KKR listing still bad for shareholders: Margaret Doyle

-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

By Margaret Doyle

LONDON (Reuters) - KPE (KKR.AS: Quote, Profile, Research) shareholders have paid dearly for their close relationship with KKR. Floated at 25 euros a share in 2006, the price has plummeted to 5.77 euros. Not so long ago it was even worse.

Now KKR is proposing to change the already complex structure by swapping KPE shares for 30 percent of new KKR -- a bigger percentage than last year's offer but still cold comfort -- and to list this company on the New York Stock Exchange within a year.

One of the original justifications for private equity to go public is to provide the business with permanent capital. However, it also gives KKR's founders, Henry Kravis and his cousin George Roberts, now both in their mid-sixties, a chance to cash in.

KKR has probably done enough to persuade KPE's independent directors to approve the deal. Institutional shareholders holding 44 percent of shares have already agreed, so this time the deal should go through. However, shareholders in listed private equity (PE) fund have not had a happy time.

It isn't only KPE shareholders who are nursing large losses. The shareholders in rival Blackstone (BX.N: Quote, Profile, Research), which floated in June 2007 before the PE game was up, and Fortress Investment Group shares have also tanked.

As with investment banks, the risk is that gains go to the insiders and losses to outsiders. KKR expects that 40 percent of carried interest, i.e. much of the income of the listed company, will go to its own staff "consistent with other publicly traded alternative asset managers."

The big buyout model, where KKR made its name, is over for the foreseeable future. It relied on loading companies up with lots of cheap debt that flattered returns to equity, but banks that have been burned by big PE company writedowns are tightening covenants so that they will have the whip hand in future restructurings.