The Hard Truth About Operational Excellence w/ KKR's Pete Stavros

Pete Stavros (0:04)

The reality is operational improvement and driving operational change is really hard, like really hard.

Hugh MacArthur (0:10)

That's Peter Stavros, Global Co-Head of Private Equity at KKR. And if you ask Pete what it will take to generate alpha in a more challenging environment, he'll come right back to some of the industry's fundamentals. They source proprietary deals and they drive real operational improvements.

It may sound like what you'd hear from any number of fund managers until Pete starts unpacking the discipline required to make it actually work.

Pete Stavros (0:31)

Senior folks on our team, they couldn't run a factory, but they could come close. And we still do some of this. Our younger people would have to leave and go work at one of our companies for a year or two if they wanted to get promoted.

Hugh MacArthur (0:43)

Today on Dry Powder, we'll explore what a prototypical KKR deal really looks like, how their operational depth works in practice, and how the firm is navigating today's slower deal flow, tougher exits and stretched LPs. I'm Hugh MacArthur, Chairman of Bain's Global Private Equity Practice, and this is Dry Powder.

Pete, welcome to Dry Powder. It's a pleasure to have you on the show today.

Pete Stavros (1:09)

Thanks for having me.

Hugh MacArthur (1:11)

What are you seeing in market conditions today around deal making, exits, what does the health of the private equity world look like from a buyout perspective?

Pete Stavros (1:19)

Well, fundraising, I think it is difficult. You know, LPs feel stretched, feel over allocated to private markets, to alternatives. I think as many of your listeners will know, one of the mistakes our industry made was over deploying in 2021 and 2022 when the tenure was one percent and private market multiples were very high.

That deal activity in 21, 22 was pretty centered on software as well. So, it was kind of the wrong industry at the wrong time, at the wrong valuation level.

And our industry spent that money quickly, meaning lots of funds were raised in 2021 and they were spent in 18, 24 months. And then they went back out to market asking LPs for more money. And LPs, for the most part, consented and re-upped, but now they're waiting for money back and saying, hey, I've basically invested 2X what my normal commit would be over the last five years, where's the money back? So fundraising is tough. New Deal activity is slow. I mean, it depends on part of the world. Europe is, I'd say, particularly slow. US is pretty slow. Asia is doing fine. And exits are tougher to come by. In 2021, 2022, if we had a great business, we'd have eight bidders who were dying to own it, and now you get a few.

So, it's definitely a slow market, I would say, on all fronts. Now, our whole orientation towards the market is consistency. So, we find a way to deploy 20% of our fund every year. So, we have this real orientation towards linear pacing, and we don't try and time the market on exit either. When we've accomplished 80% of what we came to do with the business, we head for the exits. And if there's only two buyers, so be it. I think it's a fool's errand to try and time these things. And that's one of the things that's held us in good stead, is we've just been really consistent for 20 years, in terms of deployment and money back.

Hugh MacArthur (3:26)

There's no doubt that LPs appreciate from their partners predictability of both deployment and getting the money back with liquidity. And so, I'm sure it has held you in good stead, and much of the industry is not in good stead on a lot of those areas today. And I think that some of the capital velocity acceleration period that you're describing in 2021 and 2020, it's interesting that about every decade or so, we seem to see that in the buyout world in particular. We saw it in the late 90s. We saw it in 2006, 2007

Usually, you get a big recession that happens after that. And in this instance, we've actually not. We have kind of record asset prices where they're actually trading, certainly on the public side, also on the private side as well.

And I think that, frankly, this last decade, right before that capital velocity acceleration of zero central bank interest rates, kind of masked, in a way, a maturation of the industry. And now, we're in a kind of a $5 trillion industry with $3.8 trillion of portfolio companies and buyouts alone and over a trillion dollars of Dry Powder out there. It's a much, much bigger industry, about triple what it was just in buyouts 10 years ago globally. And given the competitive nature of the industry, I think it would be great for our audience to get your take on what do you think it's really going to take to generate alpha in a more expensive, more volatile, more mature environment than we had six or seven years ago?