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On the Upswing

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On the Upswing page 24 private equity private international equity international july/august 2011 privately speaKing On the upswing One year on from fl oating its management company and 35 years after its founding, Kohlberg Kravis Roberts continues to aggressively expand and refi ne its franchise. In a rare in-depth interview, co-founder George Roberts discusses both the fi rm’s and private equity’s ongoing evolution as they move past credit crisis ‘hiccups’ and closer to maturity. ‘Investors are starting to realise this is the best performing asset class they have,’ he tells Amanda Janis photography by marK byron july/august 2011 private equity international page 25 aiting for a meeting at Kohlberg Kravis Roberts’ NewYork headquarters, you’re unlikely to get bored. Perched high above West 57th Street with dramatic floor-to-ceiling win- Wdows, the office has breathtaking views of Central Park and Manhattan. The interior is equally grand – traditional dark wood accents are offset by an eclectic modern art collection. Massive paintings of knees, clowns and clocks (by Francis Alys, Cindy Sherman an Edward Ruscha, respec- tively) were just a few of the items encountered while waiting for one of the private equity industry’s most renowned and influential people: George Roberts. KKR’s 67-year-old co-founder, co-chairman and co-CEO has long called California home and is based in the firm’s Menlo Park office. On this occasion he had flown to NewYork for PEI’s and the UN PRI’s Responsible Investment Forum. Scheduled to give the opening keynote address at the forum on the following morning, Roberts begins our meeting by asking for input on what the audience might want him to discuss. “I hope it’s what I’ve already prepared,” he quips. “But just in case.” It would not be the only time during the conversation that others’ opinions would be sought by the direct but soft-spoken Roberts, whose slight drawl, utterance of the occasional “ain’t” and use of folksy phrases call to mind his Texas roots. Despite leading one of the world’s most storied and powerful private equity franchises alongside his cousin, Henry Kravis, Roberts doesn’t come across as a leader wishing to pontificate. When talking politics, for example, he is careful to follow up strong statements by noting they are “just one man’s opinion”. Encountering a friendly, straight-talking Roberts wasn’t exactly a surprise. “He’s very candid and a very nice guy,” one large investor in KKR’s private equity funds previously told PEI. It’s an example Roberts wants the firm’s nearly 700 employees to follow: according to a source inside KKR, one of the catchphrases Roberts uses most with colleagues is, “People do business with people they like and trust.” ahead of the puck Another catchphrase Roberts is fond of using is this: “We want to go where the puck is going, not where it’s been.” It’s a concept he associates with why hockey great Wayne Gretzky was able to achieve such heights, and he refers to it often to illustrate the importance of anticipating change. Sure enough, it’s the Gretzky analogy Robert uses when asked why KKR suddenly seemed to have become swept up over the past year or so with the growing trend among fund managers to develop responsible investment programmes pursuant to environmental, social and governance (ESG) issues at portfolio companies. “We started doing a lot of this over five, six years ago,” Roberts says, adding that he personally has been involved in such initiatives for more than 20 years. In addition to The Roberts Enterprise Development Fund, a San Francisco-based venture philanthropy organisation he founded, he and his late wife Leanne Bovet (he was remarried last year to Goldman Sachs partner Linnea Conrad) helped establish the Roberts Environmental Center at Roberts’ alma mater, Claremont McKenna College in Claremont, California. One of its initiatives is publishing sustainability scores on companies’ self-reported ESG efforts. page 26 private equity international july/august 2011 Today, six full-time employees at KKR track and integrate ESG been pickets outside,” he says, noting however that times have changed. At management into KKR’s private equity investment process. Their efforts the firm’s investor day earlier this year, for example, KKR invited Andy are complemented by KKR Capstone, a 60-strong affiliate that focuses on Stern, former head of the Service Employees International Union, to operations and management at portfolio companies. The firm is a signatory join a discussion panel. Years prior, Stern would have been more likely to the UN Principles for Responsible Investment and a member of CSR to picket the event than be a part of it. Earlier this year, Stern told US Europe, a European business network focused on corporate responsibility. It newspaper Politico that KKR “has been a leader in trying to promote a has also started publishing information on its efforts and results in an annual more partnership, shared-value type of business model”. ESG report and a dedicated website, http://green.kkr.com. Active stakeholder engagement, responsible sourcing and encouraging more environmentally conscious portfolio companies are the key areas KKR has been focused on, the latter in partnership with Washington DC-based non-profit group the Environmental Defense Fund (EDF). Their relationship was established in 2007, when EDF and a number of other environmental groups including “The idea that Henry The Natural Resources Defense Council collaborated with KKR, TPG and Goldman and I are sitting Sachs prior to their $45 billion buyout of Texas utility. around making all the The environmental groups – which had decisions – that passed previously criticised TXU’s environmental policies – endorsed the deal after the private a long time ago” equity sponsors killed plans for eight of 11 new coal-fired power plants that were in TXU’s pipeline, agreed to reduce the company’s carbon emissions to 1990 levels by 2020 and endorse a federal carbon cap. Private equity’s size and scope – Roberts estimates that if roughly The sponsors also pledged to double the company’s purchase of $900 billion in private equity capital has been raised globally, it equates wind power and efficiency expenditures, explore new coal generating to about $3 trillion of purchasing power with leverage – requires that technologies, devote $400 million to demand-side management it pay attention to ESG issues, he says. initiatives, tie executive compensation to climate protection goals and “If you just look at KKR alone, we have more than 60 private equity create a sustainable energy advisory board. investments, and these companies have over $200 billion of revenue. “These things are genuine and substantial changes, and we wouldn’t There’s 900,000 people employed in nine different countries. And have been interested in supporting the buyout if it were just a PR stunt,” we’re indirectly responsible, at the last count I made, just in the US Dave Hawkins, director of the Natural Resource Defense Council’s alone, for the retirement benefits of nine million people. You can’t be Climate Center, said at the time in response to critics’ claims the of that size and substance and not pay attention to what the world’s sponsors were simply ‘greenwashing’ the deal. His organisation had been telling you, what’s really important and what are the right things to do.” negotiating with the potential buyers for weeks, he said, and wouldn’t The “right thing to do” is a phrase Roberts returns to repeatedly have bothered doing so if the private equity firms weren’t serious about when discussing the firm’s ESG initiatives. “What does it mean to us? improving TXU’s policies. It means doing the right things by the environment, to the extent you Irrespective of the financial difficulties the TXU deal has since suffered can do that without putting yourself out of business. It means making (see p. 29), it was in many ways the catalyst for KKR’s “Green Portfolio” sure – now that we’re a global world and you can make investments programme launched in partnership with EDF in 2008. Meant to help in all parts of the world and you can buy products and services from reduce greenhouse gas emissions and waste, and save money in the everybody in the world – that the people you deal with [have] the right process, the programme initially started with three portfolio companies kind of human principles. It also means trying to engage in a constructive and quickly expanded to include 16. In two years, EDF and KKR say dialogue with labour.” it has resulted in a savings of $160 million in operating costs and the elimination of 345,000 metric tons of CO2 emissions, 8,500 tons of not just pr stunts paper, and 1.2 million tons of waste. “It’s the equivalent of taking 20,000 cars off the road, it’s the Roberts acknowledges that the firm has had issues with labour unions in equivalent of taking 37,000 houses off the grid,” says Roberts. “And the past. “I can’t tell you how many meetings I’ve gone to where there’ve that’s with only 25 percent of our companies in the portfolio.” While july/august 2011 private equity international page 27 he says those results may be “peanuts” compared to what’s needed idea that Henry and I are sitting around making all the decisions on a national and global scale, individual companies taking action – that passed a long time ago.” is how Roberts believes real change will be effected. “I think that KKR today has a management committee of 11 people in addition to private equity has a real chance to be a leader here.” investment committees for all of its asset classes and funds.
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