Forbes - A titanic shift at KKR

Kevin Dowd

Staff Writer

October 11, 2021

Big Things

George Roberts (left in framed photo) and Henry Kravis (right) first conceived of KKR at Rose and Joe's restaurant (photo at left) in New York City in 1976. Forty-seven years later, the two cousins are stepping down as co-CEOs. San Francisco Chronicle via Getty Images

1. Two buyout icons, signing off

Henry Kravis and George Roberts have guided KKR for nearly half a century, overseeing its early days as a Wall Street upstart in the 1970s, its stormy adolescence as a feared buyout barbarian in the 1980s and 1990s and its more recent transformation into the $429 billion financial colossus it is today.

But their time at the top is coming to an end. And with it, an era of private equity inches ever closer to its conclusion.

Kravis and Roberts announced today that they will step down from their roles as co-CEOs of KKR and be replaced by current co-presidents Joe Bae and Scott Nuttall, effective immediately. Kravis, 77, and Roberts, 78, who are both among America's 100 wealthiest people, will remain co-executive chairmen. But the two cousins, who formed KKR in 1976 along with Jerome Kohlberg, are pulling back from the firm's daily operations, becoming the latest members of private equity's founding generation to step away from the industry they helped build. Already, few members of that generation are left.

Stephen Schwarzman is still the CEO of Blackstone. But nearly every other major private equity firm with several decades of investing experience has had to grapple with succession planning in recent years, a process that can be fraught in an industry where personal relationships and investor aura carry so much sway. Bain Capital, The Carlyle Group, Hellman & Friedman, TPG, Leonard Green & Partners and Silver Lake are just some of the other industry heavyweights founded in the 20th century that no longer operate under their original leadership.

Earlier this year, Apollo Global Management confronted its own unique succession situation, as longtime CEO Leon Black stepped down in the wake of an investigation into his financial ties to Jeffrey Epstein. He was replaced by Marc Rowan, another cofounder.

It's been apparent that KKR was headed in this direction for several years now. Bae and Nuttall were named co-presidents and co-COOs in 2017, and they've been the firm's public faces ever since, leading its earnings calls and investor days. At the time of that appointment four years ago, Kravis and Roberts issued a joint statement saying the move was about "ensuring we have the right team and leadership structure to serve our clients and partners for decades to come."

The first K of KKR has long since departed. Kohlberg left the firm in 1987, a couple years before KKR conducted its famed $25 billion buyout of RJR Nabisco. He went on to found Kohlberg & Co., another private equity firm that typically pursued smaller deals than those that KKR went on to pursue. Kohlberg died in 2015 at the age of 90.

KKR will probably never do a deal that prompts as much ink to be spilled as its Nabisco takeover, the inspiration for "Barbarians at the Gate." But the firm has remained at the forefront of the industry throughout the reign of Kravis and Roberts, making huge acquisitions, raising huge funds and pioneering new avenues for private equity to explore, including investment banking, credit investing and insurance. The small, privately held partnership of KKR in the 1980s bears little resemblance to the publicly traded financial behemoth it is today.

More changes are afoot in addition to the appointment of new CEOs. KKR also announced its intent today to gradually eliminate its current dual-class share structure that gives extra voting power to the company's executives, shifting to a "one-share, one-vote" format that will make it easier for KKR's stock to be included in public indexes. Carlyle and Apollo previously made similar shifts to coincide with their own succession plans.

The move should make KKR's stock even more appealing to investors. And it's already plenty appealing: KKR shares are up more than 65% since the start of 2021, part of a broader surge in private equity stocks that's been driven by the industry's stellar performance amid the pandemic.

That surge has taken KKR's market cap to more than $56 billion. It's a sum that likely would have been incomprehensible to Kravis and Roberts when they founded the firm 47 years ago, and a testament to how private equity has evolved from a niche industry into one of the world's major economic engines. That evolution continues today. But the next half-century of growth will be for a different generation to worry about—and to profit from.

Emerson Electric and AspenTech are creating a major new player in the industrial software space. Getty Images

2. Emerson's $11B software bet

Heavy industry needs software, too. That's the motivation behind a move announced today by Emerson Electric to merge a pair of its software subsidiaries with Aspen Technologies in a cash-and-stock deal worth $11 billion, forming a new-look AspenTech that will create and sell software for electric utilities, miners, geologists, manufacturers and clients in a range of other industries that have historically been much more concerned with physical tools than digital ones.

By this point, though, we should all know that software is eating the world. With software, AI and other similar technologies continuing to become more and more critical to industrial operations of all kinds, Emerson and AspenTech are trying to better position themselves to capitalize on a booming market.

While AspenTech already specializes on the space, industrial software is just one part of a much larger business at Emerson. The St. Louis-based conglomerate has a market cap of some $57 billion, with more than 80,000 employees and a portfolio of industrial brands that includes RIDGID power tools and Workshop vacuums. Its share price has more than doubled over the past 18 months after a precipitous fall in the early days of the pandemic, an uptick that surely increased the attractiveness of its stock as a merger currency.

Emerson will contribute its OSI and Geological Simulation Software units to the deal, along with $6 billion in cash, in exchange for a 55% stake in the new AspenTech. It bought OSI (also known as Open Systems International), which makes software for the power industry, a little more than a year ago in a $1.6 billion takeover.

The transaction values AspenTech at $160 per share, a 27% premium to the price of the company's stock before Bloomberg first reported that a deal could be in the works on Oct. 7. Based in Bedford, Mass., the company logged $709.4 million in revenue for its fiscal 2021, up 18.5% from the year prior. AspenTech chief executive Antonio Pietri will retain his role at the combined company.

Closing this $11 billion combination should keep Emerson and AspenTech busy for a while. But more M&A might be in the works before long. From the outset, it sounds like today's deal was designed with future consolidation in mind. From The Wall Street Journal:

"Mr. Pietri and Emerson CEO Lal Karsanbhai said in interviews they sketched out the deal over an Italian dinner in Boston’s North End in July, concluding in part that a combined company could be better positioned for further acquisitions."

Other Things

• For the second time this year, French retail and grocery giant Carrefour was unsuccessful in its attempts to conduct a mega-merger. After recently offering to acquire rival Auchan for €16.8 billion (about $19.4 billion), Carrefour has pulled back from the negotiations due to the objections of its leading shareholders, the Moulin family, according to a Reuters report. Earlier this year, Carrefour and Canadian retail powerhouse Couche-Tard abandoned a planned $20 billion merger due to opposition from French regulators, who believed the deal could create food security concerns. As Carrefour has been unsuccessfully chasing a tie-up, a pair of major grocery takeovers have occurred a few miles away in the U.K., where Asda sold for £6.8 billion (about $9.3 billion) and Morrisons recently signed a £7 billion pact.

• A shakeup is coming to the cycling sector. Dorel Industries announced an agreement today to sell Cannondale, Schwinn, Mongoose and the dozen other brands that comprise its Dorel Sports division for $810 million to Pon Holdings, a Dutch company whose portfolio already includes Santa Cruz, Urban Arrow and a host of other biking brands. The move will allow Pon to expand its presence in the U.S. and nearly double the revenue of its Pon.Bike unit. Dorel terminated an agreement earlier this year to sell itself to Cerberus Capital Management in a take-private buyout worth some $370 million due to the objection of shareholders. The conglomerate will now focus its efforts on its two other divisions, which sell home furnishings and juvenile products such as cribs and strollers.

• The infrastructure unit of Ardian said it will buy Spanish fiber internet provider Adamo Telecom from EQT for more than €1 billion (nearly $1.2 billion), continuing a string of recent deal activity in the European telecom market in general—and the Spanish telecom market in particular. Reports emerged last week that Telefonica was considering a sale of its Spanish fiber business for as much as €15 billion, and Red Eléctrica is conducting an auction of its own Spanish fiber network, with KKR, AXA and Allianz among those chasing a deal that could be worth €1.3 billion, according to local media reports. The looming shift to 5G is combining with years of increasing costs and shrinking margins to drive consolidation in the space.

• Late last week, Hellman & Friedman increased its takeover offer for Zooplus to €470 per share, matching a bid submitted two weeks prior by EQT. The two firms have been engaged in an extended bidding war for the German retailer of pet food and other pet-care products, a process that already got too rich for the blood of KKR, which had expressed earlier interest in Zooplus but backed out once the price started rising. The latest dueling proposals both value Zooplus at €3.36 billion (about $3.9 billion).

• An acquisition-filled year in the pharmaceutical sector continues. Pacira BioSciences, which specializes in non-opioid pain management, put pen to paper today on an agreement to buy Flexion Therapeutics for $630 million, or $8.50 per share. That's a 47% premium to the closing price of Flexion's stock on Friday. The strategic rationale is obvious on this one: Flexion develops non-opioid-based forms of pain relief for patients with arthritis and other musculoskeletal conditions, making it a natural fit with Pacira's existing portfolio. The U.S. healthcare industry's increasing reliance on opioids during the 1990s and 2000s helped spark a national epidemic, driving companies like Pacira and Flexion to search for different ways to treat pain.

• In a slightly smaller pharma deal, Supernus Pharmaceuticals agreed to buy Adamas Pharmaceuticals for about $400 million, or $8.10 per share, adding two drugs aimed at patients with Parkinson's disease to its existing portfolio of treatments for central nervous system disorders. Supernus will pay a hefty 75.6% premium to the closing price of Adamas shares on Friday. At the moment, more than half of Supernus' net sales come from Trokendi XR, a drug prescribed to prevent migraines and treat seizures in epilepsy patients.

• There's still a long way left to go in 2021. But it's never too early to start looking ahead to 2022. Co-owners Hellman & Friedman and Permira are preparing an IPO for call-center software specialist Genesys that could occur early next year and value the company at around $20 billion, according to Bloomberg, adding another major name to a jam-packed global IPO queue. Genesys sells its call-center technology to a blue-chip clientele that includes Lenovo, Microsoft, PayPal and Ticketmaster. A listing at anything near the reported valuation would be very lucrative for the company's owners: Permira bought Genesys in a 2012 deal worth $1.5 billion, and H&F acquired a stake in 2016 at a $3.8 billion valuation.

• Major Japanese oil refiner Eneos Holdings formally announced a pact to purchase Japan Renewable Energy for about 200 billion yen (around $1.8 billion), confirming reports from late last week that a takeover was imminent. Keitaro Inoue, a senior vice president at Eneos, said at a news conference that the acquisition is a "key turning point" in the company's efforts to reduce emissions and shift its focus toward renewable assets, with a stated goal of reaching carbon neutrality by 2040. Current JRE investors Goldman Sachs and GIC will exit their stakes in the deal.

• Considering the U.K. plans to ban the sale of new combustion-engine cars when the current decade is up, the importance of infrastructure in the country for electric vehicles is only going to grow. One company that aims create some of that infrastructure, Pod Point, is planning a public offering in London aimed to help it accelerate the spread of its services, which include charging systems for homes, workplaces and commercial charging stations. Majority owned by state-backed Electricite de France, Pod Point says it has sold more than 100,000 charging points in the U.K. and Norway since its founding in 2009. The company was valued at just over $110 million with a growth funding round in 2019, according to PitchBook.

• Russia's Renaissance Insurance Group set the initial price range for an upcoming IPO in Moscow that could value the company at more than 73 billion rubles (about $1 billion) and raise more than 25 billion rubles in proceeds. Renaissance is said to be Russia's largest provider of online insurance policies. The company's current majority shareholder is The Sputnik Group, a Russian investing and advisory firm led by banker Boris Jordan. it is also backed by Baring Vostok, the private equity firm led by American Michael Calvey, who was arrested in Russia in 2019 and convicted in April of embezzlement.

• KKR isn't the only alternative investor that's been busy planning for the future. Värde Partners, a Minneapolis-based firm that specializes in debt and restructuring deals, announced the promotions today of both Brad Bauer and Giuseppe Naglieri from their existing jobs as deputy chief investment officers to new roles as co-CIOs. For the time being, at least, they will share the role with current CIO Ilfryn Carstairs, who also took on the title of co-CEO last year. At the time, that promotion of Carstairs appeared to be setting the stage for the eventual exit of George Hicks, the longtime CEO who cofounded Värde in 1993.

Things To Read

SpaceX's Elon Musk and Dish Network's Charlie Ergen have two different visions for the future of high-speed internet. And the broadband spectrum might not be big enough for the both of them. [The Wall Street Journal]

After lining up a surprising merger with Sony last month, Indian TV network Zee Entertainment is locked in a battle with a major shareholder over whether the deal should be done. [Reuters]

A record-breaking heat wave that rolled over the Pacific Northwest earlier this summer created disasters that Oregon residents had never seen before. In all likelihood, they will see them again. [The New Yorker]

Consolidation has helped drive a complete transformation of the newspaper industry over the past 15 years. For millions of Americans, it means small-town life will never be the same. [The Atlantic]

The downfall of Greensill Capital created plenty of problems for Sanjeev Gupta, Britain's "saviour of steel." Now, he's facing a coup attempt in Dunkirk from an unlikely source: The private equity firm American Industrial Partners. [Financial Times]

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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Forbes - A titanic shift at KKR

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