The Early Years

In 1977, we completed our first acquisition with a total market value of $26 million. We sold the investment eight years later, providing high-quality returns to our investors. By 1979, the scale of our investing increased significantly. Of particular note was our fifth buyout, Houdaille Industries, a Florida-based industrial manufacturer, for $380 million — the first leveraged buyout of a mid-sized, publicly traded company.

We quickly established one of the most important strengths of our model: that our managers would also be equity owners. At this time, it was common for companies to be run by professional managers who thought like agents rather than owners, since their pay was insufficiently tied to the right measures of performance. As such, these managers lacked the incentive to manage costs as carefully or pursue new opportunities as aggressively as true owners would. Even at the best-run companies, performance was rarely measured in terms of asset utilization or return on investment.

Our model at KKR was intended to tackle these inefficiencies head-on. We were committed to finding and backing managers who would run a business as an owner. They would put their own money on the line, tying a large part of their compensation to longer-term performance, measured not over quarters, but years.

We also recognized that leverage, when used prudently, could encourage long-term growth, since companies that prudently borrow against their underlying assets have a unique ability to grow and seize opportunity — just as a homeowner invests in long-term value by financing a home purchase with an appropriate mortgage. With the right balance sheet, management discipline would be required to manage cash flow efficiently enough to pay the debt service, which in many cases required a shift in thinking. Rather than growing a company based only on its size or annual sales, managers had to turn instead to growing the company’s equity, helping to drive operational efficiency and increase long-term value for the equity shareholders.

These basic factors would remain central features of KKR’s approach to private equity for decades: managers with incentives to act like owners, success measured in years not months, and the prudent use of leverage to invest in long-term growth and encourage efficiency.

As KKR moved into the 1980s, the scale of our investments increased. Media interest in buyouts resulted in front-page news, particularly when well-known retail and consumer brands became KKR portfolio companies. These included Safeway Stores, the largest food retailer in the world (1986); Duracell, the world’s leading manufacturer of alkaline batteries (1988); and RJR Nabisco, a global leader in consumer products (1989).