KKR aims to take role of banks with IPO

NEW YORK (Reuters) - Of the three reasons that KKR cites for going public, its expansion into the capital markets business is what has Wall Street bankers abuzz.

Private equity firm Kohlberg Kravis Roberts & Co. KKR.UL said in its IPO prospectus earlier this week that the $1.25 billion offering will allow the firm to expand its ability to syndicate equity and reduce reliance on third-party sources of capital.

Syndicating leveraged buyout equity is normally the role of investment banks. Does KKR wish to cut banks entirely out of the LBO process? The answer is no, sources close to the firm say, since the firm will still rely on banks to handle the debt borrowed for the deals.

What the initiative means is that KKR wants to handle any additional equity needed for deals on its own, sources say. And that does cut banks out of one of its main roles in LBOs.

Private equity firms, which buy and sell companies, typically pay one-third of the purchase price in cash, borrowing the rest.

Buyout firms have increasingly relied on banks to cough up loans so they don't have to bring in rivals to afford a takeover target. The banks put up the loans, known as equity bridges, and sell down their exposure to investors.

KKR wants to be able to do this itself, and the equity it receives through the IPO will help make this happen, sources say.

Furthering a move in that direction, the firm hired Chris Farr from Citigroup's equity capital markets (ECM) group and has applied for a broker-dealer license.

"We expect that our capital markets activities initially will focus on syndicating to a broader base of investors a portion of the equity that we commit," the prospectus says.

KKR declined to comment beyond the prospectus.

The question for investment banks is how far KKR is planning to take its new capital markets strategy. Will it ultimately become a one-stop shop, handling equity and debt for its leveraged buyouts and shutting banks out of the process entirely?

While KKR says the IPO will allow it to grow through acquisitions, sources say the firm has no plans of leaving banks out in the cold, or even being their competitors, for that matter. KKR is expanding its debt finance capabilities, but that group is expected to be small, sources say.

Having KKR take on equity bridge loans is a welcome prospect on Wall Street. Investment bankers are often reluctant to make the high-risk, low-return loans.

KKR is very much aware of this, which is why the firm wants to be there when the current buyout frenzy passes and the banks no longer are willing to make the bridge loans.

Syndicating equity will "help us reduce the need to partner with large consortiums of private equity firms on large leveraged buyouts, retain greater operational control over our portfolio companies and capture a greater portion of the economics that are generated by our private equity investments," KKR says in the prospectus.

Indeed, that desire was apparent when KKR agreed to buy payment processor First Data Corp FDC.N in April for $26 billion, a deal with a big bridge loan from investment banks and not a single private equity partner.

KKR also said it was going public to use the money raised to pursue more acquisitions and to grow existing businesses within the firm.