Carpe diem, KKR

Just over a year ago the giant US private equity firm Blackstone Group floated, sending a signal that, with hindsight, was the bell tolling for the end of the long credit bubble and bullmarket. Now its rival, Kohlberg Kravis Roberts & Co, has announced its own plans to list. Given the circumstances, one assumes it its sending a rather different signal.

The big difference between the two listings, apart from the market and economic conditions, are that Blackstone's float allowed its principals to cash out some of the massive wealth they had tied up in the firm at what turned out to be the top of the market. Blackstone shares have nearly halved since listing, so the decision by its founders proved prescient.

KKR had plans last year to emulate Blackstone with a float that would have valued it at about $US26 billion, but the sub-prime crisis intervened. Its new attempt to list itself values it at, it hopes, between $US15 billion and $US19 billion after issuing KKR scrip in exchange for $US4.5 billion of assets. A year has made a very considerable difference to the net worth of its principals.

The revived KKR float, to be executed by backing the firm into an Amsterdam-listed buyout fund it created about two years ago, and then shifting the listing to New York, won't raise any new money, nor will it allow its principals to cash out their holdings through the listing process.

Like Blackstone, KKR says the listing will enable it to better attract and retain talent but the key motivation appears to be that, by backing itself into the Amsterdam-listed KKR Private Equity (KPE) and giving investors in KPE 21 per cent of the larger group, it will create both an expanded capital and investor base and a currency for expansion.

The collapse of credit markets has shut down traditional private equity activity. To the extent that debt is available for leveraged deals (and supply is extremely limited) its cost would undermine any prospect of the private equity firms generating the kinds of returns they and their investors had become accustomed to.

The losses and volatility in both debt and equity markets haven't, however, dulled the appetite of institutional investors for alternative assets or their willingness to pay the sorts of fees that the private equity firms are used to.

KKR had been expanding outside its traditional private equity sphere before the crisis and now appears want to place more emphasis on growing its asset management business and the annuity income streams and performance fees that can flow from packaging long-life assets for investors.

It regards this as a "unique inflection point" for its own growth trajectory and appears to want to extend its brand into the spaces occupied by the likes of Macquarie Bank, where lenders are still willing to lend and pensions funds are anxious to invest.

Having listed scrip would give it more firepower and a currency for acquisitions – investors in, and lenders to, any acquisition want to see some managers' equity at risk.

KKR's pursuit of equity rather than debt sends two messages. One is that it doesn't expect, or at least isn't basing its business strategies, on any early and substantial improvement in credit conditions. The other is that it sees opportunities in this environment.

KKR's existing private equity portfolio – it has more than $US60 billion of assets under management, about $US48 billion of it within its private equity business – is full of largely defensive and resilient assets. It could hunker down and have a quiet year or two if it saw few opportunities in the near term but believed its existing business model would be viable again in the medium term.

There is little doubt that the heyday of private equity has passed. No one is going to be shovelling cheap covenant-lite credit at KKR or Blackstone any time soon, if ever again. Distress, however, creates opportunities and KKR isn't the type of organisation to allow the opportunities being created by the credit crisis to simply pass it by.