The co-CEO of the US asset manager announces more investments in Germany and names a specific industry in which KKR is intensively looking for partners.
KKR has invested more than 20 billion euros in equity in Germany since 1999 and plans to deploy additional capital when opportunities arise, also due to the industrial base and strong medium-sized companies.
Co-CEO Scott Nuttall emphasizes that KKR looks in all industries, especially in family-run medium-sized companies, where there is often a lack of a succession plan, and often relies on minority investments with collaborative partnerships.
According to him, the private equity industry is currently experiencing headwinds from risks such as software valuations, private credit funds and increased interest rates, which is reflected in a K-shaped development.
KKR views investments with a long-term horizon, takes into account the pension plans of public employees and sees strategic potential in insurance investments, but is still looking for suitable insurance partners in Europe.
Mr Nuttall, for the first time the federal government is attracting capital from investors like KKR with an investment summit. Does a conference like this convince you to invest more in Germany?
KKR has been active in Germany since 1999. We have invested more than 20 billion euros in equity capital in Germany, a significant portion of which has been invested in the last six years. We are investing more today than ever. The discussions with the federal government and its reform course make us confident. Our interest in Germany is not new – and it is long-term.
If nothing changes, then what is the point of this conference?
You actually have to ask the federal government that. But the summit is an important signal: the government wants to work more closely with private investors and enable additional investments. And capital flows where it is welcome.
What would it take for KKR to invest even more money in this country?
A focus on the announced reforms and their implementation would certainly help. However, Germany sometimes tends to focus on what doesn't work instead of the positive aspects. There is a strong industrial base, competent engineers and a strong middle class. In addition, national debt is relatively low by international standards, and the scope for investment is correspondingly large. If the announced reforms are implemented, Germany will become even more attractive for investors.
You have certainly followed the AfD's successes in the state elections and the endless disputes in the governing coalition, at least on the sidelines. How confident are you that the major reform projects from pensions to taxes and infrastructure investments will actually come about?
We focus on what we can control. When we invest, we think in terms of ten to 20 years. So the political cycles are shorter than our holding period. We are therefore not dependent on individual reforms to find investment opportunities. But you know what the discussion reminds me of?
About what?
Germany seems like a good friend who has an incredible number of strengths, but sometimes gets too caught up in what didn't work in the past. You would say to such a friend: 'You can't change the past, but we can shape the future.' The way I see it, the investment summit is a signal that Germany wants to look forward. Germany has enormous potential and we remain good friends.
To stay with the picture: Your friend, tehát Germany, announced two years ago that they wanted to change. Since then, little has happened in terms of reforms. How much patience do you have left with this friend?
It's true, we are very patient investors. But it is not the case that reforms first enable investments. There are already many opportunities in medium-sized businesses, infrastructure projects and growth companies. With the right policies, the government could significantly increase the number of attractive investment opportunities.
Can you say how much KKR plans to invest in Germany in the coming years?
This is not possible. Today we have $140 billion in so-called dry powder, i.e. capital that has been raised but not yet invested. At the same time, we have raised well over $100 billion in commitments this year. If the risk-reward ratio is right, we see considerable potential to invest even more in Germany.
Doesn't the fact that economic growth has been stagnating for years scare you?
The economy has certainly not developed as hoped given high tariffs and high energy prices. But recently the trend has been pointing upwards again. And we don't buy an index of the entire economy. We invest specifically in companies that promise growth and at the same time need capital, for example to expand abroad.
In which sectors are you particularly intensively looking for investment opportunities?
In principle, all sectors are eligible. The middle class is very important in Germany. And the vast majority of these medium-sized companies are family-run. In many cases there is no plan for business succession.
How can KKR help?
People often do business with people they like and trust. So we build a relationship with the founders or family behind the companies we want to invest in. You have to work hard to be able to invest alongside a family business owner.
Have German medium-sized companies opened up to private equity?
Companies and entrepreneurial families are increasingly open to working with financial investors. If I compare this to the end of the 90s, the dynamic is completely different. We now have many positive case studies to point to. That helps a lot.
In contrast to many competitors, KKR is often satisfied with minority investments in medium-sized family businesses. Without control, how do you ensure that the portfolio companies implement the common strategy?
If you have entered into the right partnership and trust each other, it should make no difference whether you become a minority or majority investor. In our transactions, we spend most of our time clarifying what the target company wants to achieve and what we bring to the table that the family doesn't already have.
Do you have any examples of this?
This could be knowledge or access to new markets abroad. This partnership model works very well in Germany. That's why we implemented 80 percent of our private equity investments in this country as partnerships.
In the energy sector, a planned partnership between KKR and RWE recently became known, in which they will jointly bid for the supplier Uniper. What is the status there?
I can't comment on that.
Why doesn't the optimism you spread resonate with your investors? At around $87, KKR shares are down more than 30 percent since the beginning of the year, close to their annual low.
There have been headwinds for the private equity industry this year. A number of factors have weighed on sentiment: concerns about software valuations, defaults in private credit funds, lack of exits and the impact of higher interest rates on the valuation of portfolio companies, to name a few. The market is still trying to figure out where things are going.
Which of these risks are investors rightly concerned about – and which are exaggerated?
There is no simple answer to this. The fact is that private capital markets experienced tremendous growth from 2010 to 2020. Assets under management have increased fivefold from $3 trillion to $15 trillion. Interest rates were low and valuations continued to rise. But these times were not normal. We have always warned not to confuse this bull market with skill. Since 2020, the pandemic has been followed by war, tariffs, and another war. A dichotomy is now setting in on the market.
Can you explain this in more detail?
I am observing a K-shaped development in the private equity industry. Take debt-financed buyouts: Here the difference in returns between the top 25 percent of funds and the worst 25 percent of funds is 15 percentage points or more. And I think that this difference will increase in the next five years.
With what consequences?
It is now becoming clear who is able to invest across cycles. 60 percent of private equity houses were founded after the financial crisis. And only 17 percent – like us – survived the dot-com bubble and the financial crisis. Only those who invest with the right private equity managers will be adequately compensated for the risks and low liquidity.
What happens to the private equity houses that can't do this?
You will have difficulty raising capital for a period of time. They may need to launch a smaller fund and work to regain the trust of their investors. And yes, some will have to leave the market.
What lessons has KKR learned from past crises?
The industry is essentially cyclical. It tends to invest too much capital during times when the sun is shining. In bad times, she invests too little. We do not try to time the market, but rather invest 20 percent of the capital collected evenly over a five-year period. This helps to balance out highs and lows.
In addition to the risk factors you mentioned, the high level of debt to finance new AI data centers has also recently caused nervousness. KKR is also involved in the market with the portfolio company Helix Digital. Do you share your concerns?
We see immense opportunities when investing in data centers. However, it is essential to pay close attention to who you work with. Building a data center and renting out the computing power means finding a partner for 15 or 20 years. So you have to choose these partners very carefully.
How does KKR go about this?
We therefore rely on large hyperscalers, with multiple sources of free cash flow and different opportunities to achieve long-term success. Our goal is to maintain the capital invested regardless of technological developments. But there's no doubt: When trillions of dollars are spent at this rate, there are sure to be surprises.
How do you make sure there are no unpleasant surprises in your portfolio?
We are always aware of who we are investing for. We invest in the retirement savings of teachers, firefighters, police officers and municipal employees. When I talk to these people, I always want to be able to be proud of what we have done for their retirement.
In addition to asset management for pension funds and sovereign wealth funds, the investment of insurance money is becoming increasingly important for the industry. Why are investments in insurers so interesting for you?
Life insurance and pension insurance products are similar to retirement provision: Essentially, an insured person pays regular premiums in order to have protection in old age. The funds that life insurers are required to invest may also be suitable for private market investments and matched with liabilities with fixed, long maturities.
How does KKR proceed if the investor takes part in an insurance policy?
We take over the entire asset management, although some of the investments can be outsourced to specialized managers. A large proportion of the investments are invested in bonds with good credit ratings. In addition, depending on investment needs and regulatory requirements, private credit and infrastructure investments can also play a role.
While competitors like Apollo also conclude many deals with their insurance arm in Germany, KKR is perceived as less active. Do you want to change that?
We are intensively looking for investment opportunities here. That's why we carried out the joint venture transaction with Bayer, for example.
