KKR co-CEOs predict revival in global IPO and takeover activity

KKR, one of the pioneers of the $15tn private capital industry, is hastening plans to sell large investments or take them public after higher interest rates caused a two-year slowdown in takeovers and initial public offerings.

Scott Nuttall and Joseph Bae, co-chief executives of the New York-based group, told the Financial Times they were seeing an improvement in activity to take portfolio companies public. KKR was also holding talks with large corporations and other private equity buyers about potential asset sales, they said.

“The IPO markets are starting to open up a bit, and leveraged credit markets have opened. We’re starting to get more [approaches] from strategic buyers,” Nuttall said in an interview. “You’re seeing that activity pick up. If it keeps going like this, monetisations will follow. It’s just a matter of time,” he added.

In 2023, private equity groups saw their stockpile of unsold investments surpass a record $3tn. Consultancy Bain & Co has warned of a “towering backlog” of companies that must be sold so cash can be returned to investors such as public pension funds which have become overexposed to unlisted investments.

Rising public equity market valuations and demand from credit funds to make new loans are fuelling a recovery in activity. “Valuations are reasonably robust for exits and the financing markets are coming back,” added Bae. “We have a lot of activity in flight.”

At its investor day this week, KKR laid out a goal to join Blackstone Group in surpassing $1tn in assets within the next five years. KKR has $553bn in assets.

Nuttall and Bae were named co-heads of KKR in October 2021, cementing a succession from founders Henry Kravis and George Roberts, the billionaire duo who brought leveraged buyouts to the financial mainstream in the 1980s by targeting poorly managed conglomerates.

While KKR will soon raise flagship buyout funds in North America and Asia, it is seeing its fastest growth in newer businesses targeting credit, insurance and infrastructure-based investments, which are expected to propel its increase in assets.

These businesses are benefiting from similar trends that KKR first exploited when Kravis and Roberts founded the group in 1976.

Large utility, telecommunications, energy and technology groups are selling off assets to private buyers to bolster profits, fuelling what KKR expects to be trillions of dollars in investment opportunities.

KKR’s funds plan to house assets moving off the balance sheets of corporations, banks and insurers looking to simplify their operations or fund stock buybacks.

Nuttall said US lenders were considering selling loan portfolios to repair their balance sheets, while potential acquirers were raising money for acquisitions. “We’re getting calls from folks that are wanting to be acquirers of some of those banks. They’re trying to free up capital now, to be able to be ready to make some acquisitions of the banks that need help,” he said.

Those asset sales are propelling the growth of KKR’s credit business, which has become the group’s largest business line by assets with $219bn under management.

Allan Levine, head of Global Atlantic, an insurer KKR recently fully acquired, said Japanese insurers were also in the process of selling off large blocks of assets to US buyers to buy back their discounted stock. KKR believes these insurers may unload hundreds of billions in such assets in the coming years.

KKR has prioritised growth in Asia and Japan has become one of its largest investment areas globally. The firm is excited by a recent rise in Japanese yields that has pushed local savers into listed and unlisted equities, or credit-oriented investments.

“I think most US investors don’t really get what’s happening from a macro standpoint in Japan right now and it’s exciting,” said Bae, who added that a “tidal wave” in shareholder activism had prodded local conglomerates to simplify their operations.

Though much of KKR’s investment activity will be aimed at assets moving off other balance sheets, it has built up its own stable of assets.

The group sits on an $18.4bn pile of investments, which Nuttall and Bae have bet will fuel earnings in the coming years. Earnings from its directly owned investments are targeted to rise from $15mn in 2023 to $300mn in 2026, and above $1bn by 2030, according to KKR.

The stockpile of assets, called “strategic holdings”, has been created by Nuttall and Bae to replicate the success Warren Buffett’s Berkshire Hathaway has had in compounding its assets, profits and market value. It was also a way to avoid overhiring, or straying too far from KKR’s strengths as its market value has reached $90bn and where other financial firms have struggled, they said.

Those struggles come mostly through overexpansion that leads to poor risk management and internal fiefdoms, they said, and KKR is betting such pitfalls can be avoided by sitting on its current investments as their dividends grow.

“Once companies, especially financial services companies, get to the $50bn market cap, their stock performance suffers,” Nuttall said. “Investor returns become more anaemic. Their growth slows.”