KKR in 2003

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Authors: Ravi Madapati,
Faculty Member,
ICMR (IBS Center for Management Research).

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Overseeing Portfolio Companies

Over the years, KKR's involvement in helping its companies enhance shareholder value became widely recognized. KKR believed its executives, while working as active directors had to serve as a model of effective corporate governance.

KKR attempted to add value in various ways such as:

Attracting strong management: KKR believed that the best professional managers should run each company in its portfolio. It looked for individuals whose full time and attention were focused on creating value from a given business. In most situations, a strong operating management came with the acquisition and was a principal reason for KKR's interest in the investment. When it became necessary to supplement the existing management, KKR leveraged its relationships and long-standing track record in the industry, to attract the best managers for its portfolio companies. or instance, Louis Gestner who became famous, as IBM's CEO was first spotted by Kravis to run RJR Nabisco in 1989.

Management and employee incentivization: In addition to attracting talented executives, KKR attempted to structure management incentives and compensation plans that aligned the interests of managers and shareholders. All managers of KKR companies were expected to make a significant investment in their businesses and thus share directly the rewards and risks of equity ownership. Pursuing acquisitions and divestitures: KKR's portfolio companies were opportunistic in both buying and selling businesses. KKR served as an important catalyst, offering an array of contacts as well as its own experience in executing transactions. The acquisitions and dispositions of KKR's portfolio companies enabled these organizations to expand and solidify market positions, better focus their businesses and increase their financial and operational flexibility.

Helping portfolio companies arrange funding: KKR continually adjusted the capital structure of each portfolio company by taking advantage of opportunities in the capital markets to obtain lower cost funds or added flexibility. At the appropriate time, KKR would take a number of companies public, generally using the proceeds to reduce debt. But KKR typically retained a controlling stake and continued its oversight role.

Providing effective oversight: KKR believed the core oversight role that it played on a day-to-day basis through its position on the Boards of Directors of its portfolio of companies was important. KKR worked closely with each management to put in place robust processes to monitor corporate results. KKR executives were expected to be deeply involved in and knowledgeable about all aspects of a company's business, continually reviewing budgets and providing inputs in strategic planning and financial forecasting.

Maximizing value when exiting investments: The duration of the average KKR investment was typically five to ten years. KKR maximized the value of its investments by carefully timing the exit and choosing the method of sale. Since its inception, KKR had distributed in excess of $31.5 bn in value to its investors after liquidating its investments. Over $10 bn of this value had been generated through secondary offerings of stock in certain portfolio companies, as KKR took advantage of strong equity markets and went public.

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