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Kohlberg Kravis Roberts to go public through merger with Guernsey closed-ended fund

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Venerable private equity firm Kohlberg Kravis Roberts has announced plans to go public through a merger with KKR Private Equity Investors, a Guernsey-domiciled limited partnership that put

Venerable private equity firm Kohlberg Kravis Roberts has announced plans to go public through a merger with KKR Private Equity Investors, a Guernsey-domiciled limited partnership that put listed private equity on the map two years ago with a USD5bn flotation on Euronext Amsterdam.

Under the proposed deal, which is scheduled for completion in the fourth quarter of this year, the US firm will acquire KKR Private Equity Investors and its USD5.4bn in assets, giving shareholders 21 per cent of the merger company. KKR expects to report USD60.8bn in assets under management as of June 30, up from USD53.2bn at the end of last year.

The Guernsey vehicle will be dissolved and delisted from the Amsterdam exchange and the merged entity will be listed on the New York Stock Exchange. The remaining 79 per cent of the equity will be held by KKR’s partners, who are not selling any equity through the transaction; there will be no public offering of new shares.

KKR Private Equity Investors participates in private equity and opportunistic investments selected and structured by KKR investment professionals. At the end of June 90 per cent of its portfolio consisted of limited partner interests in six KKR private equity funds, co-investments in 13 companies alongside the funds and negotiated equity investments, with the rest in opportunistic and temporary investments. The vehicle makes its investments as the sole limited partner of another Guernsey limited partnership, KKR PEI Investments.

Established in 1976, KKR sponsors and manages funds that make private equity investments in North America, Europe, and Asia, and has offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong, Beijing and Tokyo.

The firm brought the buyout industry into the public spotlight nearly two decades ago with its acquisition in 1989 of RJR Nabisco for a total including assumed debt of USD31.1bn, a record that was not surpassed until July 2006.

The firm filed for a public offering last year but the plan was shelved after the onset of the credit crunch and a slump in value for rival private equity firms that had already gone public. Blackstone Group, which launched an IPO last June at USD31 per share, saw its price rise by 15 per cent on the first day of trading, but its stock closed ay USD17.01 last Friday after having fallen as low as USD13.40.

The deal, which is set to value the combined company at somewhere between USD15bn and USD19bn, will offer an lifeboat to shareholders in KKR Private Equity Investors who have seen the company’s shares halve in price over the past 12 months.

The stock closed up just under 1 per cent at USD10.50 in Amsterdam on Friday, down from an opening price of USD24.80 on May 3, 2006 following its IPO. Euphoria about a launch that raised more than three times the USD1.5bn in capital KKR had originally targeted soon turned to discontent about lack of liquidity in the shares on the Amsterdam market.

Under the agreement announced on Sunday, KKR will acquire all the assets and assume all the liabilities of KKR Private Equity Investors. In addition to the 21 per cent of the combined company, the Guernsey firm’s shareholders will receive up to an additional 6 per cent of the equity if KKR units trade below a specified threshold, tied to KKR Private Equity Investors’ June 30 net asset value, three years after completion of the transaction.

The agreement has been unanimously approved by the board of the general partner of KKR Private Equity Investors, which has a majority of directors that are independent of KKR. Completion of the transaction is subject to approval by unit holders holding a majority of the company’s common units (excluding those controlled by KKR and its affiliates).

‘This transaction offers substantial benefits for KPE [KKR Private Equity Investors] unit holders, and it builds KKR for the long term,’ KKR co-founders Henry R. Kravis and George R. Roberts said in a statement.

‘Going forward, KPE unit holders will benefit by being owners in a diversified asset management business that generates regular distributions of cash earnings. For KKR, this transaction provides us with additional capital for our business. Moving forward with a public listing will allow KKR to do what we do best – grow companies around the world and produce solid returns for our investors from a larger platform and a deeper capital base.’

The independent directors of KKR Private Equity Investors said in a statement: ‘KPE’s independent directors believe that this transaction is in the best interests of KPE unit holders. The transaction will create a partnership with a more diverse asset base in terms of strategies, geographies and companies; allow for the regular distribution of cash earnings; and facilitate the purchase and sale of stock in a more liquid market.

‘Through the transaction, KPE unit holders will benefit from direct access to KKR’s entire business as it builds upon its private equity foundation, while retaining significant participation through the contingent value interests should there be a shortfall in the expected value of the combined company.’

Until the completion of the transaction, the listed entity’s units will continue to trade on Euronext Amsterdam. KKR expects to seek approval from shareholders during the fourth quarter.

Citi is acting as sole financial advisor to KKR Private Equity Investors, Lazard as financial advisor to the independent directors and Bredin Prat as lead legal counsel to KPE and the independent directors. Goldman Sachs and Morgan Stanley are financial advisors to KKR and Simpson Thacher & Bartlett is its lead legal counsel.

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