Henry Kravis, the billionaire co- founder of KKR & Co. (KKR:US), the buyout firm that manages $66 billion in assets, knows a thing or two about disaster recovery. Following the terrorist attacks of Sept. 11, he helped secure interest-free loans for 89 damaged businesses so they could re- open.
Now, days after Hurricane Sandy wreaked economic havoc in New York and the surrounding states, the 68-year-old is already thinking about how to support future infrastructure that can withstand similar disasters. Through the Partnership for New York City Fund, which he created in 1996, Kravis wants to help fund businesses that strengthen and diversify the city’s economy.
“Can we be the seed money to get major projects going?” Kravis said in an interview in KKR’s offices overlooking Manhattan’s Central Park. “That was exactly what I had in mind when I came up with the idea for this fund.”
The fund, a limited liability corporation and public charity, has helped 125 companies in health care, education and other industries receive $119 million in funding they probably wouldn’t have received elsewhere. PNYCF is “a private fund with a civic mission,” according to its website. Over the past 16 years, it says it has helped create 6,678 jobs.
The fund tries to recoup each investment within five years. Any profit is used for other projects, Kravis said. The group has more than $35 million it plans to invest in businesses the fund’s board believes will create jobs or revitalize poor neighborhoods.
PNYCF invests in five industries: clean technology, health care, information technology, retail and tourism, and media. The fund’s involvements range from $500,000 to $5 million, and investments can include debt or equity.
“I came up with the idea to do it the way KKR does it,” Kravis said. “We’re divided up by industry specialization. We said, ’Let’s see what we can do about getting people engaged from each of the corporations,’” he said, referring to the fund’s investors and board members.
Bloomberg LP, the parent company of Bloomberg News, is one of more than 45 investors in the fund.
Kravis is worth $4.3 billion, according to the Bloomberg Billionaires Index. Almost all of his fortune derives from profits generated by KKR, the company he co-founded with his cousin George Roberts and former partner Jerome Kohlberg in 1976. At three different points, the company held the title of pulling off the biggest leveraged buyout in history, the $30 billion purchase of RJR Nabisco in 1989; the $33 billion acquisition with Bain Capital LLC of HCA Holdings Inc. (HCA:US) in 2006; and the $45 billion buyout with TPG Capital of TXU Corp. the following year.
KKR reported profit of $487.3 million in the third quarter, after a loss a year earlier, as the value of its holdings rose. The company is in the midst of raising its first buyout fund in six years. So far, it has raised $6.2 billion, short of the $8 billion it is seeking.
The company’s last main fund, raised in 2006, had a net annualized internal rate of return of 6.9 percent as of Sept. 30, according to regulatory filings. The median return for North American buyout funds raised that year was 7.6 percent, according to London-based research company Preqin Ltd.
The fund is an offshoot of the Partnership for New York City, a network of prominent local private executives established by David Rockefeller, the grandson of Standard Oil founder John D. Rockefeller, in 1979.
Kravis said that when he first joined the partnership, it didn’t have much meaning because “in those days, everyone -- large and small company CEOs -- was a member.” He saw a better use for the partnership’s network: as a means to seed businesses and create jobs. With the approval of the partnership’s new CEO, Jerry Speyer, chairman of Tishman Speyer Properties LP, Kravis raised $67 million.
“I wanted to go out to individuals and corporations and raise $1 million each, no more, no less,” Kravis said. “The reason was I didn’t want any one corporation to dominate. I really wanted it to be a network.”
PNYCF receives as many as 200 applications a year for funding, Kristi Huller, a KKR spokeswoman, said in an e-mail. To qualify for a PNYCF investment, businesses must be located in New York City, have potential to create new, permanent jobs, and offer some kind of service or product that would bolster the city’s position in a growth industry.
“We always said we’re not dumb money, we’re not charity,” Kathryn Wylde, the partnership’s chief executive officer, said in an interview. “We tried to be on the cutting edge of what would rebuild communities and support entrepreneurs, and to do it in a smart way.”
The broad mandate has yielded a diverse portfolio. The fund owns stakes in biopharmaceutical company Intra-Cellular Therapies Inc., which is developing drugs that target schizophrenia and depression, and Scratch Music Group, a disc jockey-services provider that also operates a school for aspiring DJs. The school was co-developed by Jam Master Jay of the Queens-based hip hop group Run DMC.
Huller said the fund doesn’t report its returns. She said it has met the commitment to its investors to preserve capital and pay for its operating expenses.
“We do the same analysis you would do for a for-profit business -- the same questions you would ask about the business, the competitive landscape, the management,” Maria Gotsch, the fund’s CEO, said in an interview. “What we do is we take the return off the table. We’re in effect doing venture risk and we’re getting single-digit returns.”
The fund last year started the FinTech Innovation Lab, a 12-week entrepreneurship mentoring program designed to bring together financial-technology innovators and the bankers who can fund their ventures, including those from Bank of America Corp., UBS AG and Morgan Stanley. (MS:US) Run jointly with Accenture Plc (ACN:US), the program is seeking to take advantage of rising venture capital investment in New York City.
The city received $2.7 billion in venture money in 2011, behind San Francisco with $11.8 billion and Boston with $2.8 billion, according to data from the National Venture Capital Association. Each startup in the FinTech Lab receives $25,000 and office space during the program, before they pitch their ideas to investors for more permanent backing.
PNYCF’s investments are decided by the partnership’s board, led by Kravis and co-chairmen Richard Cashin, managing partner of One Equity Partners LLC, and Charles Kaye, co-president of private-equity firm Warburg Pincus LLC. Others on the 20-member board, which meets three times a year, include Adebayo Ogunlesi, chairman of KKR competitor Global Infrastructure Partners and a director of Goldman Sachs Group (GS:US) Inc., and Brian Gavin, chief operating officer of Blackstone’s hedge-fund business, which also competes with KKR.
“I’ll never forget a comment that Dick Parsons made when he was the CEO at Time Warner,” which is an investor in the fund, Kravis said. “He said this fund is one of the best investment banks I’ve ever seen, because we got the best people from every one of those companies that partnered with us.”
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