How Henry Kravis Built Private Equity Giant KKR

Henry Kravis is a pioneer of the private equity industry. Following a successful career in corporate finance, Kravis, along with two other business partners, founded a leveraged buyout company called Kohlberg Kravis Roberts & Co. L.P. (KKR) in the late 1970s. He was 32 at the time. The objective of the company was to create and manage private equity funds that borrowed money in order to acquire businesses that were underperforming. These businesses would later be improved and sold at a profit. As of Jan. 6, 2018, the company had $143 billion in assets under management, as of Sept. 30, 2017. (See also: How Stephen Schwarzman Built the Blackstone Group.)

With a personal net worth of $5.2 billion, Kravis is one of the most talented and successful negotiators on Wall Street. Here is an overview of how Kravis built one of the world's largest private equity firms while creating a billion-dollar fortune in the process.

Born in 1944, Kravis grew up in a wealthy Jewish household in Tulsa, Okla. His father, Raymond Kravis, was a successful oil and gas consultant who had been an advisor to Joseph P. Kennedy Sr., the father of President John F. Kennedy. In the late 1930s, he became known for pioneering a process for the purchase of oil and gas properties. Loans for the properties were paid back with the proceeds of gas or oil produced from the properties themselves.

Kravis graduated from California's Claremont McKenna College in 1967, where he majored in economics. Subsequently, he enrolled in the MBA program at Columbia University's School of Business and worked as a stock trader in his spare time. He graduated with his second degree in 1969. During a commencement speech he delivered at Claremont McKenna in 2010, Kravis described how growing up in the 1960s helped craft his life. He noted, "It was a decade of tumultuous social, political, economic and cultural change ... I recognized the flexibility that change required. I understood that these rapid and disruptive changes could help me look at who I was and who I should become.”

With an Ivy League MBA under his belt, Kravis managed to land a job with the now-defunct investment giant, Bear Stearns. His first cousin, George Roberts, also got a job at the firm around the same time. Lewis Eisenberg, a senior advisor at Kravis’ company, discussed the relationship between the cousins during a Bloomberg Business documentary on the life and career of Kravis. He said, "Henry and George are more than close. They can finish each other's sentences most of the time. I have heard them disagree, but they end up coming to virtually the same conclusion. And they both share the same brilliance for business.”

Both Kravis and Roberts ended up working on a team at Bear Stearns that was headed by a contrarian investor named Jerry Kohlberg. Kohlberg focused most of his time purchasing businesses that had debt, and then fixing them up in order to sell them for much more than what the business was originally bought for. This strategy is known as a leveraged buyout (LBO), which at the time was called a “bootstrap” investment. (See also: Understanding Leveraged Buyouts.)

Between the late 1960s and the mid-1970s, Kravis and Roberts worked along with Kohlberg to buy out a number of companies. One of their most successful acquisitions was Incom International in 1971. The company manufactured industrial parts and had a purchase price of $92 million. The acquisition brought in $950,000 in fees for Bear Stearns, which at the time was the largest amount they had realized in a single transaction. Kravis and Roberts both became partners at Bear Stearns at ages 30 and 31, respectively.

Although the LBO deals were performing well, the management at Bear Stearns was not happy with the time it took for them to realize any returns from the acquisitions. Bryan Burrough, a writer who documented one of Kravis' most controversial deals, once explained, “To say they [Bear Stearns] had no patience with Jerry’s deals is like saying it tends to get hot in Texas during the summer.” As a result of this, they dismissed Kohlberg's idea to create an entire LBO division at the firm. Kohlberg, Kravis, and Roberts left the company to start a firm on their own shortly after.

In 1976, the trio founded an LBO firm of their own called KKR & Co. They successfully raised $400,000 of working capital to get the firm up and running. KKR conducted its first major buyout in 1979, a struggling auto parts manufacturer called Houdaille Industries that was acquired for $355 million. Over the years, KKR has acquired dozens of businesses. One of their most notable acquisitions was RJR Nabisco for $25 billion.

KKR has expanded into new business segments since the launch of their first private equity fund. The company holds investments in a wide range of income-producing real estate throughout the United States. This includes office rentals, retail spaces and health care properties. In 2013, KKR raised $1.2 billion for a real estate investment fund. KKR also constructs and manages hedge funds. The firm was listed on the New York Stock Exchange in 2010 and raised $1.25 billion from its initial public offering (IPO). (See also: The Most Famous Leveraged Buyouts.)

Henry Kravis made his billion-dollar fortune by using other people's money to purchase businesses. After having success with conducting leverage buyouts at an investment bank, Kravis along with his mentor Jerry Kohlberg and cousin George Roberts decided to start their own investment company called KKR & Co. Today KKR is one of the world's most successful and largest private equity firms.