Our second favorite reaction to yesterday's KKR video comes from Fake Ben Bernanke:

Now it seems everyone is a self-appointed YouTube firm critic. Dan Primack criticizes the firm for not addressing serious issues with private equity. Andrew Ross Sorkin reminds me of my intern and thinks it’s a noteworthy story. Bess Levin just wants to be Henry Kravis. Good for Bess. I’m no Randian Greenspan, but those teachers need to work harder if they want to earn $450 million a year. To the language teacher in the video, I suggest she move to another country and teach English — it’ll be easier to earn the equivalent of $57,000 US dollars per hour in another currency.

Henry Kravis makes $57,000 PER HOUR. [NewsGroper]

Brave New Films held a screening of “The War on Greed: Starring the Homes of Henry Kravis” this morning in front of the KKR founder’s 625 Park Avenue apartment in an attempt to shame him into…something. Unfortunately, director Robert Greenwald didn’t do any recon before planning the event, and was disappointed to find out that Hank is currently on vacation in Palm Beach, at his 15,000 square foot home on North Lake Way, and would not be able to catch the flick**. Oh well. This is why they invented DVDs, and the WGA worked so hard on those sandwich boards.

The movie is a Cribs-style look at Kravis’s five homes, which he’s undoubtedly already familiar with, and includes some interviews with a bunch of people who make less money per year than the buyout king does in an hour-- $51,369--for shock value. (Not too much shock or value, though, because there are no interviews with anyone who makes significantly less than HK, meaning this girl). No sequel starring Stephen Schwarzman (‘s houses) has been planned, because apparently SS's homes don't have the height to make them leading men material.

Dan Primack’s problems with the film are that Greenwald “tries to provide some “substantive” context, in a simplistic and damning definition of private equity,” he’s “stuck in the 1980s and early 1990s,” and his “definition of PE fails to point out that some PE-backed firms add employees and increase value for the shareholders – which happen to be public pensioners, universities and charitable foundations.” Mine are that it it doesn't make me want to hate Kravis, it makes me (and the youth of America I watched it with) want to emulate him. And also, that there weren’t any shots of the gift-wrapping room in HK’s house in the Dominican Republican. Other than that, good movie.

The War on Greed [PEHub]

A Movie and Protesters Single Out Henry Kravis [NYT]

*The best part of every episode of Cribs
**KKR wouldn't confirm this but I sense it's true.

Hey guess what? Stephen Schwarzman and Henry Kravis might have the same personal net worth, even though Blackstone is worth significantly more than KKR. Who gives a shit? I'm going to go out on a limb and say this guy.

As we noted in Opening Bell this morning, another big buyout has gone the way of all mortal things. Today’s entry into the deal graveyard is the $8 billion Kohlberg Kravis Roberts and Goldman Sachs buyout of Harman International. According to most news stories on the deal, Goldman and KKR are forking over $400 million in exchange for convertible notes, Harman’s using the money for a stock buy-back, and everyone’s amicable, honky-dory, smiles and handshakes about the new deal.

But when we squint at the fine text, we’re not sure that Harman should be smiling so widely. According to the acquisition agreement, the company was due to collect a $225 million break-up fee if KKR and Goldman walked. So what’s seems to be happening is that they are selling $400 million of notes to the balking buyers for $175 million. Let’s call that a 57% discount. So Harman will now owe $400 million of principal to KKR and Goldman in exchange for just $175 million beyond what they were arguably already due according to the agreement.

But Goldman and KKR are getting more than just the notes. They are getting an option to buy the stock. Typically, a convertible note is linked to a share price that places the option currently out of the money. But if we follow through on the idea that Goldman and KKR are buying the notes at a discount, we can see that these are actually currently in the money. The $104 a share translates into 3.8 million shares for $400 million of notes. Those shares are now trading at $85, which means that the buyers have entitled themselves to $326 million of shares for just $175 million dollars.

To put it even differently, after the discount, the deal prices the shares at $59. We’re not sure that’s exactly the “vote of confidence” in Harmon that its executives are touting. Harman may now have an additional $175 million for a buyback but this seems a steep price to pay for that money.

Of course, if you figure that break-up fees are not sunk costs for dead deals because the buyers aren’t ever going to pay them anyway—a growing trend from private equity buyers, to be sure—then we guess it does sound like great deal for Harman. It’s probably just our short-sighted stinginess that makes us think in terms of additional, incremental dollars in the deal rather than the complete $400 million package.

KKR and GS Capital Partners to Invest in Harman International [Press release via Market Watch]

The market for LBO loans has opened up since the catastrophe of August. By offering the loans to investors at a discount, and eating the loss, the banks that committed to make them have begun to clear them off their books But, as the Wall Street Journal's Henny Sender reports today, the amount of loans that have been sold—about $30 billion—are “a drop in the bucket” compared to the total of $310 billion of LBO loans still waiting to be placed. And that’s just from North American deals. Nearly a third of that is set to come into the market in the next thirty days, according to the Journal.

This data may shed new light on the reported plan of KKR to buy LBO loans from Citi, including LBO loans that went to finance KKR deals, and Citi’s reported plan to lend money to KKR to buy those loans. After speaking to several loan syndication professionals, we have come up with what looks like the logic of this deal.

The banks are worried that while there has been some investor appetite for LBO loans, there may not be enough to absorb the total amount they plan to bring to market. A flood of new loans selling into lowered demand could put pressure on the banks to make even steeper discounts, creating even larger losses at a time when the banks are attempting to put the legacy of credit market losses behind them. The alternative—keeping the loans on the books and hoping for better days ahead—is no better for banks trying to show shareholders that they cleaned the debt mess off their books.

Enter KKR. Without public shareholders and armed with lock-up agreements from investors, it can take a longer view of the debt market. Although a lot of debt is currently scheduled to come to market in the coming weeks and months, there may be a drought of those loans just over the horizon. The slowdown of leveraged-buyout deals this summer means that there will, eventually, be fewer loans coming to market. And this drought could hit just when investor appetite for debt is recovering. At that point, KKR would be in a great position to sell the loans at prices above the discounted price at which they bought them from Citi.

At the same time, Citi might be comfortable sitting on newer loans which it can claim it is syndicating on schedule rather than older loans. This is a sleight of hand but one that shows at least a certain kind of agility that Citi may hope will please investors. Citi too could hope to take advantage of a renewed appetite for debt and the coming LBO loan drought, and sell those loans at par, reducing losses that it might have incurred selling into a flooded market now.

We’ve said it before, but we’ll say it again: different time horizons create different profit opportunities. The logic of “if they’re buying, why are you selling” assumes a homogenous market of buyers and sellers, when in fact the market is characterized by heterogeneity. And private equity firms—at least those that don’t feel answerable for stock prices to public shareholders—are often in a position to take advantage of opportunities only available to those with longer time horizons.

Damn it must feel good to be a Kravister.

Debt on Sale: Banks Grease The Leveraged-Loan Machine [Wall Street Journal]

Let’s see if we have this straight. Citigroup wants to sell off some on the leverage loans it committed to before the credit crunch. Many of those loans were made to private equity owned companies for leverage buyouts, including companies that KKR bought. A fund managed by KKR is looking to buy the leveraged loans, which it believes are under-priced in the wake of the credit market turmoil. But everyone knows KKR doesn’t buy anything with cash: it borrows the money. So now, according to the Financial Times, Citigroup might lend money to KKR to buy Citigroup’s loans.

This is very possibly the best story ever. The only way it could get better is if KKR went on to buy the loans used to buy loans from Citigroup. And, of course, Citigroup lent it the money for that. And then, well, you get the point. In the end of our fantasy, Citigroup’s stock get’s hammered by investors skeptical of this snake-eating-its-tail lending scheme. And get bought out by KKR. With loans from....

Insiders report that credit market expert Charles Ponzi has been retained as an adviser to both Citigroup and KKR for the transaction.

Citigroup talks to KKR about leveraged debt [Financial Times]

First Data was supposed to be one of the big leveraged buyout deals teetering on the edge of extinction thanks to the credit crunch this summer. The debt load of the company was said to be at the outer limits, leaving it with razor thin margins for slip-ups. But last week investors snapped up its $5 billion buyout loan. In fact, the loan was over-subscribed by about $2 billion.

Last night First Data said the deal had closed. First Data has gone private, and its stock has been removed from the New York Stock Exchange.

Earlier this month, the buyout firm behind the deal, Kohlberg Kravis Roberts & Co, was said to be in a nasty negotiation with the seven banks involved in arranging the First Data transaction. The banks had become nervous about massive loans on their books, and were pressing KKR to renegotiate its deal. KKR eventually did offer one concession—a leverage ratio financial test in its bank loans that has been described as “toothless” and “mere optics.”

While there are still questions about the financing—banks continue to look for ways to syndicate the nearly $24 billion in debt financing they committed to the deal—but fears that the credit crunch might derail the biggest deals, or leave a the financing banks with large losses, seem to be abating.

KKR completes $26 billion First Data takeover [Reuters]

Just how much of a “concession” on the part of Kohlberg Kravis Roberts’ was its agreement to put a maintenance covenant in the buyout loans for First Data. Yesterday’s Wall Street Journal reported it as a major triumph for the banks committed to making the loans, writing “KKR has blinked.”

That interpretation has been directly challenged by DealBook’s Michael J. de la Merced who began his item on the addition of the covenant with the words: “Kohlberg Kravis Roberts has not blinked.”

“K.K.R. appears to have agreed to a covenant without any real teeth,” de la Merced writes. “Calling the development a ‘concession’ is overstating the case, a person with knowledge of the discussions told DealBook. The $24 billion offering for First Data’s debt will still include pay-in-kind toggles, an investor-unfriendly kind of bond which allows interest payments to be made by issuing more notes.”

When we posted on the addition of a covenant yesterday, DealBreaker readers took a position largely consistent with DealBook’s interpretation. One fact that stood out to many readers is that the PIK-toggle seems to have stayed in place, allowing First Data to make interest payments on its loans by issuing new debt. KKR is unlikely to let a leverage ratio covenant render the PIK toggle ineffective, which implies that the covenant will have to be very loose to allow for the new debt.

So its possible that the covenant may be nothing more than what some would call “optics”—a change meant to make the deal appear better from the perspective of investors without changing the substance.

“And First Data can’t afford real maintenance tests either,” de la Merced adds. “Normally, if a company fails to meet its performance requirements, it must meet with its lenders, who can demand payment in exchange for a waiver. But because of its newly razor-thin margins, First Data would be hard-pressed to pay up if it failed to meet its earnings criteria.”

A Concession in the First Data Deal? Hardly [Dealbook]

The banks have won the first big show down with private equity.

Last night several news outlets, including the Wall Street Journal, reported that private equity giant Kohlberg Kravis Roberts has signaled a willingness to include a financial covenant for the bank loan portion of the $24 billion of debt needed to finance its purchase of First Data.

First Data was largely viewed as a test case for some of the biggest, and riskiest, of the highly leveraged buyout deals that are scheduled to close in the next few weeks and months. The banks had been asking the private equity sponsors of the deals for concessions on the terms of the financing, saying it was having trouble syndicating the debt due to recent concerns about debt levels by many investors.

KKR Europe chief Johannes Huth has readily available completely made-up statistics to ward off those who contend that PE firms are just "financial engineers."

From Deal Journal:

At a panel discussion in Frankfurt today, Huth said the private-equity firm earns most of its money — 60% of it actually — from improving the operations of companies it buys. According to Huth, 25% to 30% of the gains in its portfolio come from reducing debt at those companies. (The remainder comes from “multiple expansion,” or a broad increase in market values.)

The fact that a PE firm doesn’t earn anything by merely “improving” company operations, and that an operational improvement would in many cases lead to steady debt pay down (yet a separate category) and a multiple expansion on some sort of liquidity event, means that statistics like this are pretty much made up, because they can be defined any way the PE firm wants.

Since when is KKR so whiney anyway? From bad-ass barbarism to bitchiness is a long PR tumble. KKR should go back to raiding, looting, pillaging (I mean “operational improvement”), without remorse. There's no law against financial engineering - the whining is all bruised ego at this point, or at least people trying to cling to low taxes on carry. You're not saving the (cheerleader or the) world Kravis, or most business for that matter, get over it and be content with your billions, consistent returns, and impending golden shower of an IPO.

Financial Engineering at KKR? Never [Deal Journal]

Once fervently pro-deal-life, PE firms are increasingly finding that they support a fund manager’s right to choose. Scared by agit-prop that preached the dangers of back Park Avenue alley dealbortions, hanging up a deal (on the following hanger, pictured) used to be a rare event when cheap debt flowed freely from the banker’s teat and your baby could be flipped when he grew up to be big, deleveraged and strong.

The pro-deal-life movement warned of the reputational risks - you’re used goods, you’ll never be able to raise another little fund of your own knowing that you murdered a little return generator. With $300 billion of LBO debt ready to hit the market starting in September, there looks to be a cascade of partial birth dealbortions, following the example of none other than pro-fund-manager-choice pioneer Henry Kravis.

Deal Journal reports on the dirty little secret in Kravis’ past. When KKR was young and foolish and engaged in rampant unprotected dealmakinig during the mid-90s boom it got a little irresponsible and pledged $2.7 billion to Xerox’s baby girl Talegen Holdings, an insurance unit. When KKR sobered up, it realized that it made a horrible mistake, and took care of it, in what was the largest dealbortion ever up to that point. KKR has hardly suffered, proving that aborting a deal is quick, easy and painless, and may be the standard course of action for the remainder of the year.

Over-Rated! Why Walking Away from LBO Deals Isn’t So Bad [Deal Journal]

Those of you lucky enough to receive the private equity edition of Shouts and Murmurs, a gossipy newsletter featuring less than blind items about Apollo’s dirty little IT secrets and Stephen Schwarzman’s Spanish Harlem pied-à-terre are well-aware that KKR has seen better days. And by better days we mean days that don’t include an affiliate saying it wants to suspend payment on $5 billion worth of commercial paper, Blackstonian roadblocks in its quest to go public, crunches in funding for new M&A deals, and horribly unfunny—actually kind of bordering on racist—jokes made by Kravis around the water cooler that everyone has to pretend to laugh at, ‘cause he’s Kravis. Yes, to the untrained eye, things aren’t looking so good for the number 1 P.E. firm. Put on your KKR night vision goggles, though, and you’ll see that, to the contrary, everything is falling into place, exactly as they’ve planned (and also—suspicious stains).

After being unable to say no to the money being thrown at them by the banks, which those who are slightly more judgmental might use as evidence to say that KKR, Blackstone, et al. singlehandedly created the credit market mess, Kravis and his cronies have come up with plan to profit from the chaos. The firm, BusinessWeek reports, is in the process of raising at least $1 billion from investors for one of its existing hedge funds, in order to buy some of the $300 billion of junk bonds and high-yield loans that no one else wants. The plan is to get the debt that—and we know this is kind of touchy—KKR may or may not have created itself, on the cheap and then, when the market recovers, do that thing where you make a profit.

Analysts are telling Kohlberg Kravis Roberts & Co to scrap its plans for an initial public offering, saying tighter credit markets make the private equity firm a less attractive investment than it appeared to be just a few months ago.

We have certainly come a long way since last spring, when Henry Kravis was instructing the world about the “golden age” of private equity. (More recently, George Roberts, Kravis’s cousin and partner at KKR, told a German magazine that he expects returns on buyouts to “significantly” from where they’ve been. “The coming years will be harder, no question,” Roberts said according to reports.)

"They should absolutely, unequivocally, withdraw the IPO," David Menlow, president of research firm IPOfinancial.com, tells Reuters.

Offerings from hedge funds and private equity shops pose a special dilemma for analysts at investment banks. Because they are involved in so many deals, private equity firms pay lots of fees to investment banks. And this can put pressure on analysts to give favorable ratings to the companies.

Covering hedge funds and private equity firms may also renew conflict-of-interest concerns Private equity-related fees, including those from advising and underwriting, accounted for $15.6 billion, or 20 percent of total global investment banking revenue last year, according to data provider Dealogic.

"The greatest challenge one faces as an equity analyst looking at Blackstone is the fact that they are one of the largest investment banking clients," said Hintz. "It isn't going to make you very popular if you put an 'underperform' on them."

Not surprisingly, many of the analysts who are calling for KKR to pull its IPO work for independent firms that don’t suffer from fee-related conflicts.

KKR should pull its IPO: analysts [Reuters via Washington Post[
Formerly private equity firms irk stock analysts [Reuters]

Let’s see what two guys (Kurt Andersen and a friend, who asked requested his name be withheld) had to say about the matter:

* Guy New York contributor Kurt Andersen knows who works around private equity “snarls” when he says the name “Steve,” and “blames the current anti-private-equity spasm not on whiny anti-business liberals, but on Steve Schwarzman”

* “The fucking birthday party” (attribution to same “guy”)

* “Where no one gave a toast, by the way, not one” (same party, same guy)

* “We’re where we are right now because of the unbelievable egos of guys running the private-equity firms like Blackstone. They put big targets on their backs by what I consider stupid actions like throwing these big parties.” (same party, different guy—head of the National Venture Capital Association)

* “Ostentatious, churlish, megalomaniacal, tone-deaf—and a hypocritical dissembler to boot.” (Andersen, in cahoots with “guy”)

Alert the National Guard: Goldman has now been left out as a major underwriting playa in two—count ‘em, two—IPOs. First there was the Blackstone slap in the face, and now KKR is jumping on the “Don’t touch me there, Goldman” bandwagon. The same banks who lead the B-stone deal, Citigroup and Morgan Stanley, will be underwriting KKR’s as well.

What’s with 1-2 punch? When it happened the first time, many believed that GS and JP were working on another P.E. IPO, there was a non-compete and so on and so forth. Others wondered if Goldman’s own “aggressive pursuit of private-equity deals alienated Steve Schwarzman,” failing to take into consideration that a 5’6” tall man probably has pretty thick skin. But Blackstone’s in the past—what’s the deal with the second snub?

As Reuters points out, JPMorgan doesn’t have a private equity arm capable of competing with KKR, but Henry Kravis may “have beef with the bank,” re: First Data Corp.

Reuters reported in April that Henry Kravis and crew were fuming at the way JPMorgan handled its proposed takeover of First Data Corp. Long story short, JPMorgan owns a majority stake in a First Data joint venture. KKR tried to reassure JPMorgan that the JV was not under threat, but JPMorgan pushed back, offering to buy out First Data’s 49 percent stake in the venture or dissolve the partnership altogether, sources told Reuters. That didn’t sit well with Kravis, sources say.

So that’s JP Morgan, okay, but the lack of Goldman is still coming as a shock to those who believe Goldman Sachs rules the world and all of its inhabitants (really, though, Goldman does have the ability to make it rain). So what’s up there? Some theories:

• Goldman’s private equity arm competes directly with KKR for deals.
• As noted by the ‘Bookies, in March, Lloyd Blankfein said, “It’s impossible for us to be in every piece of business,” which is kind of like hearing your deity admit to being human and will thusly be chalked up to Blankfein being drunk, and struck from the record.
• Goldman has different looting and plundering strategies from those of KKR
• Goldman needs a nap
• There can only be one bald supermogul per IPO
• Goldman is advising Apollo, Citadel
• Goldman is the midst of a herpes outbreak
• Kravis just doesn’t think Goldman’s all that good at the private equity business
• Goldman has told KKR in the past that it would underwrite its IPO—when small mouth bass rule the world

Goldman, JPMorgan out in the cold for second private equity IPO [Reuters]
Underwriting Henry: Who’s In and Who’s Out [DealBook]
Goldman’s Hedge Fund Alumni Network [Deal Journal]

Damn the torpedoes! Full speed ahead!

Kohlberg Kravis Roberts have hired Morgan Stanley and Citigroup as underwriters for the potential public offering, CNBC’s Charlie Gasparino reported today. While warning that the plans were still tentative, Gasparino said that KKR would pursue an IPO that would compete in size with Blackstone’s.

There has been rumor and speculation that KKR would follow its rival Blackstone into the public markets since news of Blackstone’s offering broke months ago. But the last time we checked in, people were saying KKR had rejected going forward with an IPO. What's more, some had wondered if tax legislation recently proposed in the US Senate would have a chilling effect on the urge to go public. The proposed bill would force private equity partnerships to pay taxes at the corporate rate if they go public, instead of treating profits as capital gains taxed when distributed to the partners under the current law.

But despite the potentially higher tax bills, Blackstone seems undeterred in their desire to sell shares. And investors are apparently undeterred in their desire to buy them. Talk that the higher tax bill could knock as much as 20% off the value of Blackstone has not been reflected in the appetite for the shares.

The success of Blackstone’s offering, which is expected to price tonight at the high end of its range and is reportedly oversubscribed by a factor of seven, has sparked talk of offerings coming from not only KKR, but Apollo, Carlyle and TPG. Gasparino says that Apollo is also leaning toward an IPO, something he has steadily maintained despite contrary reports in the New York Times.

There’s something of an irony in KKR following Blackstone in offering shares to the public. According to sources familiar with the genesis of the Blackstone IPO, the idea of going public was hatched after KKR succeeded in selling shares in one of its buyout funds to the public. At the time, Blackstone head Stephen Schwarzman publicly complained that the enormous offering had sucked the air out of the market for exchange traded private equity funds. Selling partnership shares of Blackstone was hatched as a new way of getting at the capital markets. So KKR may have inspired the very offering that they are now looking to imitate.

KKR May Launch IPO Later This Year: CNBC's Gasparino [CNBC.com]

The video above comes from Texas Energy Future Holdings, the joint-venture partnership set up by Kohlberg Kravis Roberts and the Texas Pacific Group to fund their acquisition of the Texas energy company TXU. They also have a snappy, graphics laden website called TexasEnergyFuture.com.
We’ve run a lot of stories about the online public relations campaigns of Pirate Capital but until now haven’t touch on the phenomenon of political campaign style advertisements in the TXU deal.

We were wondering who was behind the turn to the public airwaves in order to win sympathy for the buyout. Unfortunately, we didn’t get very far in our inquiries with Texas Energy Future Holdings.

“The investors felt the need to let the public know about the transaction,” Jeff Eller told us twice when we asked about who planned the advertising campaign and how the idea was first hatched.

This morning’s Financial Times reports that Bonderman didn’t fare too well when confronted by Dallas mayor Laura Miller during a panel discussion at Milken Institute's annual conference in Los Angeles.

In matters of substance, I would say that Mr Bonderman won on points. But Ms Miller and a member of the audience managed to rile him enough to concede a hostage to fortune. I concluded that the senior partners of private equity firms, who are under the spotlight around the world, still have much to learn about how to behave adroitly in public.

The turning moment of the discussion came, the FT reports, when Bonderman faced a question from an environmentally concerned audience member.

So why did he lose his cool when a self-righteous man from the audience demanded to know whether he felt an ethical responsibility to cease contributing to global warming? "You and others who are absolutists tend to be wrong almost always, in every event, at any time," Mr Bonderman snapped back, promptly losing the audience's sympathy.

It was an ingenue's error. A smile lit up Ms Miller's face and she said: "That was a really interesting answer." No smart politician would have been caught losing his temper with a critic in that way, especially not on camera. As they have learned, in the age of YouTube, one reckless moment can doom them.

Like the male leads who clash with sparky women in Hollywood films, Mr Bonderman is charming but arrogant. I suspect that is true of the heads of other private equity firms. Who might not be with their stellar financial records? But it is no longer tactically wise to show it and the sooner they learn that the better it will be for them and their investors.

We hadn’t seen the video of the debate. So we asked Jeff Eller about it. Was it televised somewhere?

“It wasn’t a debate, it was a panel discussion, and to the best of our knowledge it wasn’t broadcast anywhere,” he said.

So was the "panel discussion" broadcast or not? Does anyone have the video? We haven’t been able to track it down anywhere. Send what you know to tips@dealbreaker.com.

Private equity needs more charm

Private equity executives make no secret that relatively plentiful credit is the fuel power the surge in giant leveraged buyout deals, allowing the buyout shops to make acquisitions on companies which might have been untouchable in earlier eras. So it comes as a bit of a surprise to hear so many of them seem to be warning us about rising debt coupled with looser lending standards. Carlyle founder William Conway has rang the alarm bells with a memo of his that was “leaked” to the press everywhere. Remarks of Leon Black and Steve Schwarzman also have been read as warnings.

The latest entrant is the chief executive of BlackRock, Larry Fink. BlackRock is not a private equity shop—it’s an asset management firm that was spun-off of the Blackstone Group way back in 1992. But Fink’s background is in debt and private equity. He was a bond-trader at Credit Suisse and worked at Blackstone before the spin-off. And now he’s telling the Financial Times that the leveraged debt fueling the buyouts may be the next subprime mortgage crisis.

“If I was the chairman of the Federal Reserve, I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said in an interview with the Financial Times. “Standards have deteriorated to levels that we never even dreamed that we would see.”

So has Larry gone over to the other side? Perhaps. His business does compete for investment dollars with private equity firms and hedge funds, and so he may have a vested interest in seeing the current golden age of private equity come to an end.

But there’s a more paranoid theory that was suggested to us by a source (who requested that we keep him anonymous) who works at a smaller private equity shop. His theory was that the big shots in private equity were beginning to worry that the loose credit standards were allowing others in the buyout market to make bids that might once have been exclusively within the reach of the Blackstone’s, Apollo’s and KKR’s of the world. The relatively easy access to credit was fostering competition in the once cozy world of private equity, and driving-up the prices of the companies they want to take private. So they want to talk investors out of getting involved in lending into the buyout market in order to make it harder for competitors to raise funds.

Of course, as even our source admitted, this theory is more than a bit paranoid. But just because you are paranoid doesn’t mean Henry Kravis isn’t thinking about how to crush you.

BlackRock chief warns on leveraged loans [Financial Times]

If different sectors of the financial industry were to hold primaries, Mitt Romney would be the clear favorite to win the private equity primary. The founder of Bain Capital who is running for the Republican nomination for president has been received far more than any other White House contender from the private equity industry, taking in $258,000 in the first quarter of 2007, according to Dan Primack at PEHub.com.

The list of Romney’s donors include Steve Schwarzman of the Blackstone Group and Henry Kravis of Kohlberg Kravis Roberts. And despite the amounts collected from private equity employees, Romney has hardly topped out. Only one of his donors—Charles Haneman of H.I.G. Capital—has hit the statuory maximum donation. So Romney can probably expect to collect even more from his former fellow private equity colleagues.

Unlike hedge funds managers—many of whom have only recently become politically active and tend to lean toward Democrats—the top names in private equity have a history of political involvement with Republicans. Schwarzman is also a donor to John McCain’s campaign and there was talk that he might have been in the running for the top job at the Treasury department. That job eventually went to Hank Paulson, who had been running Goldman Sachs.

Romney Rakes in LBO Dough [PE Hub]

Last week several people batted around theories about what it meant when Henry Kravis let Goldman Sachs play the role of the dog that didn’t bark in his remarks about private equity competition from investment banks.

Dana Cimilluca of Deal Journal figured that Kravis was conveying an animus against Goldman.

At a conference in New York yesterday, the buyout king was asked how he felt about competition from Goldman Sachs Group, Morgan Stanley and other investment banks (those two were specifically mentioned in the question). His answer, according to Bloomberg: Morgan Stanley and Merrill Lynch have “done this extremely well.” No mention of Goldman in the response, according to Bloomberg. Ouch!

It’s long been rumored that Goldman Sachs hasn’t been on the greatest terms with Kohlberg Kravis Roberts, and Wall Street’s most profitable bank has been invading KKR’s turf by raising ever larger buyout funds of its own.

We spoke to a person familiar with the thinking inside of KKR this weekend who to us that “the fued rumor is overplayed.” His read was simpler: Kravis just doesn’t think Goldman’s all that good at the private equity business.

“PIA is almost an after-thought. Their top guys aren’t into it. You don’t go to Goldman to do private equity. You wind up there,” he said.

He did say that all this could change with Goldman's new buyout fund. "But it hasn't changed yet," he said.

KKR’s Kravis Disses Goldman [Deal Journal]

If the world seems a little bit brighter today that might be because you’re sitting somewhere near David Bonderman. The head of Texas Pacific Group is there in his suit—maybe it’s that wide-lapelled, sack-ish green number he likes to wear—his tie twisted, its front resting against his chest and its seam showing. (He’s not a slob but being Bonderman means having more on your mind than whether or not your tie rests just so.) And he’s probably smiling wide enough to throw light in a RIM blackout-sized radius. (Read: the whole western hemisphere.)

Texas power giant TXU Corp. has just announced that it is proceeding with plans to be bought out by Bonderman’s firm and Kohlberg Kravis & Roberts. Bonderman never really doubted the deal would go through but he had to smile when he got the news that with two weeks left in its “go-shop” period to look for other buyers, TXU was throwing in the towel and taking his bid. There was never much chance that serious rival bids would emerge for TXU. All those stories about Bonderman’s connections to the environmental groups supporting the buyouts, about behind the scenes deals with Texas lawmakers and regulators, no doubt sent the message to other private equity shops that
the fix was in. These guys had this deal wrapped up. No one else had the connections.

If that weren’t enough to stymie the ambitions of the Steve Schwarzman’s and Leon Black’s of the world, there were all the stories about resistance to the deal from greens, lawmakers and regulators. Who would want to step into that mess? The more trouble the TPG-KKR bid had, the less attractive the deal seemed to competitors. Worse was better.

In a sense it was all a bluff because the logic behind the TXU buyout has always been deceptively simple. The management of the power company had made itself too many enemies in Texas to succeed. It was partly bad public relations, partly a failure to build the right relationships, and partly an inevitable cost of running a power company in an age of rising energy prices, sprawling suburbs and growing environmental concerns. The management had become toxic.

A new management—under new owners—stood a chance to make the company work simply by not being the old guys. It was—it is—really that simple. The plan was to get rich by being someone else. In this case, by being David Bonderman.

TXU receives no superior offer and sticks with KKR [Reuters]

Is personal animosity standing in the way of Blackstone’s bid for the enthusiast magazine titles Primedia has put on the auction block? That’s what the New York Post’s Keith Kelly claimed in his column yesterday.

Although Blackstone is said to have put in a bid for some or all of the titles—which include Surfing, Motor Trend and similar niche magazines—in the first round of the auction, it may have backed out of bidding in the second round, Kelly reports.

One reason is that Schwarzman and Primedia's chief shareholder, Henry Kravis are bitter rivals on many high-stakes deals.

The deal for the Primedia Magazine Group is expected to fetch over $1 billion.

One source close to the situation said there is "no way" Schwarzman would want to fork over that kind of money to Kravis.

Is it plausible that Steve Schwarzman has personally quashed the Primedia bidding just to avoid giving money to Henry Kravis. We're rating this story a "sell" because it doesn't quite make sense. Why would personal rivalry stand in the way of a second round bid but not the initial bid?

Fat chance [New York Post, second item]

An initial public offering has been ruled out by Kohlbeg Kravis & Roberts, sources tell DealBreaker. “KKR is next” was one of the most persistent rumors that arose in the wake of news that Blackstone would offer $4 billion of limited partnership equity to the public was. There were published reports claiming that bankers at Goldman Sachs were already at work on putting together an IPO for KKR—and those might have been correct. Perhaps there were bankers pitching an IPO to KKR. Perhaps the venerable private equity titan had even encouraged the bankers. But now we’re told that the IPO is off. Indefinitely. Permanently. For now.

Word from CNBC’s Charlie Gasparino that Goldman and JP Morgan were working on an IPO for Apollo Management, and subsequent stories in the Wall Street Journal and New York Post, quickly helped Apollo replace KKR in Wall Street afterhours chatter and on the pages of the newspapers. Part of what had been feeding the KKR rumors was the feeling that Goldman—which was notably absent from the list of advisers to Blackstone for its IPO—must be working on something for a Blackstone competitors. How else had one of the premier banks been shut out of one of the most talked about deals? It seemed the door was held open for nearly everyone else on Wall Street.

Apollo fit just as well as KKR for this theory, and reports and rumors of its impending IPO private placement have quickly replaced those pointing to KKR. Even denials by people “close to Apollo”—as DealBook reported—and by people who maybe know some other people who are familiar with things that sometimes happen at Apollo—as the Wall Street Journal reported—haven’t quenched the thirst for this story. This morning's WSJ report only served to confirm that it was Apollo and not KKR whose deal was keeping Goldman occupied during the rush of other banks into the arms of Blackstone's IPO.

But we came not to discuss the history and origins of the KKR rumor but to lay it to rest. Our sources—lets call them, “people familiar with KKR’s plans”—tell us the KKR has decided to stay out of the IPO game for the time being. The reasons we’ve heard are purely speculative: it didn’t like the comparatives with Blackstone, it didn’t like the attention Blackstone and its tax treatment were getting, it didn’t think the timing was right, it didn’t think the price would be good enough to justify the headaches of added public scrutiny, the KKR-ers aren’t pushing for freely transferable equity stakes like the ‘Stoners are. Take your pick or invent your own.

One storyline that is clearly emerging from the various private equity and hedge fund IPO rumors and reports is that the investment banks are gunning hard for this business. And they’re not waiting around for hedge funds to decide to go public—they’re pitching, even pushing, the idea of launching a public offering on the firms.

“All over Wall Street, bankers are pushing private-equity shops to move quickly, reminding them that market conditions could deteriorate and diminish investor appetite for any offering,” Wall Street Journal reporters Katie Kelly and Robin Sidel write in today's paper. “In this case, however, it isn't clear whether bankers are more concerned about a capital-markets slowdown or getting a high-profile deal to the finish line before rival firms attempt to do the same.”

A sign of how ultra-competitive the investment banks have become for this business is the public attention paid to the fact that Goldman Sachs was not included as an underwriter for the public offering of Blackstone partnership equity. There was a lot of speculation about why one of the premier banks on Wall Street (yes, yes, Broad Street, we know, “Wall Street” is a metaphor or a synecdoche here) was left out of a deal that seemed to include every other bank on the Street. Was it because Goldman “called bullshit” on the Blackstone IPO, as some said? Or was it personal animosity between the higher-ups at Blackstone and some prominent Goldman personages? Or—and we’re sorry there are so many “ors” here but that’s just the way the world is—was it that Blackstone was hesitant to let Goldman—which competes with Blackstone in many of its businesses—do much digging into its books in preparation for the offering.

If the reports of an Apollo IPO—a story broken by CNBC’s Charlie Gasparino yesterday and carried several millimeters forward in today’s Wall Street Journal and New York Post—are correct, then it seems we have the answer: Goldman couldn’t take the Blackstone business because it was already working on the offering of its competitor. Now Goldman is famous for finding creative ways to cleverly untie seemingly Gordian knots of conflicts—but underwriting two competing private equity IPOs might have been too going too far.

That’s the story as we’ve heard it. But the boys at Deal Journal have an alternate reading of the Apollo story. They write that the Apollo IPO isn’t so much of what kept Goldman out of the Blackstone underwriting syndicate—it’s a consolation prize for the banks, a bit of business they apparently pushed to get after being shut out by Blackstone. Of course, Deal Journal has been a big proponent of the Blackstone In Competition With Goldman theory, and this take would allow them to leave that notion in place. The Apollo Conflict theory, in fact, undermines the whole idea that Goldman was shut-out.

Of course, we’re probably just counting our eggs while they are still in the bush. Or however the saying goes.

When Holman Jenkins penned his now famous column on the TXU deal, even we were stunned by the depth of his cynicism. He clearly thinks the "treehugger" alarm being raised by those wondering if the environmentalists had captured the private equity firms that were buying the texas energy giant is just plain naïve. Obviously no ideological group had captured KKR or the Texas Pacific Group. They were still following the ideology they had always followed—the ideology of making as much money as possible—it just required a bit of greenery this time around. Indeed, Holman wrote that it wasn't only the environmentalists who might end up regretting making the deal—it also seemed against the interests of Texas residents and taxpayers, as well as TXU shareholders.

One wonders, for instance, what the green groups are expecting to receive, indirectly, for their endorsement? It quickly emerged that TXU already had intended to spike six of the planned coal plants. Noticed too was the fact that TXU enjoys considerable market power in Texas. What's going to stop rates from rising in the future as Texas outstrips the available power supply, especially with heavy restrictions on new coal plants? Good question. And, for TXU shareholders, don't you get the feeling that the political phalanx behind the deal is meant to deter another bidder from beating what is perhaps, under the circumstances, a lowball offer?

The only flaw that Holman saw with the private equity ploy to dress up as environmentalists was that it was so obviously phony.

Now we'll find out if these shrewd private equity operators are really any better equipped to deal with a relentlessly more politicized business environment than public companies have shown themselves to be. Once the buzz from Monday's razzle-dazzle has worn off, don't be surprised if the answer turns out to be "no."

Well, maybe Holman underestimated the genius of private equity. Today we learned that a group called Environmental Defense—who are supporters of the private equity buyout—have hired Perella Weinberg Partners to advise them on the deal. When you can convince the environmental groups to start paying investment bank advisory fees, well, that clearly means you really are equipped to deal with a politicized business environment.

So maybe the headline to this item really should be "we're all clients of investment banks now."

Update: One the other hand, DealJournal wonders if maybe representing Environmental Defense in the TXU deal is a sign that Perella Weinberg might be getting a little desperate.

Private Equity Says 'Like Us!' [Wall Street Journal]
Environmentalists hire banker for role in TXU deal [Reuters]

By now you've probably heard that Credit Suisse is reportedly offering to finance $40.2 billion to fund a competing offer for TXU, the Texas-based energy group which this week agreed to be bought by Kohlberg Kravis Roberts and Texas Pacific Group.

The Financial Times broke the story, following it's lead-off sentence announcing the offer with this little bit of understatement:

The Swiss bank's willingness to arrange the massive financing will eliminate a key financial obstacle to several private equity groups, including Blackstone and Carlyle, that are considering a rival offer.

That key financial obstacle being, uhm, having $40 billion to throw around. Cause we were going to pick up TXU until we saw the price-tag. We're pretty well set with money these days but $40 billion is a bit steep even after that generous bonus DealBreaker paid out to its editors. So we decided to pass. But now that we know you can put it on lay-away, well that changes things.

So who wants to be a forty-billionaire? No-one, apparently.

Reuters reports from that big private equity conference in Germany:

The Blackstone Group has no interest in putting together a rival bid for TXU, but it would consider an equity investment in TXU if the current buyout team needed an extra equity partner before the deal closed, the source said.

Isn't it totally amazing that someone in the government's antitrust department might think these guys are colluding together and not competing to outbid each other on big deals. Sure, they all hang out in Germany and trade plans for the future. And no-one seems willing to grab the $40 billion that Credit Suisse has just dumped out on the table. But "collusion?" That's stretching things.

And it's not suspicious at all that Blackstone doesn't want to put in a counter bid. It's a lot of money, and Blackstone is noted for it's conservative spending on acquisitions. Oh, wait…

So maybe Blackstone just doesn't want to get into the Texas energy business. That must be it, right?

Asked earlier about the TXU deal, Chief Executive Stephen Schwarzman told Reuters "We'll look at it if someone brings it to us," speaking on the sidelines of the annual Super Return private equity conference, without clarifying further.

The source explained that Blackstone would consider an equity stake, but not a counter-bid.

So, you know, if Blackstone were invited into the club buying TXU they'd totally do it. But bidding against KKR and TPG? That would totally ruin the atmosphere of that big party they're having in Germany.

Credit Suisse offers to fund rival TXU bid [Financial Times via MSNBC]

Blackstone unlikely to launch rival TXU bid-source

The pre-takeover announcement trading in TXU call options has lots of the usual suspects complaining that the other kind of usual suspects must have had inside information about the deal. "The only possible explanation is that there are leaks in these deal processes," Whitney Tilson at T2 Partners and Tilson Mutual Funds in New York told Bloomberg.

But this story from the Dallas-Fort Worth Star Telegram makes clear that big shots at the Texas Pacific Group were going around to Texas officials and the relevant environmental groups making sure they wouldn't get in the way of the deal. Actually, the suggests TPG's chief is actually a tree-hugger himself.

When Texas Pacific Group chief David Bonderman sought help a couple months ago to get environmental groups behind Texas Pacific's plan to buy TXU Corp., he called an old friend -- former Environmental Protection Agency Administrator William Reilly.

They met in 1980, when Reilly headed the Conservation Foundation, a land-use organization that later merged with the World Wildlife Fund. Reilly needed legal help, and Washington, D.C., powerhouse legal group Arnold & Porter lent him Bonderman, Reilly said Monday.

Now Bonderman was asking Reilly to lead negotiations to win the support of two big environmental groups, Environmental Defense and the National Resources Defense Council, for the record $45 billion buyout of TXU by Texas Pacific and Kohlberg Kravis Roberts, another big private equity fund. Although the deal aims to make money, Reilly said Bonderman's long-standing interest in the environment is also a driver.

"He's for real on this stuff," Reilly said. "He was in the Amazon two weeks ago. He was in Mozambique last year for a new marine reserve. These are not places to go if he's looking to line his pockets," he said.

We have no idea whether this is just TPG spin. But whether or not TPG really is run by environmentalists or just finds it profitable to pretend it is, it certainly tells you something about which way the political winds are blowing.

Two old friends, one goal: support of green groups
[Star-Telegram]

To the surprise of absolutely no-one, the trading volume on TXU call options was unusually high in the couple of days before the deal was first leaked to CNBC. We're not saying it's right that some folks who might have had inside knowledge about the deal might have traded on that knowledge while the rest of the market was in the dark. But we are saying that it strikes us as not exactly very likely that the very first person to know about a deal outside of TXU and its private equity acquirers, KKR and the Texas Pacific Group, would be CNBC reporter David Faber.

From the Wall Street Journal:

In what has become a familiar occurrence, some stock and option investors seem to have caught wind of TXU's sale before news of it became public late Friday.

Shares of the Texas utility rose 4.1% Friday, before the deal was reported by CNBC after the market close. Meanwhile, the volume of TXU call options, which give investors the right to buy the stock, surged to 18,000. That is compared with average daily volume this month of about 2,400 contracts. Yesterday -- when the company officially confirmed reports of its planned sale to private-equity firms Texas Pacific Group and Kohlberg Kravis Roberts & Co. -- the stock rose an additional $7.91 to $67.93.

Some market watchers cried foul about the moves. Jon Najarian, a trader who tracks unusual activity for optionMonster.com, argued that volumes Friday were high enough that "certainly this information was widely distributed to get this many people reacting to it." Though some traders may have been anticipating the company's earnings release due tomorrow, Mr. Najarian argued that probably doesn't account for all of Friday's activity.

Unusual Activity Precedes TXU Buyout [$$} {Wall Street Journal]

Politics creates opportunities for private profit. That's not exactly news. We've known it at least since Senator Plunkitt of Tammany Hall explained the difference between honest graft and dishonest graft.

More recently we've seen how the regulatory and legislative response to the corporate scandals of the turn of the century—in particular, Sarbanes-Oxley and its accompanying regulations—have contributed to buying opportunities for private equity. Firms and managers find the public capital markets unwelcoming and unrewarding), regulatory overhead and legal distractions push down company valuations, and the threat of gigantic civil fines and criminal penalties make increase the risks of operating a public company. Private equity offers an escape from this hazards with promises of greater riches. And if the laws and regulations get repealed or reformed someday, well that will just create new IPO and other exit opportunities for private equities. Call it timing the political market.

This morning's Wall Street Journal carries an editorial explaining how a different kind of politics—environmentalism—contributed to the fall of TXU's share price and made it a more attractive takeover target for private equity.

TXU had painted a green bull's-eye on itself when it announced plans last year to build the 11 new plants. Never mind that the plants were to be built on the sites of existing plants, that a number of them would replace older, less-efficient plants, or that Texas is already bumping up against the limits of its ability to produce the electricity it needs for its growing population and economy. The announcement sent the environmental movement to the barricades against TXU, and may be one reason that the company's stock, after going up regularly for several years, sputtered and stalled in 2006.

That stock slide wasn't all bad for Kohlberg, Kravis Roberts, which is leading the group buying TXU for not much more than its all-time stock-price high, which it hit in the middle of last year. But then again, giving in to the pressure not to build all 11 plants may not turn out to be all bad for KKR and TXU, either.

Ercot, Texas's independent electric-grid operator, figures that peak electricity demand in the state will catch up with available capacity by 2009, if not sooner. Tight demand means higher electricity prices, which is good for TXU's profits. That squeeze will, in turn, rejuvenate calls for more capacity, which may allow TXU to dust off the plans for the new plants at a moment when the current environmental concerns weigh more lightly in the political scales than skyrocketing electricity bills. The private-equity crowd didn't get to be billionaires for nothing.

To sum up: Tree-huggers push down the price of TXU. KKR and TPG swoop in and pick up the pieces, making peace with the greens by agreeing to shut down the plans for the new plants. The resulting higher electricity prices enrich TXU and perhaps even creates a demand for those now-pariah plants in the future.

Here’s how the WSJ concludes the editorial:

As for TXU's current shareholders, the agitation of the greens may have helped bring down TXU's share price last year, so the environmentalists probably did KKR and partners a favor. There may even be a trend in the making here -- environmental protesters bring down a stock, making a private-equity transaction look more attractive, and in return, the equity firm and its management partners buy off the greens with this or that environmental promise. We're not suggesting any such quid pro quo here, but if we were TXU's mom-and-pop investors or Texas energy consumers we'd certainly be asking some pointed questions.

So you thought that when KKR launched a publicly traded fund last year it's main goal was to raise money. That's clearly because you aren't paranoid enough. According to Blackstone Group chief executive Steve Schwarzman, KKR really wanted to drain the appetitive for private equity investment from the IPO market before any other private equity firms could raise money.

"KKR destroyed the market for anyone else" mulling a publicly traded fund, he said, "which I think was their objective."

Schwarzman went on to point out that an Apollo Management IPO came up short. Apparently when KKR sets out to destroy something, that thing gets destroyed.

Blackstone CEO says public markets 'over-rated' [Reuters]

Henry Kravis and his cousin and business partner George Roberts are the subjects of a Wall Street Journal feature story today. Our first reaction was: leave it to the old boys to get the pro-private equity publicity machine humming after recent news of federal investigations into the industry. Second reaction: these guys seem like sweet, conservative old codgers. Third reaction: we kind of miss the barbarians at the gates days.

It’s kind of long, so here’s the shorter version, with some additional commentary:

• The midtown Kravis office is decorated with an “eclectic collection of books.” More details please! Which books? Like odd-ball, semi-porny dime-store novels? The works of the middle Roman philosophers? Or just the sort of thing that a journalist might find eclectic but someone in finance wouldn’t—like books about Jesse Livermore.

• George Roberts hangs out in Menlo Park, California. Err, that’s what the rest of us call Silicon Valley. Like where Sandhill Road is located.

• Roberts blames the stock market’s short-term, quarterly financials obsession for why going private is such an attractive option for management, but doesn’t say a word about Sarbanes-Oxley. A good idea if you are trying to placate an already uppity SEC!

• In 1981, KKR did eight deals and had just six people.

• Kravis pooh-poohs the financial aspects of the business, saying they spend just 5% of their time on financial engineering. "It's all about how to make better operating decisions [at our companies]. We have deeper teams. Our processes are better. We have formalized plans before we buy. We also make decisions more quickly on things like whether we have the right management structure," Kravis says.

• The wrap-up quote is totally worth the read through the whole thing. But because we’re here, you get it without the effort. Kravis’ parting wisdom: "Any fool can buy a company. You should be congratulated when you sell."

Inside the Minds of Kravis, Roberts [Wall Street Journal]

As a relatively unknown federal prosecutor, Rudy Giuliani made himself a public figure with the prosecutions of several Wall Street financiers in the eighties, including Marc Rich, Pincus Green, Ivan Boesky and Michael Milken. He pioneered the use of anti-organized crime statutes, such as RICO, to go after Wall Streeters. But that hasn’t stopped him from winning friends in the finance industry. Aides formulating his presidential campaign—as detailed in a batch of documents obtained by the Daily News—hope to raise millions from prominent names in the financial world, including KKR’s Henry Kravis and Goldman Sachs’ Lloyd Bankfein.

In a memo that appears in the dossier, Giuliani aides Dickerson and Roy Bailey urge him to court financier Henry Kravis particularly avidly.

"You need him to be a Wall Street industry leader," the memo says.

McCain announced Kravis' support last month.

The plan also anticipates his recruiting top GOP fund-raiser Cathy Blaney in New York on a retainer of $260,000 and her Florida counterpart, Ann Herberger, at $216,000. But between the plan's preparation in the fall and today, Blaney became the chief fund-raiser for the World Trade Center Memorial Foundation, while Herberger reportedly has signed on to the presidential campaign of Massachusetts Gov. Mitt Romney.

Other business leaders targeted by Giuliani remain publicly uncommitted: Paramount CEO Brad Grey, Giuliani's talent agent after 9/11, is envisioned as leading a "celebrities" fund-raising arm; former Vikings quarterback Fran Tarkenton would raise money from professional athletes. News Corp. CEO Rupert Murdoch, PepsiCo chief Dawn Hudson and Goldman Sachs president Lloyd Blankfein are also listed as "industry leaders."

The documents depict hedge fund tycoon Paul Singer, a close Giuliani ally, playing a central role in his fund-raising operation.

The dossier doesn't make clear whether the people named have committed privately to Giuliani or even been approached to support him.

Revealed: Rudy's '08 battle plans [Daily News]

Going Private revists the KKR offering memo.

Typically, private equity funds have provisions to "claw-back" fees paid to general partners of the fund in the event the fund closes with a net-loss. Not so here. To wit:

"Distributions that are made to the general partners of a KKR private equity fund pursuant to a carried interest in the returns generated by the fund’s investment generally are subject to reimbursement in the event that the fund is in a net loss position upon the termination of the fund. Distributions that are payable to KKR’s affiliates in connection with our co-investments and opportunistic investments will not be subject to similar reimbursement, although such distributions will take into account prior realized and unrealized losses."

In other words, KKR PEI could be a total bust except for three big LBOs that KKR Proper was only able to complete because of the additional funds available from this public entity. Those LBOs would pay 20% carries to KKR Proper, but the rest of KKR PEI's investments could tank and drop the fund to below the initial offering price. Despite this, KKR Proper keeps the LBO gains, and keeps the management fees it has packed in over the last many years.

You can read the whole KKR Prospectus here.

They're KKRrrreat! (Part II)

Going Private has read the KKR offering memo so you won't have to. The post is full of nifty diagrams. It describes the structure and answers some important questions, such as how KKR will be made to continue to invest in the public fund.

A bit of a warning. If you were planning on curling up with the offering memo this weekend, you might avoid clicking the link below. It's full of spoilers and we wouldn't want to ruin your beach reading.

They're KKRrrreat! (Part I) [Going Private]

We suppose it was inevitable, but post-KKR-IPO, there's a bit of bandwagoning, despite the fact that KKR performance has been less than stellar so far. From the WSJ:

Weeks after Kohlberg Kravis Roberts & Co. raised $5 billion in a European public stock offering, Apollo Management LP is following suit, with a planned $1.5 billion offering, and other private-equity firms are making similar plans.

Investors in the publicly listed fund will be earning far lower returns than those that private-equity firms generally promise their investors, because traditional investors write checks only when the firms are ready to invest the money in actual deals, while the public investors provide their cash at the time of the offering.

To entice investors, though, Apollo's fund promises to invest its money on a tight timetable.

But re: LP advantages: our favorite private equity anonyblogger, GoingPrivate (who is fending off extortion threats at the moment), pointed us to KKR's offering memorandum (downloadable here) a few days ago. One counterintuitive risk disclosure: KKR warns prospective investors that they'll be receiving less information than LPs (p. 34/35.) All the downside of investing in public equities and none of the reporting benefits, apparently.

Apollo Will List Fund in Europe [WSJ]

BusinessWeek has a story this week about Cerberus chief Stephen Feinberg's successful buyout of GMAC:

Wall Street has been buzzing over how the 46-year-old Feinberg snapped up a huge financial-services company for little more than its book value from Kravis, age 62. Kravis may someday look wise for having turned his back on a deal heavily laden with risk. But losing to Cerberus has to sting.

But not really. The BW piece is extremely flattering to Cerberus**, but the deal terms are fairly restrictive. There are risks associated with the leases and loans, an obligation to invest after tax profits for 5 years, and probably in the fine print somewhere, something about Feinberg's firstborn.

Related but not: While everyone was paying attention to GMAC, Cerberus bought Bushmaster, LLC, which manufactures assault rifles. We've always thought that in addition to Osama Bin Laden shooting targets, there should be Harry Whittington shooting targets. But how about a Henry Kravis shooting target? Just for Cerebus employees!

Cerberus to KKR: Eat Our Dust!
**"sources close to Cerberus" = Stephen Feinberg?