Barbarian No More

The afternoon of Tuesday, July 3, was dead calm on Wall Street. The markets had closed early at 1 p.m., and traders and brokers had long since hustled off to the Hamptons. But at 5:19 p.m., KKR & Co. quietly set off its own fireworks: in a Securities and Exchange Commission filing, founding cousins Henry Kravis and George Roberts signaled their intention to let public investors buy into one of the nation's most lucrative businesses: their $53.4 billion private-equity firm.

The filing, made 11 days after Blackstone Group became the first private-equity firm to float an IPO, signals a low-key return to the public limelight for Kravis, the 63-year-old Oklahoma-born multibillionaire who cofounded Kohlberg Kravis Roberts in 1976. Kravis was the enfant terrible of Wall Street during the 1980s, and his so-called leveraged buyouts of companies like Safeway and Duracell presaged today's private-equity craze. Kravis and his second wife, fashion designer Carolyn Roehm, dominated financial and gossip columns, and their names became synonymous with splashy Wall Street wealth—and, ultimately, hubris. KKR's debt-fueled acquisition binge culminated in the 1988 battle for RJR-Nabisco, the $31.4 billion transaction memorialized in "Barbarians at the Gate."

But in the years since, Kravis and KKR have faded from the limelight. Kravis and Roehm divorced in 1993 (he's now married to Marie-Josée Kravis, a glamorous Canadian economist). By the end of the '90s, Kravis and his colleagues had been overshadowed by dotcom venture capitalists and entrepreneurs—and, more recently, by upstart hedge-fund managers and nouveau private-equity magnates like Blackstone's Steve Schwarzman, who threw himself a $3 million birthday party last February. But through it all, KKR has stuck to its knitting, seeking out large undervalued companies, mostly in Europe and the United States. (KKR has lagged behind its rivals in entering the hottest emerging market, China.) In its prospectus, the firm boasts eye-popping 27.5 percent annual returns (before fees).

Kravis himself has mellowed into something of an industrial statesman. (Unlike fellow 1980s character Donald Trump, he has let his hair go gray.) When KKR and Texas Pacific jointly bid on TXU, the huge Texas utility, they gained the support of the Environmental Defense Fund by promising to reduce the number of coal-burning plants that TXU plans to build. KKR's portfolio now includes HCA, the nation's biggest hospital chain, and the Nielsen Co.

In short, Kravis is no longer the poster child for the successes—and the excesses—of the industry. That distinction belongs to Steve Schwarzman. Blackstone's sale of a minority stake to the Chinese government and its $4.75 billion offering raised red flags in Washington, in part because it shone a spotlight on the favorable tax treatment private-equity firms enjoy. A week before Blackstone's IPO, Sens. Max Baucus (Montana Democrat) and Charles Grassley (Iowa Republican) introduced legislation that would effectively raise taxes on publicly traded private-equity firms to 35 percent from 15 percent. Such uncertainty helped push Blackstone's stock below its offering price after three days.

For private-equity firms, going public has been like traversing a minefield. For the first time, their extraordinary profitability and favorable tax rates have been exposed to sunlight. Blackstone led the way, clearing a path while suffering a few casualties. By holding back, KKR may find itself in a better position: investors in its IPO will be able to process the pending tax legislation into the valuation of the stock—potentially averting the kind of price drop that has bedeviled Blackstone. Unlike Schwarzman, Kravis and Roberts have pledged not to sell any of their own shares in the offering. Two decades after loudly bursting onto the public stage, Henry Kravis is finding there can be advantages to being second.