Becker Private Equity & Business Podcast
KKR and the Regression of Private Equity 2-5-25
Wed, 05 Feb 2025
In this episode, Scott Becker examines KKR’s recent struggles, with its stock down 7.5%. He discusses the broader trend in private equity, where firms rely more on fee income rather than profitable deal-making, signaling potential challenges for the industry’s traditional investment model.
Chapter 1: What is the main topic of this episode?
This is Scott Becker with the Becker Private Equity and Business Podcast. Today's discussion is a discussion about KKR and the regression of private equity. So here's the thesis today. KKR, which is one of the great private equity funds of all time, made famous back in the day, founded by Kohlberg, Kravers and Roberts. The famous movie Barbarians of the Gate really is about KKR.
Chapter 2: What challenges is KKR currently facing?
And at that time, the biggest leveraged buyout of all time where they were with, I think it was RJR Nabisco. So let's fast forward to the current time. The current time, KKR is down about 7.5% today. And they had a really good year last year. But most importantly, they had a record year in fees. And when you look at private equity today, It almost reminds me of banks.
Chapter 3: How is private equity evolving in terms of income sources?
When banks start making their money from all the ATM fees and everything else, it's supposed to be the core business. The core business of private equity is investing in things at one price, selling at another price, and taking their 2 and 20 management fees.
Chapter 4: What does the regression of private equity mean for the industry?
when the deal market doesn't work how they want it to work and they can't get out of deals and exit how they want to exit them at some point they end up regressing to being much more reliant on their fee income their two percent in their other fee income in this case it's a lot of fees related to closing loans doing other kinds of stuff as opposed to the core business which is investing businesses
and then selling them for a lot more money three to five or six years later, then you end up with this regression, because at the end of the day, fee income is fee income, God bless, it's recurring revenue, everybody loves it, but it's not the home run and the extra basis that you get from buying businesses and selling them at a higher level.
On top of that, if you can't keep on buying businesses and selling them at a higher level, At some point, all the trillions of dollars that go into private equity, the billions of dollars that go into the funds that KKR manages, and I forget their number today, it's like $800 billion. I know the largest is Blackstone, that's at a trillion dollars.
But what happens is, at some point, you can't actually turn those dollars into winning deals, winning bets. you end up in trouble. So KKR currently has a market cap of $140 billion. It is down today 7-point-something percent. But the more alarming figure is the movement towards making its money from fee income versus deals actually and profits. That's the problem.
They reported a record amount of fees, a billion dollars in fees. which is all nice. I'd like a billion dollars in fees. But really where they make their money is the big, big money from investing in companies and selling them. And their business is much more challenging than it should be. And that's what you're seeing in the stock price with KKR, down about 7.5%, 8%.
Thank you for listening to the Becker Private Equity and Business Podcast. If you have any questions, feel free at any time to text Scott Becker, 773-766-5322. Thank you.
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