KKR: Why “Operational Expertise” No Longer Cuts It

As more and more firms use operating partners, KKR started looking for the next big thing in value creation for its portfolio companies.

Operating partners. It used to be that few firms had them, and those that did could tout the industry expertise they offered as a differentiator in a crowded PE market. Now that they’re more the norm, firms like KKR are searching for the next big thing.

So if operating expertise no longer gets an investor’s attention, what will? Alisa Wood, a member of KKR’s Client and Partner Group talked about some possibilities as part of a panel discussion at the recent Columbia Business School Private Equity and Venture Capital Conference.

Assessing geopolitical risk

KKR views its ability to assess geopolitical risk as a way to convince investors of its value-creation capabilities, Wood said. The big questions: how to price such risk, and how to get better access to financing in countries where those risks exist, she said. In KKR’s case, they have a capital markets team to seek out that financing, or the capacity to finance it from within.

Taking ESG more seriously

The “ESG part of the equation is huge,” Wood said. Environmental, social and governance has become more important to both PE firms and their portfolio companies, and to LPs such as university endowments who have been shedding controversial allocations to fossil fuels and gun manufacturing.

Wood gave an example of KKR portfolio company US Foods—part of its Green Portfolio Program—which made changes to its truck routes and instituted rules on truck idling, not only for environmental reasons but to save the company money. KKR did the same with portfolio company Dollar General. The discount retail chain saw upwards of $400M in fuel cost savings from 2008 to 2013.

And in 2015, students at MIT protested the school’s decision not to divest its interests in fossil fuels such as coal oil, and natural gas. That was only the latest in a long line of universities—Harvard, Yale, Columbia, Brown—that made the same decision. University endowments are often limited partners in private equity funds that invest in such fossil fuels.

While KKR is ahead of the curve when it comes to looking beyond operating expertise to set themselves apart in the eyes of investors and portfolio companies, many firms don’t have the manpower or capital of KKR to follow its lead and will remain on the operating partner path.