Key Takeaways
- • KKR faced dual blows on June 29, 2015: the $3.5 billion US Foods-Sysco merger collapse and an SEC settlement requiring the firm to pay nearly $30 million for inappropriately charging expenses to limited partners that KKR itself should have covered.
- • KKR's 2006 mega-fund, which financed major deals including the now-bankrupt TXU energy company, significantly underperformed relative to other KKR investments and represents a major loss for the firm.
- • Blackstone has surpassed KKR as the dominant private equity competitor, with Blackstone's publicly traded stock appreciating at more than double KKR's rate over the preceding five years, driven partly by successful exits from major positions.
- • KKR remains encumbered by legacy large buyouts from which it has not yet exited, constraining capital deployment and investor returns relative to competitors.
Summary
Henry Kravis's KKR suffered a punishing Monday on June 29, 2015, as the firm confronted simultaneous operational and regulatory challenges that underscore its post-financial crisis competitive decline. The day opened with news that the US Foods-Sysco merger—a $3.5 billion transaction for which KKR and a co-investor partner had held the company since 2007 and anticipated closing since 2013—had collapsed. Hours later, the Securities and Exchange Commission announced that KKR would settle charges for $29.75 million related to inappropriately allocating expenses to limited partners that the firm itself should have absorbed, a governance breach that carries reputational consequences alongside the financial penalty.
These setbacks reflect broader structural challenges confronting KKR despite its iconic status in leveraged buyout history. The firm's flagship 2006 fund, which financed transformational mega-deals including the eventual TXU bankruptcy, has significantly underperformed relative to KKR's other investment vehicles—a material loss that constrains firm-wide returns. More problematically for long-term competitiveness, KKR remains burdened by oversized legacy positions from which it has not successfully exited, tying up capital that competitors have already deployed into new opportunities.
Blackstone has emerged as the clear market leader, surpassing KKR in assets under management and, more critically, delivering substantially superior returns to investors. Over the five-year period preceding June 2015, Blackstone's publicly traded stock appreciated at a rate exceeding double that of KKR's equity, reflecting the former firm's success in exiting marquee investments—particularly within real estate—and generating realized gains. This divergence indicates that scale alone does not determine investment performance; KKR's inability to harvest returns from aging portfolio positions has materially disadvantaged shareholder value creation relative to more agile competitors. Once the feared "barbarian" of 1980s hostile takeovers, KKR now faces the uncomfortable reality that it has not sustained its post-crisis competitive advantage among institutional allocators.
These setbacks reflect broader structural challenges confronting KKR despite its iconic status in leveraged buyout history. The firm's flagship 2006 fund, which financed transformational mega-deals including the eventual TXU bankruptcy, has significantly underperformed relative to KKR's other investment vehicles—a material loss that constrains firm-wide returns. More problematically for long-term competitiveness, KKR remains burdened by oversized legacy positions from which it has not successfully exited, tying up capital that competitors have already deployed into new opportunities.
Blackstone has emerged as the clear market leader, surpassing KKR in assets under management and, more critically, delivering substantially superior returns to investors. Over the five-year period preceding June 2015, Blackstone's publicly traded stock appreciated at a rate exceeding double that of KKR's equity, reflecting the former firm's success in exiting marquee investments—particularly within real estate—and generating realized gains. This divergence indicates that scale alone does not determine investment performance; KKR's inability to harvest returns from aging portfolio positions has materially disadvantaged shareholder value creation relative to more agile competitors. Once the feared "barbarian" of 1980s hostile takeovers, KKR now faces the uncomfortable reality that it has not sustained its post-crisis competitive advantage among institutional allocators.
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