Key Takeaways
- • Henry Kravis identifies repeating the mistake of waiting for underperforming people to change as his only significant error made twice during his 40+ years leading Kohlberg Kravis Roberts, reflecting a core principle of his management philosophy.
- • KKR's track record with institutional investors has been exceptional: the State of Oregon Public Employees Retirement System's initial $5 million investment in 1979 has grown to a $1.5 billion allocation, demonstrating sustained outperformance over decades.
- • Academic research from California State University Fullerton and Ohio State University (2016) validates that LP skill in selecting private equity managers is persistent and measurable—good allocators consistently invest in top-half funds while poor allocators remain in the bottom half, with the effect even more pronounced in venture capital.
- • The research findings undermine two common excuses for LP underperformance: differential risk appetites and limited access to top-tier managers. Among similarly-typed investors, performance persistence holds regardless of these factors.
- • Kravis's core management methodology centers on hiring and developing exceptional talent—either by inheriting strong teams or recruiting new talent—emphasizing that human capital selection is fundamental to value creation and company improvement.
Summary
In a wide-ranging filmed interview with Institutional Investor, KKR co-founder Henry Kravis articulated the singular operational mistake he acknowledges making repeatedly: waiting for underperforming people to change rather than making timely personnel decisions. During an hour-long conversation that included gin rummy and discussion of his private equity war stories, Kravis reflected on the evolution of Kohlberg Kravis Roberts from its early days to its current status as a global investment powerhouse. This recurring error stands out as notable precisely because Kravis attributes so few mistakes to his four-decade tenure leading the firm.
The longevity of KKR's institutional investor relationships underscores the firm's consistent performance. The State of Oregon Public Employees Retirement System, KKR's first major limited partner, invested $5 million in 1979—a commitment that has appreciated to approximately $1.5 billion in recent allocation, illustrating the compounding effect of superior returns over extended periods. This durability reflects Kravis's core operational philosophy: identifying and cultivating exceptional talent as the primary driver of portfolio company improvement and value creation.
Academic research supports the broader implication of Kravis's people-focused methodology. A 2016 study by academics from California State University Fullerton and Ohio State University—"Measuring Institutional Investors' Skill from Their Investments in Private Equity"—demonstrates that the ability to select outperforming managers constitutes a measurable, persistent skill. The researchers found that some limited partners consistently allocate capital to top-half performing funds while others remain trapped in bottom-half performers, regardless of claimed differences in risk appetite or market access. This performance persistence is especially pronounced in venture capital investments, suggesting that LP capital allocation skill is neither random nor transient.
The research effectively dismantles two standard defenses for underperforming institutional investors: variable risk tolerance and restricted access to elite managers. Among investor cohorts of similar types and presumed comparable risk profiles, differentiation between superior and inferior allocators remains statistically significant. The implication is clear: institutional investors that repeatedly select underperforming private equity managers face a structural, not circumstantial, problem—and much like Kravis's repeated people-management mistake, bad capital allocation behavior tends to replicate itself.
The longevity of KKR's institutional investor relationships underscores the firm's consistent performance. The State of Oregon Public Employees Retirement System, KKR's first major limited partner, invested $5 million in 1979—a commitment that has appreciated to approximately $1.5 billion in recent allocation, illustrating the compounding effect of superior returns over extended periods. This durability reflects Kravis's core operational philosophy: identifying and cultivating exceptional talent as the primary driver of portfolio company improvement and value creation.
Academic research supports the broader implication of Kravis's people-focused methodology. A 2016 study by academics from California State University Fullerton and Ohio State University—"Measuring Institutional Investors' Skill from Their Investments in Private Equity"—demonstrates that the ability to select outperforming managers constitutes a measurable, persistent skill. The researchers found that some limited partners consistently allocate capital to top-half performing funds while others remain trapped in bottom-half performers, regardless of claimed differences in risk appetite or market access. This performance persistence is especially pronounced in venture capital investments, suggesting that LP capital allocation skill is neither random nor transient.
The research effectively dismantles two standard defenses for underperforming institutional investors: variable risk tolerance and restricted access to elite managers. Among investor cohorts of similar types and presumed comparable risk profiles, differentiation between superior and inferior allocators remains statistically significant. The implication is clear: institutional investors that repeatedly select underperforming private equity managers face a structural, not circumstantial, problem—and much like Kravis's repeated people-management mistake, bad capital allocation behavior tends to replicate itself.
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