The New Tycoons

by Jason Kelly

  Having spent most of his adult life so far at KKR, Nuttall is well indoctrinated, to the point where he, too, thinks constantly about KKR’s legacy. “Firms that found industries tend to get passed by,” he said. “We need to make sure that doesn’t happen. We all walk around with that anxiety, and that’s good.”

  Nuttall is a wunderkind in a house full of them. William Sonneborn, who runs KKR Asset Management, is 42 years old. Frederick Goltz, based in San Francisco like Sonneborn, is 41.

  Sonneborn arrived at KKR through an approach in early 2008 by Nuttall, who initially wanted to explore a KKR-sponsored employee buyout of money manager TCW, where Sonneborn was president. A phone call prompted a visit to 9 West, where Nuttall quickly determined that he didn’t want to buy TCW, but he did want to hire Sonneborn. He quickly introduced him to Kravis and, with his blessing, invited Sonneborn to the firm’s annual firm meeting, which happened to be taking place a couple of weeks later not far from where Sonneborn lived.

  That’s where Sonneborn got the full picture of KKR. He arrived at La Costa—a resort in Carlsbad, California, which KKR owned through a real estate partnership, that was the regular site of the annual meeting—for more than two dozen interviews with various partners, and his initial meeting with Roberts. One of his most striking impressions was numerous KKR executives in various states of injury incurred through the sports portion of the meeting. “These were, after all, very competitive, type-A people,” Sonneborn said.

  The sports component was relatively new to the meeting, and a brainchild of Goltz, by then a 12-year veteran of the firm who was in KKR’s first analyst class. Looking for a way for himself and his colleagues to blow off steam, he’d cast about for the right sport and chosen soccer. Roberts, perusing the agenda ahead of time and showing how deep he was willing to get into the details, questioned Goltz’s decision, worried about too many people getting injured and insisted he offer volleyball as well. Goltz acceded to the boss, but noted later that all the injuries, including broken fingers, came from the ranks of volleyball players. “The problem is, you can’t really gloat with George,” he told me.

  Goltz’s deep affinity for Roberts dated back to a time when he joined a firm that had a total of 22 executives. A native of western Pennsylvania who went to Wall Street after the University of Pennsylvania (he also earned an MBA at INSEAD after joining KKR), he briefly tried to convince Roberts to let him stay in New York. Roberts insisted the job was in California. Goltz joined an office of less than 10 people, which at the time had a single laptop that whoever wanted it had to sign out for the weekend.

  The firm meetings then were held in Vail, since the two dozen participants could stay at some houses there owned by Kravis and longtime KKR partner Paul Raether. A defining moment for Goltz at his first gathering was a high-stakes poker game where “the house” extended him and a few others credit for their bets. Goltz, then a brash young man, lost badly. As he left for home, he wondered if the debt was real. Then he got the bill. “It wasn’t about the money,” he said. “It was about the lesson. Ultimately, you’re accountable.”

  Goltz went on to co-head the firm’s energy business and then raised his hand for a new effort in 2008: KKR’s attempt at a dedicated fund for mezzanine lending, the high-interest debt used in leveraged buyouts or by companies who can’t get traditional bank loans. The decision to pursue the business was classic KKR. “The amount of time we agonized about getting into the business was measured in years,” Goltz said. They finally chose mid-2008 as the entry point, only to watch the world collapse around them. “What looked like a straightforward process became a three-year process,” he said. Goltz suffered through dozens of fruitless meetings with would-be investors paralyzed by the global credit crisis but interested to hear KKR’s take. When the world right-sized, he was finally able to raise the money, and in late 2011 KKR announced a $1 billion mezzanine fund.

  Sonneborn and Goltz both said the effort, along with a similarly tortuous path to an infrastructure fund launched around the same time, epitomized the firm’s ethos, one that largely values an excruciatingly methodical approach that at times leaves it behind its more aggressive competitors. “We’re deliberate in making a decision and then dogged,” Goltz said. “As transformative as the last 10 years have been for the firm, it’s not like we’re going catch as catch can. That is just not in the DNA.”

  So it’s left to Goltz and Sonneborn and their ilk to fiddle where they can. Sonneborn’s relative newness, his responsibility for the most recent business expansions, and working in an outpost in San Francisco give him license to try new things. While the office has the signature KKR touches—the 50th-floor office provides views of the Pacific Ocean looking over the Golden Gate Bridge, making 9 West’s vistas seem almost quaint—Sonneborn is pushing the envelope. In March 2012, he abandoned his office to sit on a newly expanded trading floor to accommodate the growing non-private-equity business. “We’re trying new things,” he said. “We have younger people and newer businesses.”

  That’s balanced by peers who’ve spent decades with the firm. Michael Michelson, the co-head of North American private equity, joined the firm in 1981 after working with KKR as an outside lawyer at Latham & Watkins; his fellow co-head, Alexander Navab, joined in 1993. Raether, who heads the firm’s portfolio management committee, arrived at KKR in 1980.

  In 2009, Kravis and Roberts decided to elevate Todd Fisher, who joined them in 1993, to the newly created position of chief administrative officer. The process of getting Fisher into the job wasn’t easy. He’d initially led an effort to hire an outsider to fill the job but the two cousins ultimately decided they wanted someone internally to take it. “It was a bit of a shock to the system,” Fisher said. “I couldn’t tell if it was a promotion or a demotion.” Kravis separately conceded to me that he and Roberts had a hard time giving responsibility to Fisher and other senior managers, a tendency Fisher was well aware of. “It was not an easy set of conversations,” Fisher said. “It involved a lot of people I was going to have to interact with and that I’d have a say over what got done. They swallowed hard and said, ‘We want to do this.’ ”

  Fisher now has responsibility over legal, public affairs, and finance. He gets a chance to shape the future of the firm, all the while shaping KKR in the mold of how it began. “We were operating as a boutique and we were changing ourselves into an institution. How do you add 600 employees to 300 and retain your unique culture so you don’t get consumed by the culture of people coming in?”

  The long tenures of the majority of executives, coupled with Kravis’s and Roberts’s role in hiring just about every one of them, mean the cousins have the ability, and use it, to call up just about anyone in the firm, at any time. “Regardless of how neat the org chart looks, they reach down deep and talk to people they’ve known for a long time,” Goltz said. That serves to give managers an extra incentive to keep the two CEOs appraised of all the important things going on.

  Going forward, one potential scenario has Kravis and Roberts ceding the CEO duties to another pair of executives, both of whom would likely be long-time KKR members. The cousins are likely to replicate the bicoastal scenario that has seemed to help balance their own leadership of the firm and, given the evolution into non-LBO businesses, at least one of the pair would come from outside the private-equity group.

  Kravis insisted to me that no decision had been made as to what the post-HRK and GRR landscape would look like in terms of organizational structure, specifically whether it would be a single CEO or a couple of chiefs. Even with Kravis’s “deep bench,” there is simply no way any one person, or pair, will bring exactly what the cousins do. For a couple of guys under six feet tall, they cast long shadows.

  Leaving Bear Stearns also made the founders focus on the type of firm they wanted to run. On what would be his last day at the firm, Kravis showed up from a business trip to find his office locked, with a guard posted outside. Kohlberg’s resignation earlier, and the announceme
nt that Kravis and Roberts were leaving as well, triggered Bear Stearns to clear out Kravis’s desk and retain his files. Thirty-five years on, he still told the story with some indignation, and in detail, right down to the accent of the security guard.

  Their uncomfortable departure, and the whole experience of working for someone else and then at a very young age deciding not to, have made Kravis and Roberts near-obsessives about the culture of the firm. During one interview, Kravis mentioned twice that I should see the cultures and values list that the firm hands out; it’s prominently featured in the firm’s annual report.

  Over the course of more than a dozen interviews with KKR executives, the message was startlingly consistent from all of them, who swore they hadn’t been coached. They chalked it up to Kravis and Roberts, who relentlessly drive their own personalities into the fabric of everyday KKR life. The work ethic is Midwestern humble can-do infused with a hearty dose of Wall Street ambition. KKR is a firm of strivers.

  One of Kravis’s favorite interview questions is about what an applicant has read. In a business school twist, he asks candidates to describe their personal balance sheet—that is, what they perceive to be their assets and liabilities. He said he presses anyone who comes to see him to show they are well-rounded; he assumes if they’ve gotten to this point they’re smart. He was intrigued by Joseph Bae, who now runs KKR’s Asian private-equity operation, because Bae had debated on whether to pursue a career as a concert pianist. Marc Lipschultz wrote an in-depth paper in college on Dante. Both men now serve on KKR’s management committee, the group involved in all major firm decisions.

  “It’s a much longer process to hire people,” Kravis said. He and Roberts insist on candidates meeting as many people as possible before they extend an offer, to avoid the perception that anyone is “Henry’s guy” or “George’s guy” and therefore starting at an advantage that quickly sours. “We want people to come in with the most wind at their back.”

  Roberts, knowing the interviewing rigor of his colleagues, uses his time as a sort of KKR personality litmus test. He presses interviewees to talk about a failure that affected them, even if it wasn’t of their doing, sometimes as personal as a parents’ divorce. Goltz said he walked out of his interview with Roberts having not talked at all about business. “The whole conversation was about my family and how I grew up,” Goltz said. “He was much more concerned about, ‘Is this a person I want to work with?’ ”

  That approach has manifested itself for anyone with hiring responsibility as what’s alternately referred to as the “dinner test” or the “taxicab and waiter test.” Because these are men and women who measure everything, a standard interview element is taking the candidate out for a meal and actually counting how many times they say “please” and “thank you” to the staff. Sonneborn said would-be employees have gone through months of interviews only to flunk that test. “We want to know how they treat people they’re never going to see again,” Roberts said.

  There are two baseball bats tucked in one corner of Kravis’s library. One’s a Louisville Slugger from Joseph Plumeri, who Kravis convinced to become CEO of insurance broker Willis, which KKR took private in the late 1990s. The other was a gift from David Knowlton, a long-time investment banker.

  Knowlton first met Kravis in the mid-1980s as a young banker at Manufacturer’s Hanover/Chase. KKR was at the time using other banks for most of its financing; Knowlton’s boss gave him responsibility for establishing a relationship with the firm to pitch ideas for potential deals as well as business for the bank. Knowlton’s first stop was a lunch with Richard Beattie, KKR’s longtime outside counsel at Simpson Thacher. His advice about KKR, Knowlton told me, was: “Call on the entire firm and don’t forget George and Henry.”

  Beattie helped arrange a lunch at 9 West for Knowlton and within a year, they’d worked on two KKR deals. Knowlton developed a relationship with Kravis that has stretched nearly two decades.

  Knowlton went on to start Watch Hill Partners, which was subsequently sold to FBR Capital Markets. In 2011, he created New York-based Three Ocean Partners. Kravis was quoted in the press release announcing the firm and agreed to spend time with Knowlton and the rest of Three Ocean to impart his wisdom. His advice, Knowlton said, to the young associates about how to succeed in an increasingly transactional Wall Street: “Be interesting, be relevant.”

  In a way, the modern KKR culture is a reflection of the maturing of not just the firm, but the industry, and of front-man Kravis himself. Early Kravis was a carouser, according to accounts including Barbarians, which tells tales of a thirty-something Kravis working hard and playing just as intensely, notably riding a motorcycle around his apartment at a birthday party.1 That behavior appeared to crest around the time of the RJR deal, the swashbuckling tactics on display in the deal a reflection of Kravis’s M.O. His wife at the time was Carolyn Roehm, a fashion designer, and the two cut a distinct figure through the Manhattan social scene.

  In the twenty-first century Kravis is a different animal. Now in his late 60s, he has taken on a more statesman-like role. His wife Marie-Josée is said to have a deep impact on that approach. An economist by training, she has served on a number of corporate boards, including LVMH Moet Hennessy Louis Vuitton, the world’s largest maker of luxury goods, and advertising company Publicis. With her husband, she’s deeply involved in the Henry R. Kravis Prize in Leadership, an annual award given in conjunction with Claremont McKenna, Kravis’s and Roberts’s undergraduate alma mater.

  Kravis, by virtue of living in New York and moving constantly within the close-knit, constantly overlapping world of high finance, has an ability to immediately disarm with a charming word. His philanthropy, especially to some of Manhattan’s better-known cultural institutions like the Metropolitan Museum of Art, makes him a bold-faced name. He’s probably the longest-standing major private-equity manager on the New York charity circuit and has served on the board of Mount Sinai Hospital. He’s also been deeply involved in the arts, with a wing at the Metropolitan Museum of Art named for him; Marie-Josée serves as president of the board of trustees at New York’s Museum of Modern Art. Kravis himself also has been involved in economic development in his adopted hometown. He created the New York City Investment Fund and serves on the board of the Partnership for New York City.

  His recent headline gift was a $100 million gift to Columbia Business School, where he earned his MBA in 1969 and is now co-chairman of the Board of Overseers. The gift was designated to fund the construction of a new home for the business school, part of a $6.3 billion project to create a new Columbia campus in West Harlem.2

  Kravis told me he’s opted to focus his philanthropy on groups tied to education, culture, and medicine, three categories that obviously give him a huge set of options. He’s increasingly interested in applying lessons learned in his day job to charity. “I love starting something new or fixing something,” he said.

  KKR’s Menlo Park office sits in a tidy low-rise building along Sand Hill Road, the thoroughfare where the world’s best-known venture capital firms are tucked into similarly unassuming structures, minutes from Stanford University, and less than an hour’s drive from San Francisco.

  The echoes of 9 West are unmistakable throughout, the office itself feels like the more relaxed California cousin to its New York counterpart. Fruit smoothies are served every afternoon. Roberts, while more reserved than Kravis, has a quiet folksiness to him. Unlike at 9 West, where lunch is consumed in waves (senior partners tend to eat early, younger associates later), the Menlo office is small enough that the group eats together. For a time, to encourage conversation, Roberts handed out a list of recommended books and asked his colleagues to deliver one-page book reports (he borrowed the idea from Britt Harris, the chief investment officer of the Teacher Retirement System of Texas).

  The art in Menlo also skews modern, the result of a wholesale changeover when KKR moved the West Coast private-equity team from San Francisco down into the Valley in 1999. In
part to help shake up the firm, he ordered the previous art collection, populated by more traditional paintings from schools like the Hudson River Valley, auctioned off. The office now features far more modern art, from a small Warhol in a conference room near Roberts’s office to several small video installations near the main reception area.

  Roberts recalled how much his colleagues resisted the change. “Everybody hated it at first,” he said. To win them over, Roberts had the woman who had helped curate the collection to come to the office for a mini-tutorial for the staff.

  Roberts is far more understated, and his desire to move to California more than three decades ago wasn’t just about liking the mild climes of northern California. He’s much less comfortable in the spotlight, and slower to warm up than his more gregarious cousin. “He’s intense and much more intimidating at first,” Sonneborn said. “It took me awhile to be myself around him. Now he’s a mentor.” He’s been known to sound the call for a return to basic principles and manners, once reminding the entire firm of the power of a simple hand-written note.

  Roberts has mostly focused his philanthropy near his home base in northern California, serving on the boards of San Francisco’s symphony and ballet. His own entrepreneurial streak led to the creation of the Roberts Enterprise Development Fund, a “venture philanthropy organization,” according to its website.3 In 1990, Roberts was among the first to try to apply private-sector metrics to the world of non-profits and philanthropy. “I was looking to do something that that if we didn’t do it, it wouldn’t get done.”

  He hired a consultant to study homelessness, a pressing issue in San Francisco, where the mild climate and relatively liberal values have led to a high homeless population. The first effort, to financially support homeless women who’d been the victims of domestic abuse, was, Roberts said, “a total failure” because the women often went back to their abusers once they had a little bit of money.