Kravis and Roberts first cousins; Kravis’ mother and Roberts’ father were siblings. Both learned the energy business from their fathers. Roberts’ father was an oil broker in Houston who took his son to business meetings; Kravis’ father was a petroleum engineer in Tulsa. The Kravis and Roberts families spent summers and holidays together, and the future lions of Wall Street swear they haven’t had an argument since they were 8 years old.1 The last one involved who would get to ride Kravis’ new bicycle first. [Barron’s]
1. Obviously when one pictures an 8 year-old Henry Kravis one pictures Kravis’s current face/head on a child’s body.↩
Underwriting a stock or bond deal can be very difficult and work-intensive: you need to coordinate your t-shirts for the pitch, manage logistics ranging from prospectus writing to investor-lunch-sandwich-buying, and actually convince investors to buy whatever it is you’re selling. But it can also be very easy. The limit case of easy underwriting is:
Your phone rings at noon on a Tuesday.
You answer it.
“Hi, it’s Company X. How’d you like us to write you a check for $100,000 in exchange for letting us put your name on the cover of a document?”
“Great, there’s a diligence call at 4:15pm. We price at 4:30.”
I’ve always liked the purity of this business model: basically, someone writes you a check, and you deposit it,2 and that’s that; you never sully yourself by actually providing them any service. But what’s in it for the client: why write you a check for doing nothing?
The answer goes something like this:
There are fixed-ish fees for underwriting services – 7% for IPOs, 3% for follow-on equity, 2-3% for high-yield, a sliding scale based on maturity for IG.
If you want actual underwriting done – someone to write a prospectus, call investors, and market the deal – you gotta pay those fees.
But you don’t have to pay all of them to the bank or banks actually doing the underwriting.
Generally you have to pay each active bank at least as much as you pay any other bank,3 but you can still hand over a decent chunk of the fees to lower-level passive bookrunners, co-lead managers, co-managers, and other fancy titles for “bank that receives check.”
So you essentially have “free” soft money: you’re writing a $3mm check anyway for that $100mm deal, but you can allocate $1mm or so of it to anyone with a securities license.
So you might as well hand that free money to banks who’ve been nice to you: banks who lend you money at below-market rates, say, or advisors who’ve done lots of free work on M&A ideas that have never happened.
If you’re Blackstone or KKR, are you on balance pleased or not pleased that Bain Capital’s favorite son is running for president? On the one hand, millions more people now think that they know what “private equity” is – and that they don’t like it – than did a year ago, and that loosely coagulated hostility has led to attempts to ban carried interest and dividend recaps and management fee conversions and the Cayman Islands. On the other hand, when a lawsuit accuses the entire private equity industry of antitrust violations and rampant corruption, now you get headlines like “Equity Firms Like Bain Are Depicted as Colluding,” and so I guess KKR employees can tell the folks back home “we are not an equity firm like Bain.” If Bain is a metonymy for Everything Bad in your industry, you can’t help but look good by comparison. Goldman Sachs once played this role for another industry, or still does, but at least Goldman is genuinely evil;1boring Bostonian Bain is a weird choice to be the poster boy for badness. Did you know that Cerberus – an “equity firm like Bain” – is named after an actual hell hound?2
Anyway! Today’s unflattering depiction of Bain & ilk comes from a long-running class action lawsuit accusing those firms of price-fixing on a series of club LBOs in the go-go five-years-agos; the theory is that every private equity firm was in a conspiracy not to bid up each other’s deals, and to split the profits. The court recently released a heavily redacted complaint in that case that claims to draw on PE firms’ internal emails basically saying “let’s collude to drive down prices on all these deals.”
Presumably the redacted bits all say “let’s do lots of crimes!” but the unredacted bits tell a … pretty unsurprising story. Private equity firms wanted to buy companies cheap. They did so in part by not getting into tooth-and-nail bidding wars over any individual target, either by just not bidding for the target or by trying to club up with other bidders to split the deal. When this worked and PE Firm A got a deal cheap because PE Firm B passed on it, Firm A was like “yaaaay” and Firm B was like “you totally owe us, man,” which I feel like is in exact equipoise between “evidence of criminal antitrust collusion” and “just a bluffy/jokey thing you say when your competitor lands a deal.” Read more »
Earlier today, KKR announced that former Morgan Stanley Chairman and CEO John Mack will be joining the private equity firm as a senior adviser, “supporting new investing activities and providing counsel to KKR portfolio companies.” Including the new gig, Mack is now working three jobs, the others being “part-time adviser” to Morgan Stanley and author (as previously noted, he’s working on a book). And while it’s nice to see him keeping busy, you know what these little diversions don’t leave a lot of time for? Manning up and going after his dream. Read more »