KKR Launches $2 Billion Europe Fund

Kohlberg, Kravis Roberts & Co (KKR) in January launched a European fund with a target of $2 billion (euro 1.8 billion) and a cap of $3 billion. If it reaches its maximum size, the fund would rank alongside the $3.1 billion CVC European Equity Partners II as the largest buyout pool in Europe. Therefore KKR potentially could control the largest buyout partnerships in both Europe and the US.

An early indication of support for the fund came from the Washington State Investment Board, the lead investor in KKR’s 1996 US buyout fund. A Washington sub-committee in January recommended a $400 million commitment to the KKR European Fund despite doubts on the part of Brinson Partners, Washington’s adviser. Washington chief investment officer Christopher Ailman said that, while Brinson expected opportunities in Europe would be slow to emerge, “We feel KKR can create opportunities others would not recognise”.

Oregon Public Employees Retirement System, another major investor in the KKR 1996 Fund, is evaluating the European fund proposal. If both Washington and Oregon go firm on the fund they will be in a position to influence the vehicle’s terms. Christopher Ailman said discussion of terms has not yet begun.

KKR is trying, not for the first time, to become a global buyout player and to join several other US groups – such as The Carlyle Group, Clayton, Dubilier & Rice and Hicks, Muse, Tate & Furst – that have extended their reach to Europe so they can deploy increasingly larger pools of capital.

KKR, however, 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, the increasing sophistication of the capital markets and the prospects for the growth of businesses across country lines, its looks as if there will be more investment opportunities”, a spokesman at KKR said.

Last year, limited partners in KKR’s $5.7 billion 1996 fund sanctioned an increase in the vehicle’s cap on foreign investments to 33% from 20%. When, towards the end of the year, KKR asked investors to increase the cap again to 50% – partly to accommodate the better opportunities the firm was then seeing in Europe – some limited partners demurred. The reason some declined, according to a principal familiar with KKR, was that their investment in the fund had been for domestic buyouts. In the wake of its decision to raise a dedicated European vehicle, KKR has scaled back the international component of the 1996 fund to 20%.

KKR therefore decided not to poll the entire partnership and instead launched the as-yet-unnamed European fund. Partners at KKR declined to comment on the fund.

KKR has deployed about 50% of its current fund, approximately 10% of it in European investments. A source close to the firm suggested KKR would invest its domestic and European funds alongside one another in Europe but said the firm has not yet set definitive plans.

Unlike some other US buyout firms, KKR is drafting existing managing directors to head its European effort. Todd Fisher and Edward Gilhuly from its Menlo Park office will head up the London team alongside Neil Richardson, who previously helped KKR source European deals through its Glenisla affiliate.

Some current LPs are concerned about the transfer of KKR’s talent from the US 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 one KKR investor.

Several of KKR’s investors believe the group can find good opportunities in Europe because there are few firms on the ground with as much capital to invest.

“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.

Over the last five years, KKR has closed five deals in Europe. The firm acquired Willis Corroon, Westminster Press and Rainford Group in the UK and Rhine Re n Switzerland. KKR also took a 36% holding in UK-based Newsquest plc. None of these deals, however was as large as “the one that got away” – the $1.7 billion buyout of the Herberts coating business from Hoechst of Germany. KKR tried to renegotiate the price of this acquisition in the light of a changed funding structure following a hiatus in the high-yield bond market, and the vendor refused. The result, according to GP sources, could be that vendors of large Continental companies, who are still more reluctant to sell than their US or UK counterparts, may be hesitant about entering into an agreement with KKR or other financial buyers.

Limiteds’ views on investing now in a European fund sponsored by KKR seem to be mixed.

“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 LPs 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”.