Lincoln: Today we're going to be talking about one of the biggest private equity firms on planet Earth, KKR, founded by these three guys back in the 1970s. Man, did they have a wild ride. Basically the creators of the leveraged buyout. So we'll be kind of breaking down some of their initial strategies and how they got to be managing $488 billion today. How'd you like that intro? Do it again? Is it fine? All right, what's up? Today we're gonna be talking about KKR, one of the biggest private equity firms on planet Earth. They manage $488 billion across their different strategies. Founded in the 1970s, they've been around for almost 45 years now. Really expanded their product sets, which we'll kind of break down, and really the pioneers of the LBO. So we'll get to that in a moment. I don't like that, but. Again, or is that fine? Okay, sweet. All right, so Jerome Kohlberg, Henry Kravis, gosh, George Roberts, I always forget. I just never remember their names. Jerome Kohlberg, Henry Kravis, and George Roberts founded KKR in 1976. They were all former Bear Stearns guys. They had worked in finance. They had worked with private equity before. But really, LBOs weren't a thing. It was actually called, wow, before the business, oh shit, I'm really struggling this morning. Sorry, Louisa. It's taking, giving me a minute to get into groove here. All right, so three guys started with $120,000. They launched their private equity fund in 1976. They went on a year later to raise about $31 million and deploy that in private equity strategies. Now, they were honestly somewhat of the pioneers in the LBO, the leveraged buyout, which is a common, one of the staple strategy in private equity today. A year after inception, they went out and bought a $26 million company with only $1.7 million down, so like 6%. Today, that's fairly common to buy real estate or private equity assets with little or even sometimes no money down. But, you know, back in the 1970s, this was like crazy. This was absolutely ridiculous. You know, at that time, yes, you could facilitate debt in a transaction, but never to this extent. And basically, you know, a quick refresher on how that works is, you know, obviously mortgages on a house, you know, If a house costs half a million dollars, you go down and you put maybe 10% or even 20% down on a home, and then the bank finances the rest. The strategy was introduced for companies back then where, hey, we've got this company that's generating revenues, and maybe there's not a fixed asset that they can collateralize, but we can collateralize the cash flows of this business. So basically this business is predictable enough that it can generate revenues, consistent cash flows that we can underwrite to cover the debt obligations of a loan. And so, but not only do they do that with one loan, they go out and they get multiple tranches of debt. So you'll have like a primary lender, a secondary, a mezzanine, subordinate debt, like there's honestly like, there's like 20 different types of debt out there today. But these guys were one of the first to realize that, hey, you know, we can use leverage to go buy out the majority of the company, put a little money down. And this actually generates a higher IRR for or relative ROI. for our investors or for our money. Now obviously with debt comes more risk because you have these fixed debt obligations that you have to cover. But it was honestly a tremendous model at the time. Now some people argue that the heydays of private equity are over. I fundamentally kind of disagree in some aspects. Now, yeah, there's not just these cash cow, massive behemoth companies sitting on the marketplace with, you know, no debt, because that's really what it was in the 1980s and 1990s. It was a heyday for private equity. But I think there's still opportunities, but just at the lower end of the market. So the lower middle market, which is a great place to be for emerging managers as well, because you're just starting out and you probably don't have billions of dollars already raised. There's still tremendous amounts of opportunities in the lower and middle markets. So I wanted to kind of jump into a timeline here a little bit to paint you a picture of how KKR went from, you know, $31 million in their first fund to now managing $488 billion today. I'm just going to pause for a second. How'd you like that kind of story intro? Was it fine?

Lincoln: Yeah. Great.

Lincoln: So KKR went out doing their traditional, their LBOs. It actually wasn't even called private equity. It was called, it's an LBO fund, right? Like it's an LBO strategy. And they went out and they had some massive hitters. I mean, they went on to acquire Safeway, which they returned a 56 return on invested, a 56 equity multiple, which is crazy. They had other notable wins, but one of their most noteworthy and what they're most famous for came out of a deal in 1988. If any of you guys have read the book or watched the movie Barbarians at the Gate, it's about this evil private equity firm that comes in and takes over RJR Nabisco. Now, obviously, that was many years ago, and it's not as common of a story today, unfortunately. But I mean, this was the banner story, the pinnacle example of of private equity and the pros and cons that come with a private equity buyout. And this was led by KKR. So if you haven't read Barbarians at the Gate, you should. It's a great read and a great film. But, you know, I'd be doing KKR a disservice if I didn't talk a little bit about the buyout of RJR Nabisco. So let's talk about that story a little bit. So, okay. I just got to refresh myself on the names here. I always forget the names. Ross Johnson. All right, so RJR Nabisco at the tail end of the 1980s was a, yeah. RJ Artipisco, at the tail end of the 1980s, was a tobacco and food company, funny enough, but those were their primary products. They had built this massive company. They were a household brand, a very well-known brand, but they had kind of reached this point of stagnation. They weren't growing that much. Their CEO, Ross Johnson, you know, he was starting to, you know, come under some criticism because I think he had like a, an army of like 10 different private jets. He had like all these different private golf memberships. He was, he was living a pretty lavish lifestyle and the CEO, uh, you know, as, as, as board meeting approached, um, and he had to present to his shareholders, you know, he originally had, he invested all this money into a smokeless cigarette. which he thought was gonna be the next big thing. And that ended up tanking and they spent hundreds of millions of dollars on this product that was ultimately a bust. And literally like weeks before his shareholder meeting, he says, well, let's pursue a buyout. Let's buy this company. He had formerly had conversations with KKR, where KKR kind of introduced the idea of an LBO to Ross Johnson. But Ross didn't like that idea because when KKR comes and buys a company, they control the company. They exclusively, at least at the time, they only entertained full buyouts where they had full discretion over the assets, which means CEO loses his jurisdiction. And so Ross Johnson didn't want to work with KKR because he would lose controls of the reins. So he said, well, look, I can put together my own team and I'll buy the company. So he kind of wrestled together this team of random misfit all-stars to try and execute on what was one of the largest leveraged buyouts ever, really. And long story short, basically, between him and KKR and a couple other firms, they get into this bidding war about trying to buy out RJR Nabisco. Ultimately, the board voted with, it was this massive bidding war, and the board voted with KKR, and KKR won the deal. Ross, because of his greed, was fired. He still made gobs of money. He didn't make billions of dollars, but I think his exit package was tens of millions of dollars. So, I mean, he didn't lose out too bad. But, you know, it was this crazy story. They ended up buying the company for $25 billion, one of the largest buyouts of its time. And, you know, in retrospect, I mean, Yes, it was good and it was bad for KKR because it was good because they made a bunch of fee income from it, from the transaction. They charge upfront fees on the deal and they got a lot of publicity from it. And you know what they say, any publicity is good for the company. But a lot of it was bad because ultimately as they started running the company, Like in order to service the debts, they started to do these corporate divestitures, right? Which is basically taking the company and splitting it up into different companies or subsets and then selling them off to cover the debt obligations. So they basically kind of sold off different parts of RJR to Bisco. And ultimately, I think it ended up being a loss for their investors. Not crazy loss, but it definitely wasn't like a home run or anything. But it's definitely one of the most talked about LBOs of all time, just because of the kind of corporate raider mentality of this deal, where this private equity firm comes in, literally buys out the company, sells off the assets, and divests it. So again, good and bad for KKR. All right, I gotta rest for a second. What? Oh, yeah.

Lincoln: Yep.

Lincoln: It's a good story, though, right? OK, let's see. Alright, so back to KKR and their business development. So they went on, you know, running their LBO business. They started expanding into different markets. They started getting bigger and bigger. And in 2004, they finally expanded to another asset class. They introduced private credit. We've talked about that before, but basically where you're issuing debt to different companies or assets. But really, they went on and ran LBOs for almost 30 years before they introduced a subsequent strategy. I say this all the time. Establish yourself as an expert at one thing, and it makes it a lot easier to go and establish subsequent products. Thanks. A few years later, they launch an infrastructure line. I don't know if a lot of you guys actually know what infrastructure is. You might hear that as a subset of private equity. An infrastructure investment really is just, you know, investing in like either utilities or roads, highways, typically any sort of government, you know, sponsored or public sponsored asset. It's not always the communities that will pay for it or, or let's see, let me start over that. I need a refresher here. All right. So and then a few years later, they expanded into infrastructure. That's an asset class we haven't really talked about at all. And that is really I mean, it's a lot of different things. There's transportation infrastructure, which is going to be like your your highways, your bridges, your roads. There's utilities. There's social infrastructure like schools. There's renewable energy infrastructure. There's communication infrastructure like telecommunications, like either radio towers or satellites. There's all the sorts of infrastructure. It's a great asset class. You should look into it. And then again, they launched a real estate arm a few years after that. Now, a couple of noteworthy line items is they actually decided to go public in 2010. Now, a lot of you guys, I've been asked the question many a time, is why would a private equity firm ever go public? Well, for a variety of reasons, really. It's a great opportunity to, well, let me step back. Traditionally, with funds, there's an LP and a GP structure, right? Your general partnership is managing your limited partnership. That general partnership is oftentimes just a traditional LLC. Now, you can take the fund portion or the management portion of that public, giving those products Well, making those products accessible to the public markets. So a lot of the times people will go public is access to new money, right? It makes it a little easier. It's also a big liquidity event for any of the partners involved because now there's basically a secondary market for their shares, right? If you're an owner of a private company, it's kind of hard to sell your private stock. But once you go public, it's a lot easier to sell portions of your stock. Brand visibility, any sort of public company is typically a lot more talked about and covered in the news because everything's public, right? They have to publish their earnings. They have to publish their filings, like everything's all out there. And so, you know, a lot of the times they'll get picked up by the press and just become a lot more of a well-known brand. And then lastly, employee incentives. With a partnership or an LLC or private companies, you can issue like unit interests in an LLC or partnership interests or rev shares, but it's a little more complicated. But on the public markets, you can introduce stock plans, stock compensation plans to employees. So as you get a bigger organization, it makes a lot of sense to have a good structure of issuing employee stock. Many years later, in 2018, they actually converted from a limited partnership to a corporation while on the public markets. And some people wonder, well, why would you ever do that? Because isn't the LPGP structure the best? And I would say this isn't legal advice, not tax or investment advice. But it's great at the beginning. It's definitely probably one of the easiest and most advantageous early out. But again, KKR had amassed hundreds of billions of dollars under management, and they're always looking to grow. And how do you grow? You bring on more investors. And a limited partnership actually limits some tax-exempt investors from investing into the partnership. But if they convert to a corporation, then more tax-exempt investors can now participate. So that was one of their primary motives, as well as when you're a public limited partnership, you lose some of the capital gains treatment. So they actually, you know, in corporate, in the JOBS Act, when the tax rate was cut down to 21%, it's actually more advantageous for them, you know, fiscally, to be structured as a corporation rather than a limited partnership. All right, so again, what does KKR look like today? They manage $488 billion. 35% of those dollars are managed through private equity strategies. About 41% is in private credit. About 11% is in infrastructure. And lastly, 13% is in real estate. So, I mean, KKR, one of these big brands, you should know them, built this behemoth of an organization over time, definitely one for the books, and you can't ever forget about one of their most noteworthy deals, RJR Nabisco.

Lincoln: That's a really good structure, to do story, technical, bringing back the story.

Lincoln: I like that. You do? Yeah, that's really good. Cool. Yeah. I want to do the beginning once more as well. Okay. Yeah. Thank you. Okay. I just need to do the recap at the end and redo the beginning. All right. To sum it up, RJR Nabisco. To sum it up, KKR started three partners in the 1970s with 120K. Went on to raise their first $31 million private equity firm, really pioneering the LBO strategy. All right, KKR started with $120K from three guys in the 1970s. Went on to launch their first fund of $31 million, really pioneering the LBO strategy. They went on to raise subsequent funds and take down one of the biggest LBOs of all time, RJR Nabisco, and ultimately today, they consist of private equity, real estate, infrastructure, and private credit, managing $488 billion. If you haven't read Barbarians at the Gate, I would encourage it. It's a great technical read, but honestly, it just kind of explains the LBO, so hopefully I covered that in this video, but still a great read nonetheless, and they get into a lot more of the details. I didn't like that. I mean, that was kind of just like a… I honestly Yeah, I honestly just think that you can close it after that first part I shouldn't even talk about barbarians at the gate, but Ultimately one of the banner private equity firms of our generation. You should know this name KKR and what they do Hope you guys took something good away from this Yeah All right, so KKR, you know, one of the household brands, one of the big names of our generation. You should know who they are. Hopefully you took something great away from today's episode. Perfect. All right. And then I'm just going to redo just like the beginning because I didn't love it. All right. What's up, guys? Today, we're going to be talking about KKR, one of the biggest private equity firms on planet Earth, managing $488 billion. Now, they're probably most famous for one of their deals in the 1980s with one of the biggest LBOs of all time, purchasing RJR Nabisco, which we'll get into in a moment. But I think you guys are really going to enjoy today's conversation. All right. What's up, guys? Today, we're going to be talking about KKR, one of the biggest private equity firms on planet Earth. They manage about $488 billion across the different asset classes. They're most famous for one of their deals in the 1980s with their acquisition and leveraged buyout of RJR Nabisco, which we'll get into the story here in a few minutes. But I think you guys are really going to enjoy today's conversation. Sweet. All right. There we go.