An Indophile who doesn’t hesitate to speak his mind, Henry Kravis, 80, is astounded by India’s economic development, making him want to know more about the economy, meet young entrepreneurs, and mingle with policymakers every time he visits. One of the three founders of KKR & Co., Kravis was on a whirlwind tour of the country, meeting over 50 founders and CEOs in five days. He spoke to Arijit Barman on a range of topics that included US jobs and capital markets and the impact on deal-making, exits, PE consolidation and where in India KKR, one of the world’s biggest private equity firms, will make the next big investment. From cyber security to data centres and financial services and AI, the scope is broad. If India can be a low-cost and efficient producer and the infrastructure and red tape continue to get better, Kravis is confident the economy will attract more overseas investment. Excerpts:
Till early 2023, KKR had deployed $10 billion in India since opening its office in 2009. So does that mean KKR will deploy the next $10 billion here faster than you did before?
Yes. India is a high priority for us, it is the anchor for our Asia-Pacific investing. Japan’s an important part of what we have too. We’re not pulling out of China —and so those are the pillars. But India is probably the most important of it and the biggest opportunity. Look at the size of your country and the economy and it’s growing. And if you can grow it more or less at 7% a year — I think there are things that could be done where you could grow 8% or 9% a year – but even that’s huge for us. And so to take advantage of that, we will continue to put money to work. Infrastructure is a new piece which we didn’t have five years ago and fast growing. We have a credit business that we’re doing. We’ll do more on real estate as it is becoming a possibility for us. And certainly growth equity and private equity here will continue to grow. So I see us putting more money to work infrastructure, possibly real estate, certainly in private equity and growth equity.Will the first six months of 2024 going up to the elections be a wait-and-watch period?
Obviously, it matters who’s elected. I have to say I’m impressed, very impressed, with what this government has done. I’ve been coming to India since 1989… I come this time or the last time around February. I just see it getting better. Infrastructure is improving dramatically. The can-do attitude is now starting to really take hold here in this country, which is terrific. Call it the atmosphere or the stage, it is set… for us to want to do more here. And so, I wouldn’t say that the first six months we’re going to sit on our hands and wait and see. We have live opportunities in the pipeline now. I meet with government people here every time I come, and what I’m hearing is very positive. From being pro-business, pro-growth, the Narendra Modi government is also about pro-help, lifting the poor in this country and then simplifying a lot of red tape. GST is a phenomenal thing that happened in this country. The productivity of that alone is just huge.A lot of the India Shining story rests on this continuous bull run that we’re seeing in the equity markets for four years running. The Nifty 50 is at a 27% premium to its 18-year average. Does that make public market trades too expensive?
Never say never. What I would say, it’s going to depend very much on the company. If we look at a company, and yes, it’s trading at a high multiple, but it’s trading at a high multiple because the company needs repairing, and it can be improved significantly, and therefore we can bring the earnings up significantly. Unfortunately, we’ve got to pay for it to do it, but that’s not going to stop us from making that. But there’s so many private companies that need capital that we don’t have to rely on just the public market as a source of investment for us. And by the way, what goes up comes down, and what goes down comes back up. And so we’re not market timers. So the market is high, but it’s high for a reason in part, and that is the growth prospects of companies today is much higher than it was before. So to me, all of that’s positive, and therefore earnings for companies are higher and better than they might have been, pushing the stock market up. There’s an encouragement for individuals to own shares, which there wasn’t before. That’s positive. It’s a way to recycle capital for a wealth distribution which is fantastic.What does that mean for KKR? In such an environment, would you rather put your money in tech companies, the valuations of which have dropped and are at mouth-watering valuations, or back frontier sectors that are opening up: Electric vehicles (EVs), green hydrogen or stick to your core areas – growth equity, core infrastructure?
Wherever there’s a need. So you look at cybersecurity, you look at renewables, energy transition. Those are areas that we like. Security is one. It’s an area that we happen to like — industrial businesses that are not operated particularly well. Financial services is an area that we happen to like. Healthcare is a need. Anywhere where we see that there is a need, as your population matures, the population has more income coming in, that middle class grows, consumer products, where the middle class ends up with more capital that they can then spend, more earnings that they can spend.
We look at those as positive. Look at the number of people that use the internet. That’s growing significantly. So we will find opportunities. On infrastructure, you’re right. The highway trust we did was an innovative product. And we saw that as a real opportunity and a need. Data storage, data warehousing is another very big need here. So yes, we’re going to pick and choose. We are not a firm that is only focused on technology or only on healthcare. But please don’t congratulate us when we make an investment. Any fool can make an investment. And that’s the easy part. The hard part is what do you do to create value? And that’s really what we’re good at.
Over the last two to three years, a brand new KKR is in place in India with new blood. Does that translate to new ideas, new strategies or do the core principles remain the same?
I appreciate the question but have to say, I think it’s a little bit of a misconception that it’s a new company. We have some people – a deep bench here – a number of those people have been with us for years. Yes, Gaurav Trehan (Asia head) been with us three years and came in as a new head as Sanjay Nayar stepped down. Akshay Tanna just came on board six months ago from TPG and has hit the ground running. There’s nothing new. It’s just that we’re growing. And I always like to think of a corporation. And any corporation is an evolving entity. People often have a picture of KKR on their desk and these are the people that are there. And they go. Then it’s like, Oh my gosh, three people are gone, the firm must be falling apart. Well, it doesn’t quite work that way. It doesn’t mean that the company is worse off. In fact, I argue the other side. Probably the company’s better off. And so in India, yes, we have a lot of new blood, but they’re not new to the industry. They know how to play but are playing wearing a new jersey. And with new talent comes new ideas, different ways to approach things.
You exited from Max Healthcare by selling 51% through public market block deals. It was unprecedented in India to see such volumes of shares getting sold in the public market. I specifically raised technology because of Tanna’s background in consumer-tech investing among other things. You said wherever there is need, you will deploy. Well many of these companies are in dire need of cash today.
Look, technology is here to stay. Right now, all you have to do is put AI in your name and you’re going to get a higher valuation. I thought maybe we should add AI to KKR — KKR.ai (smiles). The reality is not everyone is going to succeed in AI. AI will be a tool. It will be a very important tool. This probably will be one of the most important things since the advent of the internet. It’s clearly going to make companies more efficient, effective. And it’s going to be a disrupter in many ways, too. A lot of jobs will be dislocated because of AI, etc. But it is not an end-all, it’s a tool. And I think it has a long way to go. We will use it at KKR to help us analyse companies better, faster, find niches where there are investment opportunities. We will use that. But it is not an end-all.
Global supply chains are getting realigned. It’s been happening since Covid. But are we discounting China much too early? Mexico, Brazil, Indonesia, India – everyone wants to capitalise on the China-plus-one strategy. Isn’t the party getting crowded?
Supply chains are indeed becoming more mobile. More companies and a number of our companies are doing the same. They’re hedging. And they’re putting supply chains in several locations as opposed to just relying on one location. If India can be a low-cost producer, efficient producer, your infrastructure continues to get better, you’ll attract more companies coming here. The reality is if you look at US companies in particular and some European companies, they actually haven’t grown since the last 40 years. It’s the same thing in China. We have bought local companies. We’re not in the face of the government there. And these are just good long-term solid businesses. There’s no question about the plus-one strategy for corporations. But the reality is not everything will go to India. It’s not going to all go to Mexico either. You’re going to see it spread out.
You talked about private credit. Several of your peers seem to be busy pivoting towards it in a big way. Banks did retreat and large private credit investors stepped in into that void to finance big buyouts. But banks won’t sit out for long. How do you see that space evolve?
I think private credit is here to stay, so will banks that have huge balance sheets and in the end, we really need them to syndicate a lot of the loans that we have here, so don’t ever count out the major banks even with regulation tightening in the US and in Europe. The ones that will get hurt the most there I think will be the smaller banks, community banks. Private credit is an alternative for a company to find the credit they need and if a bank for whatever reason cuts back, then private credit can pick up — there’s a need for both.
You’ve been a pioneer in a private credit in India. A lot of water has passed under that bridge and the business got merged with InCred. But you’re taking baby steps again. How will KKR Private Credit 2.0 be different from the past?
We probably won’t do it through an NBFC (non-banking finance company). If we’re going to do it, we’ll do it directly… in partnership with somebody or may do it ourselves. We’ve got a good credit business now… which we’ve learned over the last five six years in Asia itself and so we have more experience than we had before.
Last February you said India needed to tighten its bankruptcy law and that it looked like it’s in a beta mode. Your message to the government then was if you can clean up all your bad assets and come up with a bad bank, you can raise private capital. Would you still say that or has there been some positive changes?
First of all, there have been very positive changes. I had a role in helping the awareness of creating a need for a bankruptcy law, which you didn’t have — that restricted the capital markets. So I was absolutely amazed how fast Prime Minister Modi and the government was able to get a bankruptcy law approved. I’m not sure we could do it that fast in the US; it was very impressive. I’ve said in the past and I say it here that in order for any country to grow, and India is no exception… to grow their economy you need a very broad and deep capital market. Having a bankruptcy law will help that but I think all the enabling regulation, not restricting regulation, will help that, so you need a broader, deeper capital market in equity and in the financial system. In credit, you need a securitisation market. In my view, that will help a lot… I would probably urge more ownership. Now you’ve come a long way opening up the insurance sector —you went from 26% max to 74% now. Why not 100%? Maybe over time, it will get there. So any kind of regulation that will enhance growth in capital markets and encourage corporations to set up shop in India and to bring capital is welcome.
You need foreign direct investment and that has stagnated to a degree here. You need to figure out how and where to do that and it’s not easy in my view to do that well. One thing certainly is to continue to improve the infrastructure. Secondly, climate. You know, companies want their employees to be where it’s healthy and if your climate is so bad that’s not conducive to attracting talent to your cities or to your country… So all of these things are extremely important. So ESG (environmental, social, governance) plays a very important role in my view in what needs to be done.
The US Federal Reserve chair has signalled that the cycle of rate rises may be over. On the other hand, private equity groups and large corporations seem to be in rush to strike deals. Will capital markets and deal making make a big comeback in 2024?
Well let’s take the US, which is obviously the biggest market. We expect 2024 to be a fairly active year for us. We were very active in 2023 too. You can always find opportunities if you’re a global firm, if you are in different product areas, which we are – we have approximately 45 different products around the world. Not every market goes straight up or straight down and not all markets are open or closed at the same time. We’ve been exceptionally active throughout.
What happened in the US was a very strange phenomenon. You had very high interest rates because all the Federal Reserve and central banks were attempting to tame inflation, while the markets in many cases and the economies kept going. It usually doesn’t happen that way. But it’s a holdover in part from the amount of money that was put into the system during Covid. For example, the US Fed’s balance sheet ballooned significantly… over $7-8 trillion from a significantly lower amount.
At the same time, on the fiscal side, the Trump administration followed by the Biden administration put a lot of money into the system which is still partly in the system. It has not all dried up, been used or invested. This has kept the employment rates high. We have a 3.5% unemployment rate in the US, which could have been much higher given high interest rates. Presumably, you have a slowdown in the economy. We haven’t had a slowdown in the economy. You’ve had a pretty much full economy. And it takes time for the effect of interest rate rises to really start to tame markets and the economy. The jolts or job openings in the US were running as high as 11 million. That is starting to come down now, maybe it’s at or a little below 10 million.
And I think that will continue as companies don’t want to hire as many people. Plus, to really work its way through the system in the US… we’re not counting on a recession in 2024 in the US. But we’re also not counting on a huge growth in the US. We think sort of ‘steady as you go’. Our belief is that inflation will stay higher longer than most people think, even though it’s obviously coming down. But we think it should stay higher. And part of that is just inflation because of the labour issues that we’ve just talked about. A lot of companies are nervous about letting people go. And so, they’ve held off until the margins start to get squeezed. And then they say, I’ve got to start letting people go. And then you’ve got transportation costs. And other costs that will keep inflation higher than normal energy costs, etc. Even though that’s not part of core inflation. But that’s just something you need to keep an eye on.
So, we think inflation globally will stay higher. I know in India, for example, you ran as high as over 7%. You’re down to now more or less 5%. I think the target is to try to get it down to 4%. Maybe you can get it to 1%. And by the way, in certain developing countries, some inflation is not bad to have.
Will this macro environment lead to frenzy in capital markets and deal making? Or it will be slow and steady?
It’s a function of prices. The stock market in the US is opening up now. We just filed for one of our companies to go public. I think you’ll see others starting to file and test the water. And we will see. There’s capital interested in investing in the IPO market. But it’s a function of pricing. You know, if the prices are right, companies including us, we’ll just wait and see. You know, there’s nothing wrong with the companies themselves. It’s a function of price. The debt market has stayed open. What has grown tremendously in the US and in Europe is the private credit market. And I think that will continue, particularly as western banks have in particular raised the bar on the types of loans they’ll give out and who they’ll lend to.
Some of your peers are getting creative. They’re increasingly embracing new financial engineering techniques like net asset value financing. Are we going to see more of that in 2024?
You’ll see some of that, I think. We expect to have a fairly active disposal period for KKR. We have a large portfolio of companies. And we’re constantly, making new investments while liquidating some. So, now with the public markets starting to open up, and I think that will continue, in the States and in Europe, we’ll use the public market. I think we’ll use the public market here in India as a possible exit outcome for some of our companies as well.
And then there are others that approach us all the time, because we have a large portfolio. We just evaluate those offers. It’s a function of price more than anything else. It’s not large companies who have a strategic need. They’re not phased so much by where the stock market is or isn’t. If they’ve got cash or can get it and if they know that there is a possibility that they can really change their strategy, by acquiring, they’ll make it. This trend will continue.
We have some investments that we’ve made where we’d like to hold for a longer time. So, we’ve opted for extension of financing, where we’ll let our investors out if they want to. You can roll over if you want. Or we’ll find new capital if that’s what’s needed. Or we’ll put more capital into the company ourselves. Alternatively, we’ll find a third party to set the fair market value so that none of the investors feel that they’re not getting a fair deal and they can get liquidity if that’s what they desire. The reason, partly, that a lot of institutions are saying we need cash back is because by regulation in certain states, they are able to allocate only a certain percent of their total assets under management to the alternative space. Once they hit that, they’ve sort of hit the ceiling and they can’t do much more. So, that’s why they need the cash back, to reinvest it somewhere else. So, that’s what you’re seeing. As the stock market has gone up, all asset value then goes up. So, that percentage is not as critical as it was when the market’s down. It’s the denominator effect. It’s what you have there.
Exits are one aspect, fundraising is another. KKR itself is in the process of raising a new flagship fund, as are many fast-growing firms. Do you expect the PE asset class to only grow in heft and influence? Because there’s already enough and more dry powder from the Covid years.
Not everyone’s going to be able to invest all the capital that they have. And I’m not so worried about what other people are doing or not doing. I can only focus on what we’re doing. And we’re right on pace, almost every one of our funds. You know, most of the funds that we have, have a life to invest of five to six years and pretty much a linear progression. And so, we watch that carefully. The worst thing that anybody can do is say, well, I’ve got money burning a hole in my pocket. We have to get the money out. I’d rather give the money back to our investors and say, we didn’t find anything that made sense in this particular fund. But that’s never been the case. If you have five years to do it, we have enough industries to go into. We are diversified enough. You’ll always find opportunities.
In addition to that, we have a very large part of our balance sheet today in what we call core investing. And that means certain very large institutions that have given us a significant amount of capital where we can make investments in companies and never have to sell them. We can own those forever, let them compound. The institutions that have given us money said that’s what we want. We’re long-term investors. Our liabilities are long term. And so, we think we’ll do much better as an institution, they say, by making long-term investments and letting those investments grow as opposed to giving us cash back. And then we’ve got to find another place to put it to work. So, we have today maybe 16 -18, something like that, in what we call core investing at KKR. They theoretically should generate a lower rate of return to some degree than our funds. But it’s the idea of the power of compounding which is the eighth wonder of the world.
Any of those 16 or 18 in India?
I don’t think so, no.
KKR, Blackstone, Apollo, all went public at around the time of the 2008 financial crisis. Last year, all three stocks skyrocketed. That’s probably what’s influencing many others to tap the capital markets or test the public markets in 2024. Would you see enough appetite for private equity stocks even in the US and Europe?
You know, we’re all different. If you take Apollo, Blackstone, and KKR, for the longest time, we were looked at as the same kind of firm. We were a private equity firm and that was it. Today, we’ve spread out and are different businesses. In our case, we’re almost a quarter between real estate, credit, private equity and infrastructure. Today, to be more accurate about it, about 30% of our assets are in private equity. Credit would be our biggest piece today. When you take Global Atlantic, which is our insurance and annuity business, along with our private credit business, that just in assets would be the largest. Infrastructure’s growing very quickly and coming up, as is real estate. We’re very diversified. As a result of that, people are saying, look, you have so many ways to win. Let’s take where we are. We have more or less 45 products. Many of those products are very young products. They’re very new products.
We have a lot of growth ahead of us. We have the opportunity today to do a lot of things that we couldn’t do before. We have a balance sheet of over $30 billion today. Again, that helps us start new businesses, helps us fund existing businesses that we already have funds that we’re already in and so forth. There’s just a lot of ways for KKR to win through these different product capabilities. With so many of them very young, the oldest product that we have is US private equity, but then you can go right through a long list, which I won’t do. The investor looks at it and said, wow, the power of compounding, the fact that as a shareholder now, they have a lot of permanent capital, so they don’t have to worry about–can they raise money next year? A huge amount of our capital is permanent or quasi-permanent capital. That’s very important to an investor.
In the last one and a half years, we’ve seen mega consolidation. EQT bought out Barings. There are reports of General Atlantic eyeing Actis, and BlackRock looking for something transformative, eyeing Warburg Pincus. Is consolidation inevitable in an industry like private equity? Will KKR do something similar?
Probably not. We don’t need to because we have the seeds in the ground for all the business that we need. We don’t need to go buy another private equity firm. Same with infrastructure, same with credit. Maybe there’s a credit business somewhere that would help us in a particular way, in a particular geography that we don’t have. That might be something someday. We have enough growth without having to buy. And we cover the waterfront as far as alternative investments are concerned.
These consolidations have also brought regulatory scrutiny. Some might argue that the Biden Administration has been far more proactive compared to, say, the Trump Administration vis-a-vis large consolidations. Even Big Tech’s vast influence is being repeatedly questioned in the US and now in the EU as well. Is this all politics in an election year?
I don’t think it is… it’s not an election issue. For sure, it’s been going on. So maybe, we haven’t seen any huge difference from KKR’s standpoint.
