It was news to Wall Street. Kohlberg Kravis Roberts is keen on expanding its capital markets capability – a service that Wall Street had rather supposed it was best at providing its private equity clients.
How big are KKR’s ambitions? Its initial public offering filing suggests they could be significant, ranging from a broker dealer licence to underwriting securities. In reality, this would change KKR’s business model so dramatically – probably for the worse given the capital this would tie up – that it is unlikely to go that far.
The focus is likely to remain on syndicating some of the equity committed in large buy-outs. This is not entirely new: KKR is already doing this with its First Data deal. And from KKR’s perspective, it makes sense. By bringing in other investors to take direct stakes in LBOs, KKR can widen the net of invested capital on which it can earn fees.
But what is good for KKR is not always good for Wall Street. Of course, it is better than seeing KKR go after debt financing. This generated well over half of the $9.6bn in revenues that financial sponsors paid in investment banking revenues in the first half of the year, according to Dealogic.
Still, it is an irritant for a couple of reasons. First are the economics. Banks take capital risk by providing equity bridges. Of course, they get paid for this risk, but not enough. Syndication fees – which could range anywhere between 3 and 5 per cent – would improve the risk-reward ratio. Second is control: if a financial sponsor is handling the syndication, the banks have far less control over how quickly and how well their exposure is being managed downwards. Maybe this will give them the prod they need to stop offering equity bridges.
