Kohlberg Kravis Roberts & Co (KKR) will pay out more than US$837 million in fees to investment banks for last year, more than any other private equity firm, in an unprecedented year for leveraged buyouts.
Henry Kravis and George Roberts' firm paid three times more in the first 11 months of last year in fees to securities firms than it spent in the whole of 2005, according to data compiled by Thomson Financial and New York-based research firm Freeman & Co. KKR spent the money on takeover advice, arranging loans and initial public offerings for companies in Europe and the US.
Private equity firms logged a record US$699 billion of deals last year, according to data compiled by Bloomberg, fueled by a combination of record fundraising and cheap debt, which they use to finance takeovers. The spate of deal-making will continue as firms target larger publicly traded companies, bankers say.
"The financing is there," said Larry Slaughter, who heads JPMorgan Chase & Co's team in London that advises buyout companies in Europe. "The appetite is certainly there."
Firms may break the record for Europe's biggest buyout with a deal that surpasses 40 billion euros (US$53 billion) this year, he added. The firms use a combination of debt secured on the companies they buy and money from their own funds, their private equity, to pay for takeovers. They then seek to improve profit by boosting sales, selling assets and cutting costs before selling the companies within less than five years.
New York-based Blackstone Group LP's takeover of Equity Office Properties Trust capped a record US$326 billion of takeovers announced by private equity firms in the US last year, according to data compiled by Bloomberg. The firms announced US$216 billion of European purchases, including the 7.6 billion-euro takeover of Dutch publisher VNU NV by a group including Blackstone and Kohlberg Kravis Roberts & Co in July.
KKR and Apollo both paid the most in fees because they sold shares in buyout funds to the public. KKR, which raised a US$5 billion fund in May, paid out US$340 million in fees for stock sales last year. Apollo, which raised about US$1.9 billion in a fund IPO, paid out about US$160 million in fees, according to Freeman. Shares of both funds are trading at less than their IPO price.
Blackstone, which agreed to buy Equity Office for US$36 billion including debt, paid the most for mergers advice in the US, handing out US$165.5 million in fees, almost two and a half times as much as Fort Worth-based Texas Pacific Group. In Europe, Permira Advisers Ltd, manager of the region's biggest fund, disbursed US$305 million in fees, up from US$179 million in the whole of 2005.
As a whole the industry, which accounts for about a quarter of all takeover activity, is poised to pay a record US$11 billion in fees to banks led by JPMorgan.
Banks can profit from buyouts over a number of years: Morgan Stanley advised Texas Pacific Group and CVC Capital Partners on their ?1.72 billion (US$3.4 billion) takeover of UK retailer Debenhams Plc in 2003.
Morgan Stanley also received fees for arranging ?1.3 billion of loans to fund the deal.
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