A few weeks ago Dan Grimm, the Washington state treasurer, got a phone call from an executive at Kohlberg Kravis Roberts & Co., the country’s biggest and most powerful investment-buyout firm. The executive, according to Grimm, wanted to alert him that a book excerpt would soon be appearing in The New York Times Magazine that would be highly critical of KKR. “He said, ‘If there’s something that troubles you, please call us; don’t assume we don’t care’,” recalls Grimm. KKR wasn’t just being friendly. As treasurer, Grimm helps decide how to invest the state’s $13.5 billion of employee-pension funds. And Washington has been very, very good to KKR, having given the firm about $1 billion in the last decade.
As that call shows, KKR leaves no number undialed when it comes to protecting its turf as the king of leveraged buyouts. KKR has mounted this damage-control campaign over a new book that takes one of the first deeply critical looks at a firm that controls a host of companies, from RJR Nabisco to Safeway and Duracell. Written by Sarah Bartlett, a New York Times reporter, “The Money Machine: How KKR Manufactured Power & Profits” contends that KKR built its empire by showering largesse on the right people. The book alleges-not always convincingly-that KKR may have given some public-pension fund administrators sweetheart deals and large campaign contributions, while allowing certain lawyers ethically questionable opportunities to invest in lucrative deals. Taken together, contends Bartlett, KKR has assembled “a power base of enormous proportions.”
Publicly, KKR’s response has been muted. “The book does not merit comment,” says a spokesman. But privately friends of the firm disparage Bartlett’s reliance on two “disgruntled” sources: Jerome Kohlberg Jr., a founding partner who quit in a bitter disagreement and later sued the firm, and Helene (Hedi) Kravis, the divorced wife of reigning partner Henry Kravis. (KKR friends were also quick to point reporters to a New York court ruling last week throwing out Hedi’s suit that claimed Henry had understated his wealth when they divorced.) The firm is said to have demanded an opportunity to rebut the book in Fortune magazine, which is running an excerpt. Last week managing editor Marshall Loeb at first denied that KKR had sought a rebuttal but later said he wouldn’t talk about any private phone calls he might have had. He added that no deals have been made on a rebuttal.
Bartlett, 36, has taken on a firm whose grasp, she says, exceeds even J. P. Morgan’s at the height of his career. Since its founding in 1976, KKR has raised about $58 billion and now controls 15 companies employing about 300,000 people. At first, KKR went after small- to medium-size companies, buying them with lot of borrowed money in a maneuver that came to be known as a leveraged buyout. But the firm’s big leap came in the early 1980s when it managed to tap multibillion-dollar state pension funds, which had invested conservatively before. The first was the Oregon state pension fund, and its success attracted investments from the pension funds of other states such as Washington and Minnesota. By 1988, the pension funds of 11 states bankrolled a big part of the largest and most controversial takeover ever, the $32 billion RJR Nabisco deal.
According to Bartlett, the former head of Oregon’s fund, Roger S. Meier, was rewarded nicely by KKR for his loyalty. After he resigned from the Oregon post, Meier was allowed to buy stock in one KKR company at what Bartlett calls an “extraordinarily advantageous” price. She estimates that Meier has reaped a $900,000 paper profit on the stock in five years. Meier has called the charges “absolutely false” and said he had paid market price.
As the firm grew, Bartlett writes, KKR cultivated more people by throwing money and deals their way. Some tactics, like spreading fees among many Wall Street firms, seem like normal business practice; others less so. The firm gave contributions to a few elected officials who oversaw their states’ pension funds. The firm, the book says, also allowed one of its lawyers, Richard Beattie, a senior partner at the New York firm of Simpson Thacher & Bartlett, to invest in KKR properties while he was acting as counsel on the deals. A spokesman for Beattie said the book merits no comment.
This unflattering portrayal of KKR comes at a time when the firm seems on a roll. Although the days of highly leveraged deals seem over, it has successfully refinanced its shaky RJR deal. It sold stock in Duracell, reaping a paper gain of some 300 percent in three years; and a KKR partnership won approval to take over the failed Bank of New England.
The book is unlikely to slow the KKR steamroller. Some public-pension funds were growing skittish about KKR-but mainly over its high fees, not alleged improprieties. Officials in states like Washington and Oregon said they were “studying” the book. Even though Bartlett contends KKR may have gouged its investors of some $750 million, few were likely to pull the plug, barring more damaging news. That would only be admitting a mistake, as well as giving up the chance to be part of big KKR deals in the future. As Washington’s Grimm put it, “It’s hard to look a gift horse in the mouth. If Sarah can produce a 41 percent annual rate of return over eight years, we’ll consider her.” That wasn’t Bartlett’s point, of course, but it gives a pretty good idea of the kind of clout KKR still wields.
