Add legendary private equity investor Henry Kravis to the growing list of those publically warning about excessive leverage levels utilized by the largest and most politically powerful banks.
Speaking at the SuperReturn conference in Berlin this morning, Kravis was reported to have said the banks are responsible for bringing leverage levels beyond “levels of safety.”
ValueWalk readers will note that on January 17, in a ValueWalk exclusive, Paul Singer, head of one of the world’s largest hedge funds, warned of a derivatives catastrophe due to big bank leverage. Later, in a confidential investor letter, he called the large banks “over-leveraged hedge funds” as well as calling for an end to “financial lawlessness” that pervades Wall Street and prevents robust investigation into activities that threaten national security.
“Not a game of financial engineering”
In this latest warning, Henry Kravis was reported to say, “This is not a game of financial engineering,” referencing overburdened leverage structures surrounding today’s buyouts. He then added a proper capital structure is required to invest in a business, rather than overburdening companies with disproportionate amounts of debt that makes debt repayment an issue.
Henry Kravis: “That ain’t gonna work”
“That ain’t gonna work,” he was quoted as saying, referencing what he considers as excessive leverage levels beyond what he had pioneered decades earlier.
Henry Kravis, said to have a net worth of $4 billion and number 88 on the Forbes list of wealthiest Americans, got his start working at Bear Stearns with Jerome Kohlberg, Jr. and the two both became partners at the young age of 30 and 31 respectively. They ultimately left the firm and formed Kohlberg, Henry Kravis and Roberts, which led them on a number of infamous buyouts, the most notorious of which was the highly leveraged $31.4 billion buyout of RJR Nabisco, which was the subject of the movie Barbarians at the Gate. The movie painted a picture of financial engineering-led greed that enriched the pockets of the deal makers, an image in need of altering.
Private equity image adjustment needed
In today’s speech, Henry Kravis says the image of the private equity firm needs improvement. “We’ve done a lousy job of telling our story. People think private equity is hedge funds. We have not done a good job as an industry.”
Henry Kravis said he, along with George Roberts, the two remaining founders of the firm, have with no immediate plans to retire. “I love what I’m doing,” he was reported to have said, “George loves what he’s doing.” The pair will remain in control of the firm “as long as we’re…healthy and having fun and our partners don’t kick us out.”