FRANKFURT (Reuters) – Leveraged buyout doyen Henry Kravis believes market economies would benefit greatly by adopting private equity’s method of linking management compensation with a firm’s long-term financial performance.
The head of Kohlberg Kravis Roberts & Co told German Sunday paper Welt am Sonntag that buyout firms empower managers at their portfolio companies to invest and become part owners, something that could help correct unjustifiable levels of executive pay.
“The model that we use when managing companies could stabilise the economy worldwide. Aligning interests is key: the real payday comes when our managers sell their stock – stock in which they have invested their own money,” he said in an interview.
“That makes a big difference. If a person only receives stock options in a company, then he himself risks nothing,” added Kravis, who attended the private equity industry biggest conference “SuperReturn” this past week.
After Wall Street firms paid out billions in bonuses despite massive losses that forced many to take government aid to survive, U.S. President Barack Obama on Wednesday set a $500,000 annual cap on pay for executives at companies receiving taxpayer funds.
Kravis was confident that the U.S. government’s immense stimulus package and the Federal Reserve’s quantitative easing would lead the world out of the current crisis.
“In such times, the government has to intervene to stabilise the system,” said Kravis, whose buyout industry symbolised for many the very excesses of the debt-fuelled asset bubble whose bursting led to the worst recession among industrialised nations since the Second World War.
Kravis called on more stringent capital requirements for banks, which he believed will in the future shrink their proprietary trading books, shy away from complex financial derivatives and leave more loans on their balance sheets.
He also said businesses would have to become more transparent, for one.
NO SHORT TERM THINKING
“Secondly, companies and managers will have to pay more attention to all stakeholders in firms, in other words not just the owners but the employees, customers and the company overall as well,” he said, in a comment that could have been voiced by a trade unionist in labour-friendly Germany.
Kravis rejected criticism that private equity firms were short-term oriented, by comparing his sector with hedge funds that buy big into a company and later sell within weeks after forcing shareholder friendly concessions like share buybacks or divestments from management.
“The companies we buy, we hold in our portfolios for seven years on average. Many exchange-listed companies 60 to 80 percent of the stock changes hands in a year, so we are more long-term oriented than most shareholders,” he said.
He also dismissed the notion that the industry billions generated from its investments stemmed mainly from a rise in asset values.
“I can certify that 85 percent of our profits can be traced back to operational improvements, while only 15 percent stem from rising corporate valuations in the market,” he said.
(Reporting by Christiaan Hetzner)