Originally published in Nikkei Asia's “Henry Kravis: My Personal History"
Chapter 17
Losing out to Warren Buffett convinced us to diversify into credit
Founded in 1976 with a focus on acquiring and optimizing companies, our goal was to create long-term value by transforming good businesses into great ones, ultimately generating alpha for the investors who entrusted us with their capital. However, today, private equity represents only around a third of the assets we manage, reflecting the strategic diversification we've undertaken.
Our journey toward diversification began in earnest in 2004 with the launch of our credit business, but the seeds of this evolution were planted much earlier. Our global deal-sourcing funnel consistently uncovered compelling investment opportunities that lay outside the traditional capital base of private equity. These opportunities often multiplied during periods of market volatility, such as the technology bubble and the Enron collapse in 2001. Unfortunately, some of these deals slipped through our fingers, most notably one in 2002 with Williams Companies, an energy firm in Tulsa, Oklahoma, burdened by a heavy debt load.
Williams Companies was a great business facing unique challenges. When they sought financing to restructure their debt, we found ourselves unable to provide the necessary capital through our private equity funds, which were not equipped for such transactions. We proposed acquiring and rehabilitating the company through a leveraged buyout, but the management was committed to maintaining its public company status. As an alternative, we suggested a debt restructuring plan, involving the acquisition of new shares and benefiting from the company's turnaround. However, due to the constraints of their financial structure, we were forced to walk away.
The deal did not end there. Williams Companies eventually turned to Warren Buffett, who provided the funding they needed. The company went on to implement the debt restructuring plan we had proposed, with Buffett reaping the benefits of the new shares. This missed opportunity underscored the need for us to be in a position where we could say "yes" to companies seeking a capital partner, regardless of the type of investment required. It became clear that to avoid such scenarios in the future, we needed to expand beyond traditional private equity and enter the credit market.
This shift marked a significant evolution in our approach to business. The sales pitch expanded from the straightforward question, "Is your company for sale?" to offering a broader range of financing solutions. If a company wasn't interested in selling, we could now provide alternative capital solutions without needing to control the asset. This strategic flexibility increased our opportunities, much like a baseball team getting more at-bats in a game.
Since then, our investment scope has continued to broaden. We've expanded into infrastructure, real estate, insurance, credit and now manage approximately 45 distinct investment strategies within what we call our "toolkit." This diversification is a testament to the entrepreneurial spirit that has been a cornerstone of KKR's success. It didn't happen overnight; it has taken nearly five decades of deliberate and strategic growth, collaborative culture and creativity to reach where we are today.
Despite the inevitable challenges that come with growth, such as the risk of bureaucracy and slower decision-making, we have made it a priority to maintain our culture and an entrepreneurial environment. Even with 2,500 employees worldwide, we strive to ensure that innovation and agility remain at the heart of our operations. Our new NYC headquarters, designed with a wide spiral staircase connecting all floors, embodies this ethos by encouraging spontaneous interactions and the free exchange of ideas. We've tried to replicate this in other locales too.
At KKR, we believe that innovation-driven growth is essential to survive and thrive in a competitive marketplace. Our diversified platform allows us to capture opportunities across a wide array of asset classes, ensuring that we remain at the forefront of the industry. By fostering an environment where every employee has the opportunity to say, "Hey, I've got an idea," we continue to evolve, innovate, and drive success for our investors and the companies with whom we partner.