Jul 09, 2018


Adam Smith, Head of KKR Capital Markets, explains why the capital markets team at KKR is unique in terms of the breadth and scale of what it does and how it grew into a full-scale business for the firm.

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KKR Capital Markets

Adam Smith
Head of KKR Capital Markets



Good morning. My name is Adam Smith; I joined KKR in 2007 and run our Capital Markets group globally. While many investment firms have capital markets teams that work to arrange financing for their transactions, we are fairly unique in terms of the breadth and scale of what we do and the fact that we have turned this into a full‑scale business for the firm. I would like to spend a few minutes this morning providing you with an overview of our Capital Markets platform as a whole, reviewing our financial performance and spending a little time talking about what I think the key drivers of our success have been. We are going to ask Tara Davies, a partner in our London office, who is responsible for our Infrastructure business over there, to join me and share her experiences working with Capital Markets.

KKR Capital Markets Overview

If you think about our Capital Markets business, the first thing you will notice is it is a full‑service platform that serves both KKR companies and independent clients. We operate globally with a team of more than 40 professionals who are experts in debt, equity and structured transactions. For me, the most important part is that it is an investor‑facing, market‑driven business, meaning that our individuals are not only responsible for structuring transactions but being able to place them in the markets themselves. For us, those markets are quite broad. They include not only the public markets, where many of the people in this room reside, but also the private markets, where we are able to place private securities with holders of long‑dated assets.

The breadth and the frequency of our interactions in the market is driven by the size of our portfolio and our investment activities. The frequency with which we approach the markets gives us unique insights into current trends and developments. It allows us to innovate and share experiences from one transaction across the other.

Components of our Business

Organizationally, we have divided our business into two key components. The first is equity capital markets, which is involved in raising additional equity capital from co‑investors to help facilitate transactions. We do this alongside our partners in CPG. That provides us with an important competitive advantage. We can speak quickly for transactions; we do not need to partner with others; we can retain control of our companies and we can avoid sharing proprietary ideas with competitors. Our equity capital markets team is also involved in the monetization of our investments when we exit them in the public markets, where the focus is going to be on valuation and aftermarket stock performance with the goal of driving a seamless transition of ownership of the companies from our private funds into the markets themselves.

Our debt capital markets team acts as an arranger and a capital provider to both KKR companies and independent clients across a broad range of transactions. As Todd just mentioned, importantly, by using a combined sourcing model, we are able to partner with our credit funds to deliver solutions that other folks are not able to do. We do this globally and we do this at scale. Our debt capital markets team, for instance, has arranged over $0.5 trillion in debt financing since we started that initiative, $100 billion of which was raised last year. Our equity capital markets team syndicated out $27 billion of co‑invest since we began that initiative. It has managed over $109 billion of public equity offerings.

Opportunity to Generate Business over the Life of an Investment

When we think about the combined capabilities that this team brings in the context of the lifecycle of a portfolio company or investment, you can see the earnings potential. We can generate revenue by arranging debt financing when we acquire a company, or by syndicating the equity. We can participate in refinancings and repricings, amendments, extensions, modifications and debt capital structures. We can raise incremental capital to fund growth initiatives, or CAPEX, for acquisitions or even dividends. When we are looking to monetize the company, we can act as an underwriter in an IPO or a follow‑on offering and we can provide staple financing in the case of a sale.

If you think about that in the context of a large portfolio and an investment complex with significant dry powder, you can really understand the financial returns that you can generate.

Financial Performance

When I first got to the firm we generated $1.3 million in our first year of operations as a capital markets business. Last year we were able to generate $440 million. While there has been a number of drivers of that growth I think one of the most significant has been the introduction of new business lines to our firm and the scaling of those new business lines.

New Business Lines have Helped Drive Growth and Diversification...

You can see, for instance, that whereas private equity generated almost 90% of our revenue in the first five years of our operation, today we have a much more diversified business mix with new business lines, such as our infrastructure activities or our third‑party business, generating about half of our results.

Not only has this allowed us to grow our top line. It has given us a much more balanced and stable earnings stream and allowed us to win in many different ways. The same has been true of our geographic expansion.

...And So Has Global Expansion

We have seen steady growth in Asia and Europe provide additional top line revenue. It has given us a much more balanced mix of fees from the global markets themselves.

The Contribution of our Product Lines has Remained Balanced

While this has occurred our composition of earnings across the debt and equity markets has maintained relative stability and a healthy blend. We typically generate about 60% of our earnings from the debt markets and about 40% of our earnings from the equity markets.

The Firm's Investment Activities Provide us with a Strong Foundation

But I do not think you can really talk about our financial performance without touching on 2017 and asking the fundamental question: what was the driver of that significant growth last year? How sustainable is it really?

To me, while it is true that 2017 was a record year in terms of financial performance, I think what it really did was highlight the earnings potential of our platform and the model that we have. It shows you what you can achieve when you have a diversified business where you apply the right organizational structure and management approach and you have scale on your side.

In our case, we have many ways to win. We can generate revenue when we acquire companies. We can generate revenue when we own companies. We can generate revenue when we sell companies. We can do the same things with third parties. We do that globally and we do that across asset classes.

If you look at the scale of KKR, with 119 portfolio companies in private equity alone, $59 billion of dry powder that needs to be invested and a large third‑party client base, you will see that there are a lot of places we can draw from. What that gives us is the flexibility in a strong baseline business to start with, and the capacity to achieve 2017‑like results whenever there is economic activity. To me that is the lesson of 2017. That is actually what really excites me to be part of this business and part of this firm.

Transforming our Debt Capital Markets Business: 2015–2017

I would like to take one minute to transition to our debt capital markets effort. This is a business that we started to grow in 2015, recognizing what we believed to be a new market opportunity, as different market entrants were joining the financial markets and banks, in some cases, were retrenching.

The first thing we did is we decided we needed to scale our direct distribution to allow us to sole‑distribute transactions and multiple transactions at that, into the broadly syndicated markets. We capitalized on what we saw as periods of bank retrenchment and regulatory pressure to gain market share. We essentially doubled down when others were not. In so doing that, we combined our product offering with our credit funds to create a strategic and competitive advantage to approaching clients. We used a high‑volume KKR business and control over debt allocations in our portfolio companies to drive a deep dialogue with the markets and ensure that our transactions, when they are executed by us, would perform. We added additional capital from, internal or external sources, to our business in order to become more relevant to our clients.

All these factors combined to allow us to increase our transaction volumes and win more leadership mandates across our roster of clients, which ultimately generated higher levels of fees and more performance.

Growing Contribution From our Third-Party Business

The third-party business that we operate was a clear beneficiary of this. 2017, I think, proved the scalability that we had. That was built off the back of the debt capital markets initiative. In 2017, for instance, we had 25 sponsors across the world mandate KKR to lead their financings. Many of these folks mandated us on multiple occasions and gave us sole lead roles. In fact, what I find most impressive is that in 2017 in the United States we led more financings for other sponsors than we did for KKR. If that is not a validation of our capabilities and the strength of our franchise, I am not sure what is.

Approach Financings From a Differentiated Perspective

When people ask, 'What is the driver of your business in the third party? Why do people want to hire you?' I often point to the AM General case study. I think what drives us is a unique ability to approach financings and capital structures from the perspective of the owners and investors, to come up with solutions and to bring the full resources of our firm to bear in ways that others are not.

AM General is a leading manufacturer of military and commercial vehicles, probably the most famous of which is the Humvee. It is a nuanced credit story, though, given its significant government contracting nature and uncertainty and confusion over what the future will be for the Humvee.

We were initially invited to participate in this transaction as a passive syndicate member in a bank‑led unitranche financing. That transaction went to market but failed, ultimately, to gain investor demand. When the bank‑led financing failed we approached the company and said, 'Let us have a chance at leading this transaction.' We took over, converted the capital structure into a first lien, second lien structure and involved our credit investment team who looked at the first lien. They developed the thesis around the credit story and decided to go ahead and anchor that transaction. We were then able to take their learnings and their credit story, position the company for success in a marketing roadshow and take them to a place where they were able to get a transaction completed when others had failed.

Connect the Dots Across Transactions

The second reason, I think, that we often succeed is that we are able to connect the dots. By centralizing all of our activities, all of the functions that we have and all of the dialogues we have around capital structures inside a single team, we are therefore able to use our experiences across deals and markets to identify opportunities, create results and drive mandates.

As an example, in 2015 we acquired a company called Mills Fleet Farm. It was a regional retailer that we agreed to buy in the depths of the worst credit dislocation since the financial crisis. We went out to the market and we could not find a bank‑led solution to finance the acquisition. Our team placed the capital structure directly in the market itself.

The understanding that we were able to get in the market from those interactions gave us the confidence to shortly thereafter underwrite an acquisition financing for another sponsor who, similarly, could not obtain bank financing. It also gave us the confidence to take one of our portfolio companies on the road and lead a dividend recap transaction when no one thought it could get done.

After we had successfully led the dividend recap transaction we approached all of our other sponsor clients and pitched them dividend recaps. One of those conversations turned from a dividend recap into an opportunity to arrange financing to allow one of the companies to grow through acquisitions. That company happened to be one of the largest franchisees of Pizza Huts and Wendy's. So we gained a tremendous understanding of the market for financing franchisees of restaurants.

We took that market intelligence, that understanding and went on the road. We pitched to two of the largest franchisees of Taco Bells similar refinancings. We successfully won mandates to take them into the broadly syndicated markets and arrange covenant‑light financings for them. So if anyone asks you how is it that KKR overnight became a top‑five market share in fast food franchisees and number three if you look at deal count, it is somewhere on this page.

Right now I would like to invite Tara Davies, who is a partner in our London office, involved in our Infrastructure business, to share her thoughts on experiences working with our team.



Investor Day podcasts and corresponding transcripts have been prepared for KKR & Co. Inc. (NYSE:KKR) for the benefit of its public stockholders and is not intended to be a solicitation or sale of any of the securities, funds or services that they may discuss. Please find a copy of the presentation here.