaction that we do whether you worked on it or you didn't work on it whether you're operating out of Australia you're operating in mental openers when you say that how you say investment staff or all the way down the board to every it's it's the investment staff particularly but every single person at KKR when we went public George and I because the two of us owned 100% of the firm we wanted to make sure that every single person at KKR was an owner I'm surprised you guys outlasted Bear Stearns there what outlasted Bear Stearns no I mean I didn't really think about it too much I just knew what we wanted to do what was right for us it's a it's a sad day for Bear Stearns you know they should never have gotten themselves into that position but it's a different culture it's a different kind of firm that was a trading firm our view was totally totally different in our view about culture is here's what we do and I and I would say this for any young company to think about one of the most important things we do is how do we evaluate people twice a year we evaluate them at midterm and we evaluate them at the end of the end of the year and we evaluate them in three buckets one is management and leadership two is commercial success and three is culture and values and we've had people at the firm that have been great commercial success for us and yet they never became a partner because they did not fit into the firm now so we do a 360 review not we'd-we'd the written ones are for the birds quite honestly everybody loves everybody in those things so we do the written that we do the 360 reviews in person for the top 85 200 people and it's amazing what you'll find when you start talking to somebody and and doing the review of those people and it shouldn't be the person that is that you're the boss you know that works for you somebody else in the firm will do the review so we evaluate people in those three buckets that I just talked about and and then what we do is we get together as the management committee we go through the report the the person that did the report plus the boss and then we vote and we vote by by compared closed you know those land held things and and we rate people and that's how people are evaluated at the firm and I I can't urge you enough to think about something like this it works it helps you with your culture it helps you evaluate your people because as fast as the technology firms are growing you're going to be making mistakes as you're hiring people we've got time for a couple questions and while if you have one raise your hand a person with a Michael come Henry I'll ask a quick yes/no two years ago with this conference the Dell buyout basically began and then last year this conference is essentially closed we haven't seen a ten billion dollar plus tech buyout since just yes note in the next 12 months will we I think you might and the only reason I say you might these are certainly opportunities out there and there's plenty of capital what has changed since the Dell deal was done is that the regulators have clamped down on the banks and basically said we don't want you'll any more than six times debt to Eva da and that and that really does start to to crimp what the banks will do so that's the that will be the limiting factor how much equity is there out there fair enough do we have any questions do we not have my question if not I've got more southern I'm never mind oh yeah we do right over there yeah as you were saying mr. Kravitz you've been around for a very long time you pay scrupulous attention to the fundamentals but you've moved into a tech market there's a lot of volatility you've had companies go from 5-year plans to one-year plans over the past 25 years what's the one fundamental insight you've had to abandon when you began your career that makes you successful today what have you had to give up believing to be more successful today when you have invested I'll tell you the one thing that we made mistakes on for a long time is we waited too long to change the CEO out when you know earlier days for taking our we always believed that you could change a CEO that a CEO would become materially better than what you saw I can say almost categorically that what you see is what you get if you've got reasonable judgment you're asking the right questions very hard to change a CEO materially you can help them around the edges however what we found when you do change a CEO a lot of the people below them just blossom and they're fantastic and and yet they were they were smothered because you had the wrong CEO and they never blossom or though or you lose them they eventually move on they want to go somewhere else so I'd say the one thing that I learned mostly is move much more quickly if you you know in your gut and after doing some real thought and and research on the on the person running the business you don't think that person is the right person move quickly and make a change I Henry I really want to thank you all for doing this today appreciate it thanks a lot very much Oh

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Length: 26min 22sec (1582 seconds)

Published: Tue Jul 21 2015