Saturday, July 05, 2008

KKR Demonstrates Why Public Banks Don't Need Capital

Thursday's Wall Street Journal carried a detailed piece on KKR's preparation for a larger, broader role in the financial services sector.

For now, according to the article, the firm is adding syndication of its own investment assets and infrastructure finance as new businesses.

Whether the private equity shop actually goes public seems less material to me than that they demonstrate what I contended in this recent post.

Why should we think KKR will stop with these few new businesses? Once they build a larger infrastructure to manage a broader range of financial units, can basic loans, various types of equity underwriting, and asset management be far behind?

Having moved to wean itself from the simple leverage buyouts for which KKR became famous in the 1980s, there wouldn't seem to be a natural stopping point.

Of course, with each new business will come some more watering-down of returns, competition for capital and expense dollars, more resources spent managing the internal efforts of the businesses, etc. Which will gradually mean lower returns on a larger income stream for partners.

But in the meantime, wouldn't it make more sense for KKR to just hire the necessary people, raise capital and do the businesses which make sense, than to buy into badly-managed banks, commerical or investment, which are publicly-held and in bad shape?

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