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Sunday, July 14, 2024

Power list interview: Private-equity kingpin Henry Kravis speaks with Nido Qubein

Private-equity kingpin Henry Kravis joined High Point University President Nido Qubein in the Power List interview, a partnership for discussions with influential leaders. Interview videos are available at www.businessnc.com

Henry Kravis isn’t on the Power List, but his company’s 1988 acquisition ofRJR Nabisco changed Winston-Salem and North Carolina. At the invitation of his friend and Greensboro business leader Bobby Long, he visited the Triad in May to promote the SEO Scholars program, which provides education funding for 48 Guilford County Schools students. The Tulsa,Oklahoma, native joined George Roberts and Jerome Kohlberg at the Bear Stearns investment company, then the trio started their own private-equity firm in 1978. He is co-executive chairman of KKR.

This story includes excerpts from Kravis’ interview and was edited for clarity.

KKR started with $120,000. It now has a market cap of more than $55 billion. How did you do it?

Well, you’re going to be a good entrepreneur, what do you do? You’re either going to get through the wall or you’re going to get over the wall, but you’re going to get to the other side somehow.

You got a job at Bear Stearns and became a partner by age 31. Then you and your cousin, George Roberts, left and started KKR. What happened?

George and I were both 32 at the time. We went to the senior partner at Bear Stearns and said, ῾You know we’ve been doing (we call it private equity now).’ They hated it because they were a sales and trading firm and, for them, overnight was long term. They never put a penny into any deal we ever did, but they were happy to get the fees that we would bring in.

Boren Clay Products of Greensboro was one of our very first investments. That was in 1974.

We said, ῾We want to do this and we’d like to do it within Bear Stearns. We’ll give you half of this new firm and we’ll call it KKR, and we’ll take half.’ The senior partner, Cy Lewis, said, ῾You’re either here doing what we want you to do, or you’re out.’ So, we went back to our office and we said, ῾Well, there’s our answer. We’re out.’ 

I put up $10,000 — that’s all the money I had. George put up $10,000. Jerry Kohlberg put up $100,000. The idea was to make long-term investments of five to 10 years and improve businesses. 

What fundamentals do you look for in a company?

One thing that’s pretty standard is, ‘What’s the industry, and where does this company fit in the industry?’ If it’s No. 7 in an industry, and unless you have a pretty clear path to get it to 1 or 2 or 3, it’s pretty tough to do anything unless it’s a niche business.

Management is key whenever we buy a company. Now, mistakes that we’ve made over the years are that we’ve waited too long to change out a bad management team. What you see is what you’re gonna get when you first meet somebody. You can change them around the edges, but after you spend a number of hours with them, you’ll pretty much size up the person.

Another thing that’s important are risk factors. If you always worry about what you can lose, and never worry about how much you’ll make, you’ll always make money. 

Our mistakes have never been because we overpaid. Mistakes we made were big macro mistakes. We missed on gas prices. Toys ‘R’ Us was a big mistake for us because we didn’t pay enough attention to this little company called Amazon. They came along and chewed our legs off.

When you bought RJR in 1988, it was the 19th largest U.S. company. I think you paid $25 billion?

$30 billion. What’s $5 billion? 

There was a lot of money available then. We had been talking to the management of RJR and Nabisco about putting it together with Beatrice Foods, which was one of the worst-run companies that I’d seen. One day, we get a call that they just fired the CEO of Beatrice. And I said, `Well, let’s dust off our numbers and see what we can do. We ended up buying Beatrice for about $8.6 billion. We then thought about combining it with RJR and Nabisco. We had a number of conversations with [RJR CEO] Ross Johnson.

Then, he got the idea that, ‘Geez, maybe I could buy the company.’

So, he went off and talked to a couple good friends and they put an offer in at $70 a share. George and I said, ‘This is crazy. This company is worth over $100 a share. They’re stealing the company.’ We worked all weekend and on Monday afternoon, we sent a letter in at $90 a share. That started the bidding contest. 

It was a very poorly managed business that had incredible potential. We were worried about the tobacco business but that was the cash flow machine.

KKR eventually won the bidding at $112 per share.

I’ll give you an example of the waste in that company. Our lawyer, Dick Beattie said, ‘Do you know one of the senior executives at RJR by the name of G. Shepherd?’ He started laughing and said, well, that is Ross Johnson’s German shepherd, and he flies on one of their 11 airplanes by himself. Whenever Ross Johnson wanted to get his dog out to visit with him, he sent the plane for him. 

That was the tip of the iceberg. There was just waste everywhere. What company has 11 airplanes? We just saw where we could run the business so much better than it had been run.

Would you do it over?

In the end, it was a lousy investment. Yeah, we fixed a lot of it. We were going to go with the tobacco business as one separate business and the food business as a separate business. But we had to wait five years to do it, otherwise there was a big tax splitting the company apart. Then we were worried because a couple of investigations started in the tobacco industry and we knew we’d be dragged into that as well. So, we couldn’t split it apart.

The bottom line was we made a little money but not a lot. It got more publicity than it probably should have. They wrote a book about it (and a movie) called “Barbarians at the Gate.” Thirty-three years later and we’re finally getting rid of that name.

It was not a great investment. It was a great experience.

I have yet to see the whole movie. I’ve fallen asleep twice trying to watch it. My wife, Marie-Josée, will tell you I fall asleep at all the movies. It didn’t depict what really happened. The book, on the other hand, is about 85% accurate. I learned a little from the book about what the other side was doing.

Why is there an ‘Arrogance Kills’ sign in your office?

My assistant had it framed because she heard me say that so many times. I don’t believe anybody should be arrogant. I don’t care who you are. We all get dressed the same. I’ve seen more companies, institutions and people fall apart because of being arrogant

What is your view of a highly effective corporate culture?

We came out of Bear Stearns, which was an ‘eat what you kill’ culture. It was a culture where everybody raised their hand and said, ‘I did this,’ and ‘I did that.’ Everybody was trying to get whatever they could grab. We wanted a ‘we firm’ not an ‘I firm.’

Today, 47 years later, it’s exactly the same culture. That is our DNA to date. I tell young companies, when they say, ‘What piece of advice would you give me?’ I said, ‘Have a culture. Whatever culture you have, talk about it constantly. I’m not going to tell you what’s the right culture for you, but I’ll tell you what is the right culture for us. And you can’t talk about it enough.

When we’re hiring people, we are trying to see, ‘How will they fit in the culture?’ We may have as many as 25 interviews for that person. And they come in with 25 supporters on day one!

How does KKR review people?

We review them in four areas. Management leadership. Commercial success. Culture and values. And diversity and inclusion. We’ve had people at the firm that did exceptionally well as far as making us money and we fired them because they wouldn’t help anybody else at the firm. You’ll kill a firm, in my view, if you do that. 

We have not only diversity in gender and ethnicity, but we want diversity in thought. So we want different people all the time. Too many young people want to hire people like themselves, and I think it’s a big mistake. You want people with different views and different perspectives. We’re not to where we want to be yet, but 38% of our executives today are women.

What worries you the most?

My biggest concern is what schools teach. Our education system in general has declined, particularly in the elementary and high school level, and I worry about that. I worry about the quality of education in America. We have a chance at moving toward losing our democracy. That’s a big statement, but I’m worried about that. Look at the number of countries where democracy is declining, in one way or another. I worry that we stand a chance, if we’re not careful, of diminishing our democracy.

What we need in the country is real leadership, Republican or Democrat. The problem is today, nobody talks to each other. You see it on college campuses, and if they’re too far to the right or too far to the left — oh no, we don’t want them here. I want everybody, OK? We went to college to learn from each other, not just to be with people like myself.

Are you worried about China?

Of course, you’ve got to be worried about China. I don’t think we’re communicating with China. Our government should keep talking. They’re not going away and we’re not going away, and the less we talk to each other, the more danger we have of something
bad happening.

Final thoughts?

This is the greatest country in the world. We have, today, more opportunity than anywhere in the world. You just have to take advantage of it. I’d like to say to young people. Take one sentence out of your vocabulary: ‘I wish I had.’ 

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