Henry Kravis Discusses Founding KKR and the History of Private Equity


In 1976, Henry Kravis co-founded the private equity firm Kohlberg Kravis & Roberts (KKR) with his cousin, George Roberts, and Jerome Kohlberg. They were the early pioneers of the private equity industry and today KKR is a recognized leader having done 280 investments valued at over $540 billion. In October of 2009, KKR listed 30% of its shares (SYM: KKR), while the remainder is held by the firm’s partners.

The history of KKR is quite interesting. Running the corporate finance department for Bear Stearns in the 1960s and 1970s, Jerome Kohlberg and later with protégés Henry Kravis and George Roberts completed a series of what they described as “bootstrap” investments beginning in 1964–65. They targeted family-owned businesses, many of which had been founded in the years following World War II which by the 1960s and 1970s were facing succession issues. Many of these companies lacked a viable or attractive exit for their founders as they were too small to be taken public and the founders were reluctant to sell out to competitors and so a sale to a financial buyer could prove attractive.

Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions. In the following years the three Bear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973), as well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. Despite a number of highly successful investments, the $27 million investment in Cobblers ended in bankruptcy. By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts (source: Wiki).

In this 2008 presentation at Claremont McKenna College, Henry Kravis talks about the history of KKR and beginnings of the private equity industry. We’ve posted an excerpt of the transcript below. We have posted the [FULL TRANSCRIPT HERE FOR MEMBERS].

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Henry Kravis:

How did we get started? Well, we had been in doing buy-outs at Bear Stearns with Jerry Kohlberg and George Roberts who’s my first cousin and an alumni of CMC and, and we were doing these things together. We decided that we would want to just focus on private equities, now it’s what it’s called. And so we bought about six or seven, eight companies while we were at Bear Stearns. We went into the senior partner, Simon Lewis, and we said, "What we’d like to do is we’re going to set up a new operation, and we’re gonna just spend full time on this private equity. But if you’d like, we’ll let you have half of the operation, you Bear Stearns, and we’ll take half. Talking about getting lucky. We got lucky because they said no. They said you’re either here, and you’re gonna work like everybody else and in all sorts of things and we were the mainstay of their corporate finance department which didn’t mean much at that time, or you leave. So we said that’s a pretty simple decision. We left and we started KKR.

We started with a $120,000. I put up 10,000, George put up 10. That’s all we had. We didn’t have any more than that. Jerry Kohlberg who was 20 years older than we were and keep in mind George and I were 32 at the time. Jerry had a little money, and he put up a hundred thousand and I went in with these three checks to the Chemical Bank in New York, a branch and I said, “We want to open an account” in 1976, and the woman who was the branch manager said, “Well, I’ll call you tomorrow.” I said, “No, you don’t understand. I don’t wanna borrow. I wanna open an account and give you these checks, and you can just deposit. And by the way, two of the checks are on your own account or bank.” So we opened an account, and we were in business, except we weren’t in business because 120 wasn’t gonna get us very far. We thought we could go out and raise a fund. There were no funds in those days, maybe a couple of venture funds, that was it. So we said, we will do a 25 million dollar fund. And so we were put in touch with a man named Henry Hillman in Pittsburgh, didn’t know him but we were told, “Go see him.”

We went down and had lunch with him, and his right hand man, West Adams, and we told them what we were gonna do and he said, “Well, give us two weeks and we’ll be back to you.” 25 million, keep in mind. So we got a call. I got a call about five days later from West Adams, he said, “Did you not like us?” I said, “I don’t understand.” He said, “Well, you haven’t called us since you left.” I was petrified at this point. I said, “Mr Adams, I thought that you said you’ll get back to us in two weeks.” And he started laughing and he said, “You know, the minute you walked out the door, Henry Hillman says, “I like those boys, and I want half their fund.””

Well I was at the airport with Jerry and George in Chicago at O’hare and I did the Toyota leap, because I thought we were in business. This was fabulous. The guy’s gonna take half the fund one first meeting we ever had. And the problem was we couldn’t raise the other twelve and a half million dollars in 1976. We went out, and we talked to the Prudential Insurance Company, Teachers Insurance and Mass Mutual, Connecticut General and so on, who had invested with us at Bear Stearns, said, “We really like you. Absolutely we’ll give you money, but we wanna be the investment committee.” We said we’re entrepreneurs, we wanna start something. We’re not going to work for the Prudential Insurance Company. No offense to the prudential but that just was not what we wanted to do. And so we literally could not raise 25 million dollars to start with the fund.

So George and I went out and had dinner, and we said, “What is it we need? Well, we need 500 thousand dollars.” That was our overhead. “Now how can we get that? And then we’ll need money when we find a deal but that’s the least of our problem.” So we came up with an idea. So let’s approach eight people and see if they’ll give us $50,000 each and agree to do that for five years. And so we got eight that’s 400,000. Between George and Jerry and I and some fees we might get from buying some companies, we could put up the other hundred and we were in business. And that’s how we got started. We actually went to some people and they bought and Henry Hillman took two of the units and then we gave him the option that if we found a company we would come to them first and they could invest, but if they did, we wanted 20 percent of the profits. That’s how this 20 percent started. We just picked it out of the air. It could have been 25 percent or 15 percent.

Anyway, it became 20 and that sort of became the norm, and so we bought a few companies first year our first full year, so that was really 1977. We bought three companies, and I got a call from one of these investors and bankers and Bill Graham and he said to me, “Gee, you’re going to break me. I don’t know which deals I should go into and which ones I shouldn’t because I thought you might buy one company a year and I want to go into all of them.” He said, “I suggest you go out and raise a fund now.” And we did. We went out and we tried to raise 25 million. We got lucky this time, we raised 35. And that’s how we got the firm started. But it was just persistence, and it was an idea that we had. It was something that was very important to us that we believed in, and we said, “We can do this.” But I wanna read to you just something that’s really important to our firm and this is something that basically we started with in 1976 and they’re called values and culture.

Let me just tell you our culture first of all, we’re global, we’re a single team, very bright, honest, energized, thoughtful, self starters and good people working together all over the world to create the best outcome for KKR and our investors. We’re inclusive, we’re one team, and we work together. Nobody raises their hand and says, “That’s my idea or that’s my deal.” We support each other. We have unquestioned integrity. We share credit, we take responsibility, we share profits. Everyone at KKR participates in every single thing we do. Every company we buy, whether you worked on the transaction, you didn’t, whether you’re in Beijing or whether you’re in our London or Paris office or New York, it doesn’t matter, you participate. Everyone, including all of our systems that work there, the people in the kitchen, they all get to participate in every transaction that we do.

We care, we’re a caring firm, caring for our people, our executives and our various communities. We communicate with each other. We learn from our mistakes, and I can tell you we made a lot of them, and we certainly try to do that. We are not arrogant, and it’s the one thing that will drive George or me nuts, if we see any arrogance within KKR. Because I have a sign in my office, which my assistant gave me because she heard me say this so often, “Arrogance kills”, and I’m sure we’ve all seen if you think about it, how many really talented people implode because they’re arrogant. And so that’s a very important thing. Our values being honest, treating everyone how you would like to be treated, sharing openly, instill team work and choose the right people, hiring self starters, being innovative, not afraid to take prudent risk, investing in people and in companies where we would be very proud to own them.

Have the fortitude to say, no. This is a very important thing. I know we may have been working on something for a long time, and we’re now at 1159 and at 12:00 o’clock we’ve got to sign. But if there’s things in it we just don’t like, we’ll walk away from the transaction. You have to have that fortitude if you’re going to be a good long-term investor in our view. Build relationships, very important. You’ll never know where those relationships will come back and be helpful to you. Don’t be afraid as a young person coming out of CNC to reach out, ask questions. You know the worst thing that can happen if you call somebody on the phone at an executive at a company, is they can say no or maybe not return your phone call, but you’ll be surprised how many times that if you make a call and you have something to say or you wanna go see him, you’ve got something to offer that makes sense, we’ll listen

And so don’t be afraid to reach out. And lastly, and probably most importantly, our word is our bond. You know, as individuals, all of us in this room and elsewhere, you really only have one thing and that’s your reputation and if you ever lose that, you have absolutely nothing, and I cannot tell you, particularly young people coming out of college, how long it takes to build a really good reputation in business, but how easy it is and how quick it is that you can lose it. And we’ve all seen it. And so always think about what you’re doing. I know it may seem like, “Oh, well this will never come back to haunt me.” Believe me, YouTube has changed a lot and Facebook and so on, and don’t forget that, how people will look back there. And you know, Tom and Scott, I got some stuff on you, it’s Facebook and YouTube.

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We told the great story of how KKR was formed above. Here is a good short video interview where Henry Kravis retells the story. A couple interesting tidbits in it. The institution that invested $5 million with KKR initially in the late 1970’s would ultimately invest $1.5 billion. The second interesting thing was he mentions his biggest mistakes were always inaction. Thinking a CEO was going to get better, and that in almost all cases the CEO doesn’t change from what they saw initially. So today KKR acts quicker.