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Opening Bell: 7.05.07KKR Special Edition

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KKR to Raise $1.25 Billion in IPO After Blackstone (Bloomberg)
Late on Tuesday—after DealBreaker and everyone else who loves America had departed for early Independence Day revelry—Kohlberg Kravis Roberts finally announced its plans to raise as much as $1.25 billion in an initial public offering. If you buy into this IPO, the redcoats win.
Good Times, Bad Times: Make a Deal (New York Times)
Is conservatism “creeping in” to the private equity world? That’s the conclusion drawn by Michael J. de la Merced writing in the Times this morning. It seems an odd assertion to make in wake of the KKR IPO announcement. MJdlM, however, points out that KKR plans to raise only $1.25 billion, an effort he says amounts to “almost humbleness.” But is it the attitude that’s changed or the economics? Rather than a sign of conservativism, it might be better to look at these equity offerings as a bet against the continuation of cheap money. In the nearish future, borrowing probably won’t be as cheap as it’s been in recent years. So the private equity guys are building an equity umbrella for rainy days ahead.
The Barbarians are through the gate (Telegraph)
Telegraph writer James Quinn details Henry Kravis’ last moments before the IPO. “The clock approached 5.30pm EDT (10.30pm BST). He glanced at the framed yellow slip detailing the $10,000 (£4,958) he and fellow founders Jerome Kohlberg and George Roberts had deposited with the Chemical Bank in 1976,” Quinn writes. It would just be spoiling it to ask how Quinn can possibly know this, since it’s pretty obvious he wasn’t in the room.
KKR aims for premium over Blackstone (Financial Times)
Should KKR’s stock trade at higher multiples than Blackstone’s? KKR certainly believes it should. One justification we're hearing is that since KKR is more focused on private equity than Blackstone, which some have said has all but become an investment bank, it has more exposure to pure private equity upsides. But that’s just another way of saying it has more risk should the takeover-and-turnaround business start to crumble. What’s more, it’s 300-page prospectus mentions plans to “expand into new related businesses” which might mean more diversification. That’s usually a good thing but seems to undermine the pure PE multiple justification. So maybe it's the long-term investment lock-ups and revenue streams of its portfolio businesses?
KKR and Blackstone (Financial Times)
Wasn’t there some sort of bill in the Senate that was supposed to have the effect of discouraging private equity firms from going public? Our sources in Washington, DC say that rumors have started to fly around Capitol Hill that this bill won’t get passed—and if it did pass, it wouldn’t get signed by the president. One reason we’ve heard for the lack of enthusiasm for the bill among even some top Democrats is the fear of upsetting the electoral balance before the 2008 presidential election. Some Democrats think they gain from “soak the rich” rhetoric and politics, while others (*cough* Hillary *cough*) worry that the threat of raising taxes on private equity might be exactly what the Republicans need to spur on their laggard fund raising and unite a fractured financial community to stave off the Democrats.
KKR float threatens investment bank fees (Telegraph)
So why did KKR make their big announcement on the eve of Independence Day? What exactly is KKR planning on becoming independent from? Perhaps the answer is: they were declaring independence from investment banks. The prospectus indicates that KKR will use money from the IPO to reduce its "reliance on third party sources of capital." That phrase—“third party sources of capital”—roughly translates into “investment bank debt underwriting and syndication.” It might seem surprising that KKR—which notoriously pushes around its lenders when it makes deals—wants to free itself from the banks which have helped it grow into the giant that it is. But no matter how loose you can convince a bank to make its covenants, you still have to pay its fees. From the prospective of a lot of private equity folks, the fees from investment bank debt syndication and bond underwriting are pure dead weight costs, and the folks “earning” those fees are simply making money from having money to hand out. And after the triumph over debt covenants by private equity, the investment banks aren’t even acting as the cautionary conservatives in the takeover business anymore. If there is one thing that could put a smile on Henry Kravis’s face, it would be freedom from those fees.


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