INSIGHT-At KKR, Nuttall and Bae are favorites to fill founders' shoes

NEW YORK, July 16 Wed Jul 16, 2014 6:00am EDT

NEW YORK, July 16 (Reuters) - KKR & Co LP's co-founders Henry Kravis and George Roberts have indicated they intend to stay at the buyout firm for at least five more years, but two men - Scott Nuttall and Joseph Bae - are emerging as front-runners to eventually succeed them.

Interviews with more than half a dozen current and former KKR executives reveal that the firm is likely to preserve the co-chairman and co-chief executive jobs, currently held by Kravis and Roberts. Nuttall, 41, head of the global capital and asset management group, and Bae, 42, who leads the firm's operations in Asia, are now seen within the buyout shop as the most likely people to take those spots, the sources said.

Kravis and Roberts, both 70, have kept details of the succession plan a secret even within the firm. The sources, who requested anonymity, based their assessment on their observations of interactions among senior KKR executives, including the founders, and firsthand knowledge of the inner workings of the firm.

Their assessment provides the clearest indication yet of how succession may play out at one of the world's oldest and largest private equity firms. It is a question that has become increasingly important within the private equity industry as many of these firms have gone public and their larger-than-life founders have aged.

Nuttall and Bae are part of a wider list of potential candidates for the job, the sources said.

The bench of possible successors includes Alexander Navab, 48, head of KKR's Americas private equity business; Todd Fisher, 48, the firm's chief administrative officer; Marc Lipschultz, 45, global head of energy and infrastructure investments; and Johannes Huth, 54, who heads KKR's operations in Europe, the Middle East and Africa, the sources said.

Kristi Huller, a spokeswoman for KKR, declined to comment on behalf of individual KKR partners. "Henry and George are very proud that the firm they have built has such a deep bench of leaders," she said.

Kravis and Roberts made more than $160 million each in 2013 and Forbes pegs the net worth of each at more than $5 billion. However, most of their earnings are due to their collective ownership of close to a quarter of the firm.

The succession race is far from over. Kravis and Roberts remain actively involved in the management of the firm.

Last month, Roberts told an investment management committee meeting of the Teacher Retirement System of Texas that having two co-leaders had worked "pretty well" for KKR. He told the KKR investor that he and Kravis were thinking of a transition where they would put new leaders in place but stay on as chairmen for a while.

"What we have told the firm is we are going to be here, God willing, for at least another five years, so don't push us out the door just yet," Roberts said. He added that such a time period of five years could be renewed.

SENSE OF CONTINUITY

Kravis and Roberts, who are cousins, pioneered leveraged buyouts through the eponymous firm they created in 1976 alongside Jerome Kohlberg Jr with $120,000. Kohlberg, 89, left KKR in 1987.

By attracting money from some of the world's largest institutional investors such as pension plans and sovereign wealth funds, the firm grew from a single $30 million fund in 1978 to more than $100 billion in assets under management currently. It raised more than $20 billion from its fund investors just in the last 12 months to the end of March. The firm employs more than 1,100 people in 15 countries.

"Henry and George provide a sense of continuity and stability to KKR's fund investors and remain very active in the investment process," said David Fann, chief executive officer of TorreyCove Capital Partners LLC, a private equity advisory firm. "They still source deals and can be very persuasive with CEOs and boards of directors."

Unlike publicly listed peers such as Blackstone Group LP , Carlyle Group LP and Apollo Global Management LLC , KKR has never named a president or someone with an equivalent title, a job that could serve as a stepping stone to leading the entire firm.

This is partly because of Kravis' and Roberts' concerns about alienating other members of their senior leadership team, the sources said.

Kravis and Roberts also like the flexibility that comes with not having to commit to successors, the sources said. This allows them to easily modify their plans based on the potential candidates' future successes and failures.

COLLEGIALITY AND LOYALTY

KKR is one of the more tightly knit firms in the private equity industry. Both Kravis and Roberts speak often about the importance of preserving KKR's culture and values, shaped by collegiality, old-school Wall Street loyalty and valuing long-timers in the firm more.

"Your word is your bond. If you say something to someone, you're speaking on behalf of KKR. Whether you've been here six weeks or you've been here 30 years, it's your obligation to stand behind what you say," Kravis said in a promotional video in 2012.

He rejected the 'eat-what-you-kill' culture seen in many investment firms in the video. "We didn't want people running around here and saying, 'That's my idea', and raising their hand, patting themselves on the back and so forth," Kravis said.

The perception within KKR that Nuttall and Bae are currently frontrunners is closely linked to that culture as well as Kravis' and Roberts' business priorities.

Bae has proven he can renew and grow KKR's franchise of buying and selling companies, while Nuttall has emerged as a strategist who can launch and expand related businesses such as credit and special situations, as well as represent the firm to investors.

KKR insiders who know Nuttall and Bae said their relationship is close and friendly, a key consideration in any decision to appoint them as co-CEOs. Bae also has a loyal following among people who have worked with him, praised both for his management style and his ability to socialize with and motivate staff, the sources said.

GROWING UP AT KKR

Nuttall and Bae joined KKR in 1996. Nuttall had previously spent less than two years at Blackstone, while Bae had a similarly short stint at Goldman Sachs Group Inc's principal investments group.

Nuttall rose to head of KKR's financial services investment team and also became involved early on with the firm's diversification into debt investments, which started in 2004. He now oversees KKR's credit investment, capital markets and fundraising activities.

Nuttall also played a key role in taking KKR public, a process that involved merging the firm with an Amsterdam-listed fund in 2009 and then moving the listing to New York in 2010. He now leads KKR's earnings calls with investors.

Bae was sent to Hong Kong in 2005 at the age of 33 to kick-start the firm's business in Asia, a diverse and fast-growing region whose capital markets are, for the most part, less developed, and in which several private equity firms accustomed to Western-style leveraged buyouts have struggled.

The Korean-American dealmaker's team launched its first Asian private equity fund in 2007, raising $4 billion from investors. Its success led to KKR raising a successor fund last year that amassed $6 billion, making it the largest private equity fund dedicated to Asia.

THE BENCH

Bae's front-runner status leaves KKR's two other regional private equity heads, Navab and Huth, trailing in succession odds in the eyes of many of their peers.

Navab, who heads KKR's biggest and longest-running business, had been previously perceived among the front-runners.

Navab has been seeking to diversify KKR's more mature private equity business in North America by expanding in Latin America. He led the creation of KKR's Sao Paulo office and the firm announced its first private equity investment in Brazil earlier this year.

Nevertheless, Latin America offers fewer investment opportunities at this stage of the economic cycle than some Asian counties for which Bae is responsible, the sources said.

Navab was co-head of the Americas private equity business between 2008 and last May, at which point the other co-head, Michael Michelson, gave up that title to return to investing. This allows Navab to assume more ownership of his group.

Some KKR investors raised concerns last year over Navab's heart arrhythmia, but insiders said that he has treated this condition effectively and is healthy.

Fisher is seen inside KKR as an effective operator who knows the ins and outs of the firm and is credited with setting up its real estate business.

Lipschultz, KKR's global head of energy and infrastructure investments, has managed to defy the negative headlines on the bankruptcy of Energy Future Holdings, a Texas power utility that KKR and other private equity investors acquired in 2007 for $48 billion. He has emerged as a potential candidate thanks to the assets in energy and infrastructure he has amassed for the firm since. (Reporting by Greg Roumeliotis in New York; Editing by Paritosh Bansal, John Pickering and Lisa Shumaker)

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