Henry Kravis
Henry Kravis is an American billionaire businessman and investor, best known as the co-founder of the global investment firm KKR & Co. Inc. (Kohlberg Kravis Roberts & Co.). Alongside his cousin George Roberts and their mentor Jerome Kohlberg, Kravis was a key architect of the leveraged buyout (LBO), a financial strategy that transformed corporate America in the 1980s and laid the foundation for the modern private equity industry. His fame skyrocketed following the colossal 1988 takeover of RJR Nabisco, a battle immortalized in the bestselling book and movie, “Barbarians at the Gate”. This event cemented his public image as a brilliant, audacious, and ruthless dealmaker who used massive amounts of debt to acquire and reshape underperforming companies. For ordinary investors, the career of Henry Kravis offers powerful lessons on analyzing businesses, the role of active management, and the immense power—and danger—of leverage.
The King of the Buyout
Henry Kravis didn't invent the LBO, but he and his partners at KKR perfected it and brought it to a scale previously unimaginable. They transformed it from a niche tactic for small family firms into a tool for taking control of some of the largest public corporations in the world.
The KKR Model
The KKR strategy, driven by Kravis, was conceptually simple but revolutionary in practice. The core idea was to identify established, often sluggish, public companies with steady, predictable cash flow and undervalued assets. KKR would then:
- Acquire the Company: Instead of using their own money, they would borrow heavily against the target company's own assets and cash flow to finance the purchase. This is the “leverage” in a leveraged buyout. Often, these deals were friendly, done in partnership with the existing leadership in what's known as a management buyout (MBO).
- Take it Private: By buying all the company's stock, KKR would remove it from the public stock exchange. This freed the company from the short-term pressures of quarterly earnings reports and gave KKR complete control.
- Restructure and Improve: As the new owners, KKR would aggressively restructure the business. This often involved selling off non-core divisions, cutting costs, replacing management, and optimizing operations to improve efficiency and profitability.
- Cash Out: After several years of improvements, the goal was to sell the now leaner, more profitable company or take it public again in an Initial Public Offering (IPO) for a substantial profit, which would be used to pay back the original debt and reward KKR's investors.
Barbarians at the Gate: The RJR Nabisco Deal
The 1988 battle for food and tobacco giant RJR Nabisco defined the era and Henry Kravis's career. The company's own CEO proposed a management buyout, but Kravis, seeing a hugely undervalued company, jumped in with a competing offer. This triggered a month-long bidding war of unprecedented scale and ferocity. When the dust settled, KKR had won with a bid of $25 billion ($60 billion in today's money), making it the largest buyout in history at the time. The deal was a cultural phenomenon, showcasing the immense power of Wall Street financiers and turning Kravis into a household name.
Lessons for the Value Investor
While Kravis is known as a buyout artist, his methods contain crucial insights that align with the principles of value investing. A value investor seeks to buy good businesses for less than they are intrinsically worth, and Kravis, in his own way, did exactly that.
Focus on Cash Flow and Assets
An LBO is a massive bet that a company's future cash flows will be sufficient to cover its new, enormous debt payments. To make this bet, Kravis and KKR had to become experts at dissecting a company's financial health. They weren't speculating on future growth; they were analyzing the hard, tangible reality of the business: its brands, its factories, its contracts, and its ability to generate cash. This deep focus on underlying asset value and predictable cash generation is the very bedrock of value investing. Before you can leverage a business, you must first value it correctly.
The Power of Active Management
Henry Kravis wasn't a passive shareholder; he was an active, demanding owner. Unlike retail investors who buy stock and hope for the best, KKR took complete control to force change and unlock hidden value. This demonstrates a powerful concept for value investors: the best returns often come from situations where there is a clear catalyst for improvement. While you may not be able to replace a CEO, you can look for companies where new management, a new product, or a corporate spin-off is poised to improve performance, acting as your “internal KKR.”
Understanding Leverage: A Double-Edged Sword
Kravis mastered leverage to amplify returns, turning relatively small equity investments into enormous profits. However, this is perhaps the most important cautionary tale. Leverage magnifies both gains and losses. For a company, too much debt can lead to bankruptcy if cash flows falter. For an individual investor, using a margin account to borrow against your portfolio carries the same explosive risk. The lesson from Kravis is to respect leverage. Understand how debt on a company's balance sheet affects its risk profile, and be exceptionally cautious about using it in your own investing.