Henry Kravis - 40 Years of Innovation in Finance

Thank you for having me. This is quite an honor. Thank you all.

We'd made a decision, the three of us: Jerry Kohlberg, George Roberts. And by the way, you have to understand, George and I are first cousins, grew up together, been friends since age two. We wanted to focus just on private equity. That was not what it was called in those days. What it was called was bootstrap acquisitions, and then it became management buyouts, and then it became leveraged buyouts, and then it became private equity. The firm at the time, and actually through its history, was an institutional sales and trading firm and really had a very small investment banking business, and certainly no interest in anything in private equity. In fact, every time we bought a company, we'd have to scramble around for the money, and I couldn't because the firm never put any money in it. So we went to see him. Said we would like to focus on private equity, and we'd like to give Bear Stearns a half interest in this new vehicle we'll set up within Bear Stearns, and we'll keep a half interest. And as luck would have it, immediately he said, 'No, we have no interest. You're either here or you're out.' Well, thank God for that answer, because that enabled us to then be on our own and go out and raise our own money, and be our own bosses.

We really like to take a long-term view, and we always have taken a long-term view, and that's really critical to how we create value. Our job really begins the day we buy a company. We like to say to people, 'Don't congratulate us when we buy a company. Any fool can buy a company, just pay enough. That's the easy part. To make an investment, that's the easy part. The hard part is what do you do with the business once you have made your investment? How do you create value? What do you do to make that company much more efficient?' And with a lot of younger people I find at KKR, the hardest thing for them to get over is they'll run models, and the models are wonderful. We used to get big stacks of paper and all of this, and I basically looked and I threw it out and said, 'Doesn't mean much.' And they'd say, 'Well, what have you done? I spent the last three days running this model.' I said, 'That's all fine, but what happens if I change the working capital assumptions? What happens if all of a sudden we can refinance the company in two years? What happens if we can sell a subsidiary at a huge price?' When you invest, investing is a movie, it's a series of still shots. It is not a photograph. Too many people look at something, they look at the model and they will say, 'We're going to earn 18.76.' They're very proud of the fact that that's what it's going to be. I can guarantee you, everybody in this room, we will never earn on an investment 18.76. If that's what the model shows, it will either be higher or lower, but it won't be that. The reason is there's so many things that you can do to improve a business, to make it better, to merge it with somebody else, to go to China which you hadn't thought about doing, and so forth. Investing today is really one of a series of events and what can happen. I always say to people, to be a good investor, you have to be curious. Too many people are in their silo, they're in a box, and this is how they do it, they sit in front of the computer. And I try to tell them, 'Get away from the computer. Garbage in, garbage out. Go out and meet people, talk to them. You don't have to have every single answer. It doesn't matter how many blue trucks a company owns. What's more important is, what can you do with the business in the 20% that will really drive the results and drive the outcome? What can you do with that to create more value?' So a lot of things have changed, but a lot has still stayed the same. Without a doubt, one last point I will make: what has stayed the same at KKR is our culture. Our culture is critical. When we started the firm, we had two parts of a longer conversation. Both weren't very long actually. The first one was: how do we divide the firm? And we said, 'Jerry, you're 20 years older, you're running the corporate finance department at Bear Stearns. You'll take why don't you take 40, and George and I'll each be 30. And the first 10 points we give away will come out of your 40 and we'll all come down together.' And secondly, what kind of culture do we want to have? This was critical to the firm and we can talk about that later on. But to us, what was very important right at the beginning: we came from a firm which was an eat-what-you-kill firm, Bear Stearns. It was what you produced, and at the end of each year you walked in to your boss with a piece of paper and said, 'This is what I worked on, these are the fees that I created,' etc. And we decided that when we started KKR, every single person at KKR was going to participate in everything we did, whether you're a partner at the firm or you weren't a partner, whether you worked on a deal or you didn't work on the deal, whether you lived in San Francisco where one of our offices or George was, or in New York where Jerry and I were. Everyone was going to participate. Today, 41 years later and 21 offices around the world, lots of different businesses, we're exactly the same. And this is critical, I think, to what KKR is all about.

I'm really a big believer that every 10 years or less, you have to take a step back and assume this is your first day on the job. You're the new CEO, you've just arrived at the XYZ company, and you've got to take a fresh look. That's what George and I have done at KKR. So today, I'd say we move much faster than we did before, and as part of our 100-day plan, it's part of our thinking when we do analysis than what we had before. I'd say there's a couple of other things that have really made a difference and helped us continue on. That is, in addition to taking a fresh look at ourselves every 10 years or so, constantly trying to reinvent ourselves, staying at the cutting edge. If you, I have a sign in my office which my assistant gave me many years ago, and she did because she heard me say it so much: 'Arrogance kills.' I truly believe that. I've seen more people blow up because they're arrogant, and there's no reason for anybody in my view to be arrogant. And so we look at how we can, we're making mistakes, we're all human. How can we do a better job at what we're doing, and how can we stay on the cutting edge? You know, we'll talk about technology in a little bit, but it seems to me that if you don't take a fresh look, you don't get out of your comfort zone, you don't try new things. George and I always say, 'Well, you throw enough stuff up, something will stick.' That's really what we try to do: constantly be innovative, trying to stay ahead of the curve. We've had many of those events at KKR and learned from mistakes. God knows we've had plenty of mistakes that we've made, but sit down and correct them.

Well, let me just give you my personal thoughts on the economy. Look, we're almost through the end of '17, and obviously I think the rest of '17 is going to be fine. I actually think '18 will probably be fine too. I think you'll start seeing rates move more in 2018. Think about the strength that there is in the economy right now, but there's a lot of vulnerabilities as well. So I think that 2018 will get through probably fine. If I had to pick a time when you'll start to see a slowdown, it's probably going to be in 2019. Look, there's always the black swan that we don't know about: North Korea, just a lot of things that can happen. Everybody's looking for return, everybody's looking for yield today, and one of the reasons the stock market has been strong is the hope that there'll be tax changes. As far as what Christine Lagarde is saying, yeah, I think there's certainly vulnerabilities, no question about it. And you know, just look at how hard it is for companies to grow their top line. Yes, bottom lines are growing fine because companies are better operated today than they were in the past, but I can tell you from our own 130-odd companies that push that we have toward trying to grow the top line, we're successful at it, but boy we concentrate and it's hard.

Well, let me just give you a bottom line. George and I have probably the best relationship that any two people could have in business. It's been a 71-year relationship. We met when we were two. People ask, 'You two must really fight a lot, right?' I said, 'Oh yeah, the last time we had a big disagreement we both were seven.' He wanted to ride my new bicycle and I didn't want him to, so I got chased in the house, I ran in the corner of a wall, cracked my head open, and had 23 stitches. I said there's got to be a better way than this. No, we don't. Look, very simply, if you've got respect for the other person, if you've got trust in the other person, if you both believe in a common goal that you want to attain, and it's big, much bigger than you personally, then you can go a long way.

Well, I've got a piece of advice I give startup companies a lot when I personally invest in them. I don't do it as a firm at KKR. But the one thing is: get out of your comfort zone. It's easy to stay where you feel comfortable. Get the heck out of it and open your eyes and test yourself, because you'd be amazed how far you can go if you just try. And number two: be as curious. No one in my mind can be a great investor unless you're curious. That means thinking about how to connect the dots, looking at a global view. I'm interested a lot in the arts, I'm interested in medicine, in the medical area which I put a lot of money into personally, and education. In my view, you'll learn a lot. My last point I would make to you: take a part of your day or part of your time and give back to society. That's critical. I can tell you, those three areas — if you focus on curiosity, get out of your comfort zone, and give back to society — you're going to be really happy.