KKR Plans Its IPO: Hold Onto Your Wallet With Both Hands

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Remember private equity? That's where a group of rich people get together to borrow loads of money from banks and the bond market to buy a business that generates cash. These investors put in a tiny sliver of their own money, then use the assets of the business as collateral to extract enormous fees and dividends. Now the big daddy of private equity, Kohlberg Kravis and Roberts -- KKR -- is finally tapping the New York Stock Exchange for an initial public offering, and that can only mean that the rest of us better hold onto our wallets.

According to Reuters, KKR plans to list 204.9 million common units (not common shares) valued at roughly $2.2 billion on the NYSE -- moving its public listing from Euronext in Amsterdam. The firm's biggest owners are the legendary Henry Kravis and George Roberts, whose fame peaked during the 1980s leveraged buyout boom with the leveraged takeover of RJR Nabisco, which provided fodder for a great book about the era, Barbarians at the Gate.

KKR managed $52.2 billion at the end of 2009. Since its launch in 1976 by a gaggle of Bear Stearns alumni -- including Jerome Kohlberg, about whom I wrote in 2004 -- KKR boasts that it has made 70 private-equity investments with a total transaction value above $425 billion.

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If you buy into this IPO, you get common units -- instead of common shares -- that Reuters reports represent a 30% interest in KKR -- which is a partnership, not a corporation -- while its principals control the remaining 70%. These common units are subject to legal restrictions and daunting tax complexities.

Then there are the underlying financial assets of KKR, which are a mixed bag. The good news, according to Dow Jones Newswires, is that some of these assets are performing well -- such as retailer Dollar General and hospital chain HCA. Unfortunately, KKR is also saddled with assets valued at deep discounts from their purchase prices -- Energy Future Holdings (40% of cost) and First Data (60% of cost).

Overall, Dow Jones Newswires reports that things improved for KKR from 2008, when it lost $12.87 billion, to 2009, when its investment income totaled $7.75 billion.

But public investors in private-equity IPOs do not have a happy track record.

Blackstone Group (BX) went public in 2007 right at the peak of the last private-equity boom, at a time when its CEO, Steve Schwarzman took the buyout fame baton with stories of lavish meals in his mansion and complaints about his employees' squeaky shoes. For the IPO, Blackstone stock was valued at $31. Afterward, it sank relatively quickly, and since 2008, has never come close to recovering that level again. Its current value is down 52% at around $14.80.

I am sure it's possible that things will be different for KKR investors, but I wouldn't bet money on it.
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