Those of you lucky enough to receive the private equity edition of Shouts and Murmurs, a gossipy newsletter featuring less than blind items about Apollo’s dirty little IT secrets and Stephen Schwarzman’s Spanish Harlem pied-à-terre are well-aware that KKR has seen better days. And by better days we mean days that don’t include an affiliate saying it wants to suspend payment on $5 billion worth of commercial paper, Blackstonian roadblocks in its quest to go public, crunches in funding for new M&A deals, and horribly unfunny—actually kind of bordering on racist—jokes made by Kravis around the water cooler that everyone has to pretend to laugh at, ‘cause he’s Kravis. Yes, to the untrained eye, things aren’t looking so good for the number 1 P.E. firm. Put on your KKR night vision goggles, though, and you’ll see that, to the contrary, everything is falling into place, exactly as they’ve planned (and also—suspicious stains).
After being unable to say no to the money being thrown at them by the banks, which those who are slightly more judgmental might use as evidence to say that KKR, Blackstone, et al. singlehandedly created the credit market mess, Kravis and his cronies have come up with plan to profit from the chaos. The firm, BusinessWeek reports, is in the process of raising at least $1 billion from investors for one of its existing hedge funds, in order to buy some of the $300 billion of junk bonds and high-yield loans that no one else wants. The plan is to get the debt that—and we know this is kind of touchy—KKR may or may not have created itself, on the cheap and then, when the market recovers, do that thing where you make a profit.
In a marketing brochure, KKR took the GEO approach, telling potential prey, “[u]nprecedented opportunity to invest in current corporate credit ‘meltdown’ and earn estimated gross returns in excess of 20%.” The pamphlet also noted, "Opportunity exists due to credit market technical issues, not deterioration in credit fundamentals." Remember, always—it’s not a lie if you believe it.
KKR’s major selling point—according to KKR—is that nobody knows LBO debt better than them. When shopping for a bunch of junk, they know all the best thrift stores to look, since, they claim, “80% of the pending LBO financing involves deals where KKR is either the pending buyer, knows the company well, or knows its industry and competitors.”
BusinessWeek, always intent on killing a good buzz, is skeptical that KKR’s ambition will be able to match its ability to convince investors to give it money, noting the fact that KKR Financial’s stock has been cut in half this month because of the credit market mess. (Though the direct connection between the two seems nebulous at best, barring a strategy change that has KKR investing all managed assets in KKR Financial stock).
Another hurdle is that KKR's strategy is predicated on the ability of the public company and hedge fund to use their leverage at a time when it is hard to borrow money, which, of course, is the reason loan and bond prices have been discounted in the first place. The hedge fund intends to leverage its investment four times and is counting on borrowing some of that money through collateralized loan obligations, the issuance of which has nearly ground to a halt.
KKR executives may be correct in predicting that the current crunch in the credit markets for LBO debt will soon pass. But judging from the problems its own publicly traded investment arm faces, actually making money from the current turmoil will be easier said than done.
But what our sons and lovers at BusinessWeek don’t get is this—this is what diabolical geniuses do. Wait for situations or events—fabricated or otherwise—that make everyone else feel like impotent, incompetent fools, swoop in, and capitalize. That or they’re on a great precipice of failure (and embarrassment, don’t forget embarrassment, got to have embarrassment). It’s one of these two things.
KKR: Cashing In on Credit Woes [BusinessWeek]
A Commercial-Paper Hit Close to KKR [WSJ]
LBO Shops Drove Debt Boom; Now, They Profit From Its Fall [WSJ]