Fireside Chat, Interview
Talks at GS – Henry Kravis: 40 Years of Innovation in Finance
- In 1976, Henry Kravis, George Roberts, and Jerry Colbert founded KKR to focus exclusively on private equity (then known as Bootstrap Acquisitions, Management Buyouts, or Leverage Buyouts), departing from their parent firm Bear Stearns.
- Bear Stearns initially rejected a proposal for the trio to create a private equity vehicle with 50% firm ownership and 50% partner ownership, a refusal that enabled the founders to become independent and raise their own capital.
- Kravis emphasizes a long-term investment horizon (5+ years) to avoid the short-termism (quarterly or immediate) that hinders executive decision-making.
- KKR asserts that the hardest value-creation phase begins after acquisition; Kravis states, "any fool can buy a company... The hard part is what do you do with the business once you have made your investment."
- Kravis discourages over-reliance on static financial models, noting that investing is a "movie" of evolving events rather than a "photograph," and guarantees returns will rarely match specific model projections (e.g., 18.76%).
- Success is driven by identifying the 20% of business levers that drive the majority of outcomes, rather than focusing on granular details like the number of assets owned.
- KKR's internal culture mandates full profit sharing for all employees regardless of role or office location, a policy established at founding and maintained across 21 global offices today.
- Ownership equity was initially structured so that Jerry Colbert (the senior partner) held 40% while Kravis and Roberts held 30% each, with any initial giveaways deducted from Colbert's share first.
- The firm operates on a decadal "first day" mindset, where leadership treats the company as if it were being acquired anew every 10 years to foster reinvention and avoid stagnation.
- Kravis identifies "arrogance" as a primary cause of business failure, citing a personal office mantra: "arrogance kills," and advocates for constant innovation and learning from mistakes.
- Economic outlook: Kravis predicts the U.S. economy will remain stable through the end of 2017 and 2018, with potential slowdown risks emerging in 2019.
- Specific macro risks cited include geopolitical volatility (e.g., North Korea) and a "false sense of security" regarding government finances, aligning with warnings from IMF head Christine Lagarde.
- While corporate bottom lines are growing due to operational efficiency, top-line revenue growth remains difficult across KKR's portfolio of over 130 companies.
- The 71-year partnership between Kravis and Roberts is attributed to mutual respect, trust, and a shared vision that transcends personal interests; their only significant childhood disagreement involved a bicycle and resulted in one partner requiring 23 stitches.
- Advice for millennials and entrepreneurs: actively exit comfort zones, maintain global curiosity across diverse fields (arts, medicine, education), and dedicate time to societal contribution.