NEW YORK – Kohlberg Kravis Roberts & Co. in early January launched a debut European fund targeted at $2 billion and capped at $3 billion. If it exceeds its target, KKR potentially will control the largest buyout partnerships in both the United States and in Europe.
The firm is trying, not for the first time, to become a global buyout firm and to join several other U.S. groups – such as The Carlyle Group, Clayton, Dubilier & Rice and Hicks, Muse, Tate & Furst Inc. – that have extended their reach to Europe so they can invest increasingly larger pools of capital.
However, KKR wants to do more than its brethren and is intent on focusing much of its overall effort on Europe. “We feel that with the unification of currency in Europe, and with the capital markets becoming more sophisticated, and with prospects for the growth of businesses across country lines, it looks like there will be more investment opportunities,” a KKR spokesperson said.
Last year, the firm received permission from its limited partners to increase the cap on foreign investments in its $5.7 billion KKR 1996 Fund to 33% from 20%, but the firm soon wanted a larger allocation.
KKR late last year asked its investors again to raise the cap to 50%, partly because it saw better opportunities in Europe than in the U.S., but this time some L.P.s told the firm they could not support the move because their investment in KKR had been for domestic buyouts, a principal familiar with the firm said. KKR decided not to poll the entire partnership and instead launched the as-yet-unnamed European fund. Partners at KKR declined to comment.
KKR has deployed about 50% of the $5.7 billion U.S. fund it raised in early 1997, and has invested 10% in European investments. It will likely invest the domestic and European funds alongside each other, although it has made no definitive plans, a source said.
Unlike some other U.S. buyout firms, KKR is using existing managing directors to put the European effort to work once it is raised. Todd Fisher and Edward Gilhuly, two of the dealmakers from its Menlo Park, Calif. office, will be investing the vehicle out of London offices, along with Neil Richardson, who previously helped KKR source investments in Europe through its British affiliate, Glenisla.
Some current L.P.s are concerned about the transfer of KKR’s talent from the U.S. to Europe.
“It’s a negative that those two partners will concentrate on Europe … but it does not change my view of the firm,” said a KKR investor.
The group is offering fund terms similar to its most recent U.S. fund, which includes sharing transaction fees with investors and calculating returns on a portfolio-wide basis, another KKR investor said.
Several L.P.s believe KKR can find good opportunities in Europe because there are few firms that have as much capital to invest there.
“There’s an awful lot of opportunities in Europe, and there’s not a lot of firms over there of that size,” said Phil Cooper, who heads Goldman, Sachs & Co.’s funds-of-funds.
European firms that have raised funds similar in size to the KKR effort include CVC Capital Partners. Ltd., which raised a $3 billion fund last year; Cinven, Ltd., raising a $2.5 billion fund early last year; and Doughty Hanson & Co., raising a $2.5 billion vehicle in 1997.
Over the last two years, KKR has begun investing in Europe and has closed five deals. KKR acquired U.K.-based Willis Corroon, an insurance broker; U.K. publisher Westminster Press; U.K. telecommunications company Rainford Group; and Swiss reinsurance company Rhine Re. The firm also took a 36% stake in U.K.-based Newsquest plc, a newspaper publisher. Those investments, however, are not nearly as large as the $1.7 billion investment it had agreed to make last August in German-based Herberts GmbH, the largest European supplier of coating systems, and then broke.
KKR tried to renegotiate the price in light of a changing financing structure, and the sellers refused, ending the deal. The result, sources say, could be that sellers of large continental European companies, who are already more reluctant to sell than their U.S. or British counterparts, may be hesitant about entering into an agreement with KKR or other financial buyers, G.P. sources say.
KKR has been in Europe since the late 1980s. In the 1990s, KKR set up its Glenisla affiliate, which investigated European investing for the firm. The firm did not do much investing, though, because it did not believe the timing was right, said a G.P. close to the firm.
“I know they’ve expended substantial resources in Europe, and I know they believe they’re prepared to make a quality offering,” said Jon Vanderploeg, a portfolio manager at Wisconsin Investment Board.
Earlier, in the late 1980s, KKR also looked to Europe as an escape from the crowded U.S. deal market. The firm spent three months at the invitation of management conducting due diligence on Gateway, the U.K. food retailer, but did not make an offer. In doing so, it dodged a bullet.
Isoceles, partly owned by Wasserstein Perella & Co., bought Gateway for $3.3 billion. Subsequently, Wasserella lost about $350 million in its Isoceles investment, setting Wasserella’s buyouts effort back several years, sources said.
Limiteds seem mixed on the prospect of investing now in a European fund sponsored by KKR.
“The people in KKR are excellent managers of money and have a proven track record, and there will be opportunities in Europe in 1999 and 2000, so the fund fits the bill on both counts,” said Patrick Mitchell, chief investment officer at California State Teachers’ Retirement System, adding he had not yet reviewed the partnership.
Other L.P.s were not as enthusiastic.
“This kind of news makes me nervous,” said Brewster Wyckoff, securities analyst for San Francisco City & County Employees’ Retirement System. “There’s too much bleeding across the borders. They don’t have a knowledge of the laws and politics over there, and I am concerned there are things they are not going to see.”