Cover Story December 10, 2009, 5:00PM EST

Can KKR Make Like Berkshire Hathaway?

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(L to R) Adrian Moser/Bloomberg News; Santi Burgos/Bloomberg News

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But with the debt markets frozen at the start of 2009, Kodak couldn't raise money cheaply by issuing bonds or taking out loans. It began kicking around the idea of selling a stake instead. For KKR, this presented an opportunity for a new kind of dealmaking: Instead of taking over Kodak outright, it could become a partner.

Chen and Clammer performed due diligence for six months, talking extensively with Farr's capital markets group about how to structure a deal amid such volatile markets. They also reached out to KKR's in-house team of operational executives who parachute into companies to turn them around. And they talked with Fisher, the former Kodak CEO who now works for KKR, about how Kodak's operations could be improved.

As the two sides examined the numbers, Kodak's current CEO, Antonio M. Perez, visited Kravis in New York and Roberts in California. He wanted to know whether they shared his view that Kodak's stock was undervalued and whether they intended to be long-term shareholders. Kravis and Roberts convinced him of both. "That was the key," Perez says. "They believed in the value-creation opportunity we thought we had."

KKR also sold Perez on the potential for Kodak to tap its 51 companies as customers and suppliers. The two sides agreed that KKR would take two seats on Kodak's board and that KKR would deploy its in-house managers to work on new growth opportunities. An hour after the deal closed on Sept. 16, Kodak formed the "K Squared" team, which consists of seven Kodak executives and six KKR operational executives. The group, which meets monthly, aims to find ways Kodak can sell more to KKR's companies, ramp up its sales force, and make acquisitions. Since the deal closed, at least six KKR-owned companies have gotten involved in dialogues with Kodak about how they can work together.

K-Squared hasn't been around long enough to affect Kodak's quarterly profit results. Investors, though, don't seem optimistic. Kodak's long-suffering share price has fallen by 36% since the deal closed. "It's a long-term investment," says Kravis. "We got involved in this because we knew it was a turnaround."

CORE VALUES AND LONGEVITY

For Kravis and Roberts, the biggest challenges in remaking their company may be internal. They'll have to figure out on the fly how to grow quickly without falling prey to Big Company syndrome. With headcount having tripled since 2004, from 204 people to 637, Kravis and Roberts fear KKR could become siloed and bureaucratic. The two now consult regularly with senior adviser Rajat K. Gupta, a former global managing director at McKinsey & Co., for thoughts on the best way to manage the expansion. Gupta saw similar growth at McKinsey: The firm's professional staff grew from 500 to 9,000 during his 35-year tenure there. "The vision," says Gupta, "is to develop a premier global institution for alternative investments."

More than anything, Kravis and Roberts want to create a mature, meritocratic company that will long outlast them. To drive that point home, the two have begun tying part of KKR compensation to how much an executive takes advantage of all the firm's new capabilities.

But Gupta has pressed them to do more, sometimes veering into touchy-feely territory. In May, at Gupta's urging, KKR partners and managing directors from around the world gathered in New York to talk about how they were adhering to the firm's "core values" (integrity, respect, teamwork, excellence, innovation, accountability, fortitude, and sharing). There were no "trust falls" during the four-hour meeting at the New York Sheraton Hotel and Towers, but between bites of deli sandwiches the team discussed how they could improve the way KKR is carrying out its new mission and improve its internal and external communication. Another Gupta idea: As part of the annual 360-degree performance-review process, 12 partners now must conduct in-depth interviews of 72 executives at the firm.

These sorts of things don't seem like the province of buyout barons. Then again, what choice do Kravis and Roberts have when the rules of the game have changed? Loading mounds of debt on a company in hopes of selling it later for a big profit is a technique befitting a "cave man," says Kravis. "The days are long gone when you just buy a company and hope that financial engineering will work. Our job today is to create value. Private equity, to me, is acting and thinking like an industrialist."

With Jason Kelly and Cristina Alesci

Thornton is a senior writer for BusinessWeek.