I've refrained for some time from posting about KKR's IPO on the Amsterdam Euronext exchange. However, there have been a lot of provocative articles in The Deal, WSJ, and NY Times suggesting that the KKR IPO is a "transformational" event in the private equity industry. Perhaps it is indeed a transformational event, but if anything, the IPO shows that KKR is just like any other greedy private equity firm that is striking while the iron is hot.
There are a lot of good reasons that KKR floated their private equity fund - easy access to lots of cash while retaining incentive fee structure, less reporting requirements to investors, doing away with the need to go back to investors for each fund. Indeed, it is an ingenious financial strategy - an endless well of "dumb" money with no one to report to but themselves. Or is it?
This strategy has been tried before. As one article alludes, it is this type of event that may indeed signal a market top. Remember "meVC"? Draper Fisher Jurvetson launched this similar type of public venture fund at a market peak. Remember Internet Capital Group and CMGI? Both variations of the sort of private equity holding company that KKR has established. All of them fizzled off without much fanfare. Albeit, these were venture funds, not cash-flow driven buyout funds. Also, this is KKR we are talking about - the original Barbarians at The Gate!
There are three things I really don't like about KKR floating a public fund. The first is that they have cheapened their elite private equity brand by offering shares to the public, at the expense of their private funds. While I suspect the hybrid buyout-hedge strategy of the fund will enable them to do some creative deals like never before, my question is this - if KKR is so good, then why change their strategy?
Secondly, I do not believe that private equity investments are suitable to the general public. The general public wants high quality short term results, quarter after quarter, this is not the modus operandi of private equity investments. When the market turns sour and a few deals blow up, public investors will not be able to stomach the heat.
Lastly, I believe that the best part of private equity is the strength of relationships built among investment managers and their limited partners. The oldest and most respected funds have generations of investment relationships with prominent families, endowments, and pension plans. When I invest in a fund, I am initiating an investment relationship with the manager, not just for one fund. A firm's true strength is the strength of its investment relationships. If KKR has a bad fund, they undoubtedly will be able to raise another one based on these relationships. However, when the buyout downturn hits, who will KKR be calling for the next fund? Public investors? I think not.
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