Changing of Guard at KKR Takes Shape -- WSJ

Promotions of Bae, Nuttall solidify their candidacies to one day run private-equity titan

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 18, 2017).

KKR & Co. put two executives in line Monday to take over one day for Henry Kravis and George Roberts, the private-equity pioneers atop one of the biggest brands in finance.

The New York asset manager elevated Joe Bae and Scott Nuttall to the roles of co-president and co-chief operating officer and added them to its board, according to a statement Monday. In their new roles, they will run KKR's day-to-day operations.

The appointments solidify the men's candidacies to one day run KKR. There's no guarantee that either or both the men will end up atop the firm.

KKR, founded in 1976, helped popularize debt-fueled corporate takeovers known as leveraged buyouts. It earned a place in Wall Street lore with deals such as the 1988 purchase of RJR Nabisco, chronicled in the book "Barbarians at the Gate: The Fall of RJR Nabisco."

But like its rivals, KKR has faced nagging questions over its ability to endure a generational change. The top private-equity firms rely on the track records, influence and mystique of their founders to raise money and land deals, and many of the industry's leaders have been reluctant to hand over the reins.

KKR has expanded dramatically in recent decades, though it has lagged behind some rivals such as Blackstone Group LP and Apollo Global Management LLC since the financial crisis in a race to accumulate fee-generating assets. While KKR's stock has roughly doubled since the company listed its shares in 2010, it has lagged behind Blackstone's and the S&P 500.

Mr. Bae, a 45-year-old Korean-American deal maker, is well-known in private-equity circles. A Harvard grad and Goldman Sachs alum, he built an Asian investing operation that proved a bright spot for KKR as the firm struggled with souring U.S. buyouts struck in the run-up to the financial crisis. Its wins included the $1.8 billion buyout and subsequent sale of Oriental Brewery to Anheuser-Busch InBev NV in 2014, earning the firm five times its investment, according to a person familiar with the matter. KKR last month closed a $9.3 billion fund dedicated to buyouts in the Asia-Pacific region, the largest such investment product focused on the area.

Mr. Nuttall, 44, helps manage some of the activity KKR sees as key to differentiating itself from an increasingly crowded field. More than its peers, the firm has expanded into the lucrative business of advising companies on raising debt and equity capital, and put its own money into deals, a twist on the private-equity model KKR's founders had a hand in creating.

A soft-spoken executive who previously worked at Blackstone after graduating from the University of Pennsylvania, Mr. Nuttall joined KKR as a private-equity investor. As time passed, his focus shifted to building the firm's own business, helping it create in-house debt-trading and hedge-fund units as KKR sought to diversify beyond its private-equity roots.

He rose through the ranks while taking part in challenging deals such as KKR's 2007 buyout of First Data. KKR has struggled to unload its investment in the payment processor, whose business had stumbled after it was saddled with debt that at one point totaled more than $20 billion. Mr. Nuttall routinely speaks for the firm on quarterly earnings conference calls and investor events.

In their new roles, Mr. Bae will lead KKR's efforts in private-equity, infrastructure, real estate and energy investments, while Mr. Nuttall will primarily oversee its businesses in corporate debt, hedge funds and capital markets, and manage the firm's own corporate development. Both men joined the firm in 1996, and in recent years have been perceived as among the potential front-runners to one day lead it.

Meanwhile, Alexander Navab, head of KKR's private-equity business in the Americas, plans to depart the firm, according the company's statement, which didn't provide further details.

Succession at KKR has been a subject of mounting interest inside and outside the firm as its founders age. In recent years, Messrs. Kravis and Roberts, 73-year-old cousins, had largely dismissed questions about when they'll retire. They and some of their peers have played active roles as their firms have grown from modest investment partnerships to major asset managers. Many of the largest such firms are still run by the men who started them.

Messrs. Kravis and Roberts will retain their roles as co-chief executives and co-chairmen at KKR.

The pair formed KKR with Jerome Kohlberg, their colleague in the corporate-finance division of Bear Stearns. In the following decades, the company's fortunes traced the rise of private equity and other so-called alternative investments, growing to manage $138 billion as of March 31.

Private-equity firms' growth has made the companies major players on Wall Street and in the mainstream economy. The portfolio companies of KKR's private-equity unit alone employed 995,000 people at year-end, according to the firm's website. Along the way, KKR and Blackstone morphed into public companies themselves, as did Apollo and Carlyle Group LP.

The industry's success also has bred competition. Blackstone, the largest so-called alternative asset manager, has outpaced KKR in building large businesses in real estate, corporate debt and hedge funds. It had $368 billion in assets under management as of March 31.

KKR and its rivals also face competition from scores of newer entrants, some of which seek an edge by specializing in a particular industry or region.

Private-equity firms have amassed growing sums of capital to invest from pensions, sovereign-wealth funds and other major investors seeking better returns. The firms have sometimes struggled to put all the cash to work, a task made more difficult as valuations in the stock market and elsewhere rise.

The industry's assets under management increased to a record $2.49 trillion last year, and private-equity managers recently sat on a record $820 billion in unspent capital, known as "dry powder."

What also sets KKR apart from its rivals is the dozens of capital-markets executives the company has hired to arrange debt and equity financing for companies -- both those that it owns as well as third parties. The group competes for fees with the investment banks that also serve the firm, prompting occasional grumbling from Wall Street bankers.

But KKR executives argue the division gives the firm's bottom line a boost and helps it keep a finger on the pulse of the market. KKR's capital-markets revenue rose to $121 million in the first quarter, far exceeding the unit's previous quarterly high of $87.5 million.

The firm also uses its $13 billion balance sheet, the biggest among its peers, to seed new businesses and strike unusually structured deals that might otherwise be difficult for a private-equity firm to complete. This year, for example, it used its own money to team up with Canadian pension Caisse de dépôt et placement du Québec for a roughly $2 billion purchase of insurance broker USI Insurance Services.

Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com

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July 18, 2017 02:47 ET (06:47 GMT)