Washington Poses Big Risks to KKR Offering

We know every investor out there wants a chance to get a piece of Henry Kravis and George Roberts. But, KKR’s latest public filing, in which it seeks to sell $500 million worth of shares on the NYSE, is littered with “risk factors” that might make you a bit skittish.

The most significant come from Washington in the form of new tax policy, increased regulation and ongoing investigations by the Justice Department.

The Obama administration has delivered legislation to Congress that would require private pools of capital with over $30 million in assets under management to register under the Investment Company Act of 1940. While it’s unclear if the legislation will get passed, it could deal a huge blow to KKR’s business.

In the risks section of KKR’s S-1 filing, the firm says if it has to register as an official “investment company” under the Act, it “could make it impractical for us to continue our business as contemplated.”

New proposals to tax carried interest as ordinary income instead of capital gains, which were passed by the House in December, would also damage KKR’s profits as would a change in the firm’s effective tax rate.

If the changes suggested by the administration or any of the proposed legislation or similar legislation were adopted, income attributable to carried interest may not meet the qualifying income requirements under the publicly traded partnership rules, and, therefore, we could either be precluded from qualifying as a partnership for U.S. federal income tax purpose or be required to hold interests in entities earning such income through a taxable U.S. corporation. If we were taxed as a corporation, our effective tax rate would increase significantly. The federal statutory rate for corporations is currently 35%. In addition, we would likely be subject to increased state and local taxes. Therefore, if any such legislation or similar legislation were to be enacted and apply to us, it would materially increase our tax liability, which could well result in a reduction in the market price of our common units.

The firm also disclosed it has been asked by the Justice Department for documents related to how it values certain structured products and has also received requests regarding the long-running federal investigation into collusion among certain PE firms during the buyout boom.

In September 2006 and March 2009, we received requests for certain documents and other information from the Antitrust Division of the U.S. Department of Justice (“DOJ”) in connection with the DOJ’s investigation of private equity firms to determine whether they have engaged in conduct prohibited by United States antitrust laws. We are fully cooperating with the DOJ’s investigation.

In addition, in December 2009, our subsidiary Kohlberg Kravis Roberts & Co. (Fixed Income) LLC received a request from the SEC for information in connection with its examination of certain investment advisors in order to review trading procedures and valuation practices in the collateral pools of structured credit products. We are fully cooperating with the SEC’s examination.

There’s also this piece about lack of deal financing and griping from LPs about fees:

In particular, the current limited financing options for leveraged buy-outs resulting from the credit market dislocation has significantly reduced the pace and size of traditional buyout investments by our funds. Due primarily to this reduction in traditional buyout investments, the amount of committed dollars invested by our Private Markets Segment decreased to $2.1 billion for the year ended December 31, 2009, a decrease of $1.1 billion, or 33.5%, from the year ended December 31, 2008. In addition, we have confronted and expect to continue to confront requests from a variety of investors and groups representing investors to increase the percentage of transaction fees we share with our investors. To the extent we accommodate such requests, it would result in a decrease in the amount of fee revenue we earn.

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Comments (12)

  1. Posted by Anonymous | May 12, 2010 at 1:10 PM

    *pin drop*

  2. Posted by Anonymous | May 12, 2010 at 1:24 PM

    Am I the only one who thinks Kravis looks like a constipated version of Dracula?

  3. Posted by Anonymous | May 12, 2010 at 1:37 PM

    ugh I just got a P.E. offer… back to banking I guess :(

  4. Posted by Anonymous | May 12, 2010 at 1:42 PM

    Shut the fuck up Kouwe

  5. Posted by Anonymous | May 12, 2010 at 1:52 PM

    Haha finally, all those d-bag PE firms deserved to get taxed years ago. I have no idea why hedge funds and PE firms are not taxed, I mean you’d think that if an institution owned several companies the government would consider it a “corporation”.

  6. Posted by Anal_yst | May 12, 2010 at 2:25 PM

    I haven’t read the filing but just thinking this out real quick: some of the partners (namely the founding ones) are getting old(er), sure, wanna liquidate and all, but I doubt they’re all tied-up in firm.

    Now, Kouwe, were the worries about “D.C.” as big as you seem to indicate, do you think they’d even file at all?

  7. Posted by Anonymous | May 12, 2010 at 2:45 PM

    Anal_yst,
    Thank you for your thoughts and insights. In the future, when reading any OM, I shall interpret the risk factors section to be NBD since, if it were a BD, the issuers would not be coming to market in the first place. This will give me additional comfort when buying assets like hybrid synthetic CDO-squared notes.
    Please let us know which shop you work at so we can make sure we provide coverage.

  8. Posted by Anonymous | May 12, 2010 at 3:16 PM

    Clearest sign yet the game is over. These scumbags don’t want partners in their gold mine until there’s nothing left. Motherfuckers are going to need a ladder to climb into Hell.

  9. Posted by Anonymous | May 12, 2010 at 3:25 PM

    ominous sign, remember Blackstone, it suggested the market was topping out…..

  10. Posted by Anonymous | May 12, 2010 at 3:32 PM

    7 – Heidi Moore. Cunt.

  11. Posted by Anonymous | May 12, 2010 at 5:03 PM

    Just about all of these disclosures were in Blackstone’s OM, so I’d say it’s not a big deal

  12. Posted by Kouwe - Uninformed | May 20, 2010 at 1:40 PM

    Kouwe, you are wrong. Investment companies already have to registed with the SEC if they have more than $30 million in AUM. Private equity funds don’t have to register because they qualify for the private fund exemption. No politician has introduced legislation saying that the funds themselves have to register, only the advisers to those funds. Do you really think KKR is stupid enough to engage in some business which requires them to register their funds as investment companies? They know the rules, they operate in and around them, and that’s why they are way smarter than you, who doesn’t appear to know the rules in the first place. Before you read and understand them yourself, shut up.