Originally published in Nikkei Asia's “Henry Kravis: My Personal History"
Chapter 8
Our job begins the day we buy a company
When George, Jerry and I founded KKR in 1976, the acquisition method we now call private equity was unknown. After a series of big acquisitions, our business approach garnered attention, including from the media and the U.S. Congress. I'd argue that while no doubt mistakes have been made, including by us and KKR, many have misunderstood (or greatly simplified) the model. They have overlooked how value is created -- and for whom.
It's not possible to create long-term value by simply loading a company with debt and cutting costs. Nobody will partner with you or entrust you with their valuable capital if that is your business model. We would not have stayed in business with the support of our clients if that was our business model.
Over the years, George and I have tried various analogies to clear up misunderstandings, like buying and investing in a house as I mentioned before. Our goal is to leave any company better than we found it. We stress this commitment by saying, "Our job begins the day we buy a company." It's not about the transaction itself.
We require top executives to own shares in the business so that they have a stake in the outcome. A newer innovation I will address later is that we also work with our companies to grant (free) ownership stakes to all employees in companies we control so they too can benefit, and everyone is working together. They are "free" stakes because it is an added benefit, not something in exchange for wages or something that non-senior management has to buy into.
Take Houdaille Industries, a machinery manufacturer we acquired in 1979. At $355 million, it was the largest public-to-private transaction at the time. Before we got there, members of its management team had planned to divvy up the same amount of capital into the company's businesses equally, but it was clear some of those businesses were more viable than others. So, we said to them, "Let's focus on the higher-returning assets, the successful parts of the business, and invest in those." We encouraged them to redirect their investment strategy.
We de-emphasized the company's machine tool business, which was facing stiff competition from Japanese companies. We decided to expand and strengthen the business of manufacturing rubber gaskets by investing in new acquisitions and integrating it with one of the other divisions. We later sold Houdaille to a British company, Tube Investments, in 1987, making a great return for our investors.
After the market crash in Oct 1987, Tube decided they wanted to sell parts of the company. We bought back the assets in early 1988, renamed them IDEX and worked with the team on the value creation plan. We took IDEX public in 1991 and delivered a second great return for the firm and our investors.
Maintaining a long-term perspective is crucial. Right after the initial acquisition, we told the management: "You're going to have more capital to invest back in the business. Let us focus on the business, looking five years ahead, not just to the next quarter."
Our stance and approach on this have not changed. Since our founding, we have been aiming to provide our companies with "patient capital." One of the questions that I always like to ask the CEO of a public company is: "OK, you're here today. This is your company today. Tell me what you're going to be like five years from now." Even when KKR became a public company, we were looking five years ahead.
There is no magic formula for corporate reform. In American football, they talk about "blocking and tackling." On offense, you have to be able to block your opponent to open passing and running lanes. On defense, you have to stop your opponent; you have to tackle them.
It's playing the game one step at a time. It's getting the basics right. Supply chain, pricing, quality of management ... corporate reform is also about getting the basics right.
I have one unforgettable memory from 1998. At a French-American business council meeting, then-French President Jacques Chirac asked the U.S. CEOs, "How is it that you have made your companies so much better? Your companies are growing faster than ours, why?"
The storied business leader Jack Welch, who was managing General Electric (GE) at the time, responded and he actually cited us in his explanation. I'm paraphrasing here. He said, "It's really, in large part, because of what KKR is doing. If KKR finds companies that are poorly run, that the boards of directors are not holding management accountable, they come in with their 'patient capital' and bring discipline to the management; they bring discipline to the company."
Companies are much better run today. It takes a lot more than discipline to create value. But I'll never forget that moment.