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Henry Kravis

Interview: Henry Kravis
Financier and Investor

February 12, 1991
New York, New York

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You went to Claremont McKenna college in California. How did you find it to begin with?

Henry Kravis: Through Time magazine. My dad was reading an article in Time magazine about the Oxford/Cambridge of the West Coast. It's part of a group of small colleges in Claremont, along with Pomona, Scripps, and Harvey Mudd. I wanted to go to the West Coast. I'm from Oklahoma originally, but I had been in an Eastern boarding school for five years and I said, "I want to see how the other half of the United States lives." I tell people I went there to play competitive golf. I liked it. I used to say the first year was like a prep school with ash trays. I really went there because it was very strong in economics and political science, and those were the two areas that I wanted to focus my future on.

Was this what you wanted to do? Was this where you wanted to be?

Henry Kravis: Business-wise? Yes. I took a circuitous route getting there, though.

I was an economics major in college, and every summer after school, I would drive my car from California, from Claremont men's college at the time, to New York. And I worked on Wall Street. I started out as a runner, which was a messenger. I went to the other runners' homes in Brooklyn and Queens, just to see how they lived, how they thought. They were totally different than I was. My next summer I worked in the research department of Goldman Sachs, and my last summer I was in institutional sales and corporate finance. I thought at the time that I wanted to go into institutional sales, which are selling stocks and bonds to institutions. In those days, which was the 1960s, the salesman was making about $100,000 a year. I thought that was just an enormous amount of money.

But the one thing that always stuck in the back of my mind was what happens if, for some reason, this institutional sales doesn't really work? I mean, if it's not all that it's supposed to be. I said I'm really trained to do nothing. I am trained to be maybe a shoe salesman. The second thing that bothered me: I said, when I am old (that meant 45 years of age), I want to have an office. I don't want to be at some desk yelling and screaming and people hearing what I'm saying on the phone all the time. And I said, that bothers me. These people don't have an office.

Henry Kravis Interview Photo
I then started looking into the corporate finance side, and became fascinated by that. But before I made up my mind what I wanted to do, I wanted to find out how an institution -- a fund that buys stocks and buys bonds -- makes its decisions? How did they make the decision to buy General Motors, or IBM, or whatever company it was. I wanted to find out how the other side worked, because I didn't understand how it was that one time an institutional salesman had a special on IBM, and the next day he'd got a special block of stock on some other company, and another day, another company. How could he know so much about these different companies, other than reading the one page that was given to him by the research department. I was going to find out how the decisions were really made from the other side, and then I'd make a decision about what I was going to do. I was fortunate.

After I graduated from college, that summer, I was given a job at the Madison Fund, which was a closed-end mutual fund here in New York. Ed Merkle ran it. What a terrific guy he was! After I was there for about three weeks, he said, "Kid," (they used to call me kid all the time), "I want you to go out and call on a company called Tri-State Motor Transit, in Joplin, Missouri. And I said, "That's interesting, but who is going to go with me?" He said, "What do you mean, who is going to go with you? You are going to go by yourself. You are going to go meet with the president of this company, you are going to be there by yourself." I said, "Well, I've never done this before." He said, "Well, no better way to learn than trying it." So, I put my questions together, and they reviewed them at the Madison Fund before I went out, and I arrive out there. A man in jeans and a t-shirt picks me up at the airport. Introduces himself and I said, this is the president of the company. I knew that he was worth many millions of dollars, because I knew how much stock he owned, and I said, I just learned a great lesson that you can't tell a book by its cover. I said, "What a good experience this is." I spent the day with him. He then took me to his house for dinner that night, and the next morning I spent some more time with him, and I called back to Ed Merkle at the Madison Fund. I said, "We should start buying this stock." What the company did was, they were in the transportation business, hauling explosives during the Vietnam War, so they were doing very well. I got lucky, and every share of stock we bought, the stock kept going higher and higher. And Merkle thought I was pretty smart.

Then he sent me out to call on a few other companies. I remember calling on Roy Disney, at Disney. That was just a great experience for me, never having met somebody like that. I had read everything that I could before I got out there and had all my questions laid out. I had really thought through what I wanted to ask and, as a result, it went very well.

I then finished that summer, and was going to go to business school at Columbia, to get my Master's. I told the Madison Fund people that I was going to do this, which they knew. They wanted me to stay, but I said, "No, I'm going to go ahead and get my Master's."

I started at Columbia and, after my first semester, I said, "I don't know if this is really for me." I remember being in a class, a marketing class, my first year, first semester. And the professor said, "How many of you want to work for Procter and Gamble?" And everybody's hands went up. And I said, "Oh, my gosh, this is not for me. I've got to get out of here. I'm in the wrong place." I called my dad, and I said, "I'm going to drop out, and I'm going to go back to work for the Madison Fund." He said, "No, you're making a mistake, son." He says, "I think you've gotten the worst over. The first semester is always the hardest at business school. Stick with it. It will always be good to have your Master's." And long story short, I did stick with it.

I asked at the Madison Fund if I couldn't come back and work, though, for the next three semesters, while I was getting my Master's at the same time. They said fine, and I said, "I'll have to work around my course schedule, but I'll try to arrange my courses so that I can do more work with the Madison Fund and a little less work, maybe, at Columbia." I did that, and I was able to call on other companies.

Eventually, the Madison Fund had a company which they controlled. It was the old Missouri-Kansas-Texas Railroad in Denison, Texas. We set up a holding company to utilize the tax loss that was being generated by this railroad. They were abandoning track that went into cornfield, and so forth. Merkle came to me one day, and he said, "Henry, I'd like you to buy companies for Katy Industries. I said, "Well, that's fascinating, but I don't know how to buy a company. I've never bought a company in my life." And he said, "Look, kid, you know how to pick stocks. You buy a company the same way you buy stocks. If you don't like it you just sell it." And that's that. And I thought, well, it doesn't sound right to me, but this man has been pretty good in the stock market, he must know, and he's a lot older than I am. So, I said, "Fine, let's see if I can find some companies." I thought about areas where I could buy small companies, and really build a group. It was the oil service business I picked, because there were a lot of family companies down in Louisiana in particular. I spent a lot of time in New Orleans, and found a number of companies in the surrounding areas, like Houma, Louisiana, and Berwick, Louisiana and Lake Charles. I'd sit in these people's homes, in their kitchens sometimes, eating crayfish with them and shrimp. They'd say, "Where's the guy with gray hair?" They assumed somebody with gray hair was going to come down. "If my company is going to be sold, I'm not going to sell it to some kid here, I'm going to sell it to some guy with gray hair." And I said, "Well, unfortunately, it's me. I'm the only one you get to deal with." And so I bought a few companies. They worked out all right.

Eventually, I left the Madison Fund and Katy Industries. Then ended up at Bear Stearns, in their corporate finance department, where my cousin, George Roberts was working and also where Jerry Kohlberg was working. Jerry had bought a company. It was the first buyout that the firm had done in 1965. I started studying it, liked what I saw. George and I kept talking about it. In the late '60s we started buying a few companies, and in the early '70s. They were all very small companies. George, at that point, was in San Francisco with Bear Stearns, and I was in New York with Jerry. We bought probably seven or eight or nine different companies in the early '70s, culminating in the largest acquisition that Bear Stearns did, which was in 1975. That was a company called Incom International. It was the industrial components group of companies from Rockwell. We paid $92 million to buy this company, and Bear Stearns, I remember, got the biggest fee they'd ever gotten, which in 1975 was $950,000. We decided hortly after that, George, Jerry and I decided to leave the firm. We wanted to do something on our own. Really wanted to concentrate just on management buyouts, or leveraged buyouts, which are one and the same. We said, "OK, lets go off." On May 1, 1976, we formed this firm, and the rest is history.

We got lucky. I think we've had some principles that we've stuck to. Very disciplined investors and very disciplined people there. And that's what's given us the ability to say no. It's one of the most important things at the end of the day, being able to say no to an investment. Even if you've done a lot of work, work will never hurt you.

But once you buy a company, you are married. You are married to that company. It's not like Ed Merkle said, "If you don't like it, just sell it." You know, you've got it. It's a lot harder to sell a company than it is to buy a company. Since we formed the firm in 1976, we've bought some 38 different companies, and we spent about $65 billion, buying these different companies. People always call and congratulate us when we buy a company or when it's announced. I say, "Look, don't congratulate us when we buy a company, congratulate us when we sell it. I said any fool can overpay and buy a company, as long as money will last to buy it." I said, "Our job really begins the day we buy the company, and we start working with the management, we start working about where this company is headed."

And make sure that capital structure we have in place is the right capital structure.

I think that's the reason that we've been successful. It's not just buying the company. Sure, we picked the right companies, we picked the right management and we've given them the right incentive to perform. But most importantly, we've had the management have the right incentives. Management has been an owner, management has had their own equity on the line. They have something at risk. I always like to refer to many managers in corporate America as the renters of the corporate assets, not the owners. "Where have the Carnegies, and the Mellons and the Rockefellers gone?" A lot of them are gone. Our concept is to bring that back. To bring back that ownership. If you have something at risk, you think differently. If you go out and rent an Avis rental car, and you put a scratch on it, you are not going to be that happy, but it's not going to really upset you that much. What you really want to do is get back to the Avis counter before they see the scratch. Whereas if you own your own car, and you put a scratch in that car, you are going to be out there polishing it, and making sure that scratch is gone. You are going to take extra special care. Exactly the same concept if you own the company, if you have your own money at risk.

You start to say, "Do we really need all those people that we have in the company? Do we need as many airplanes?"

RJR Nabisco, for example. We had 81 people in the flight department when we bought the company, and they had eleven corporate jets. Today we have 24 people in the flight department, and we have four planes. We've got one airport, versus four airports that the company had. You think differently.

I'm giving you a very long answer to what appears to be a simple question, but everything was done in steps, and everything becomes a building block. As my mother said to me on many, many occasions, "You've got to build the foundation first." If you build that foundation, both the moral and the ethical foundation, as well as the business foundation, and the experience foundation, then the building won't crumble. But if you don't build that foundation, its not a solid foundation. The building will crumble.

Let me ask the eternal question first. Sitting in Tulsa, trying to make decisions about what to do with your life, you could have gone in a lot of different directions. Why high finance? Why the world of Wall Street and corporate America?

Henry Kravis: Good question. My father wanted me to go into the oil business. He was in the oil and gas business as a consulting petroleum engineer up in Tulsa. He had an incredibly good reputation, which I learned more and more about as I was living in New York.

Everybody would come to me and say, "Are you Ray Kravis's son?" And I would just beam and say, "I didn't know you knew my dad." "Oh, yes, you know, I worked with your dad on this transaction, or on this company in the oil business." And I thought about it, but I said, "Look, as proud as I am of my father, I don't want to be known as Ray Kravis's son. I want to do something myself." And I hope my children will do something on their own. My dad helped me, was there, is a very loving and supportive father. But I said, "I've got to do it myself." As a kid, my mother says to me, "You know, you were always 'me, myself' as a kid. You wanted to tie your shoes when you didn't even know how to tie your shoes. But you had to do it yourself."

So I picked a field where I had a little exposure. Where I thought I could have an enormous challenge, and have a chance to really do some good, to be a pioneer in an area, and not just be like everyone else. That became the field of finance and, in particular, the leveraged buyout field. In hindsight, I wouldn't trade it for anything. It's been just a phenomenal career for me so far, and I don't see any reason why I should change.

What is the challenge in a leveraged buyout?

Henry Kravis: The challenges are several fold.

One, I love the creativity. I love the ability to create a capital structure that is appropriate for a company, no matter what field it happens to be in. I love the ability to make a company more efficient. I love the ability to work with very good managers, and to provide the right incentives for them, and truly become a partner with that management, and make that management take a long view. The trouble, in my opinion, with corporate America today, is that everything is thought of in quarters. Analysts push them. "What are you going to earn this quarter?" We say to the management of companies, "You are here today. Where do you want to be five years from now, and how are you going to get there?" It may very well mean taking a step backwards. But believe me, in five years, we are going to have a company that is much more productive, efficient, and competitive. That's a challenge. One of the problems with corporate America is we're, in many respects, losing our corporate competitiveness in this global environment.

If we can just take a few companies, and use those as models, as examples, to show the rest of corporate America how they can become more competitive, that's what I'd like to do and that's what I hope to do. I'm very proud of that aspect. It's not just "make a lot of money."

Yes, we've been fortunate, we've made a lot of money. Some people say maybe we've made too much money, but its a way to keep score, that is all. What's more important is not coming in to work and counting the money. What's more important is coming in and saying I've got a challenge today. And I want to overcome that challenge. And I want to conquer whatever we set out. And we all set goals for ourselves.

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I've been in a hurry all my life. I've been in a hurry to succeed, and in a hurry to prove myself. Maybe its because my father was so successful in a totally different field, but I found working in a small environment just a great joy. I have, in my partner George Roberts, a person who is the most wonderful man in the world to me. He's like a brother to me. Creating with him, being side by side with him, in whatever we try to do, is a real pleasure to me. And he's family. He's my first cousin also. You might say that both of us got lucky, because it really has worked. It makes it a real joy to come in. We have 16 professionals at this firm, and we've hand picked every one of them. We don't pick them off of a resume. Almost everyone that works here has been on the other side of a deal for us. Either a lawyer, an accountant, or an investment banker, or a banker. So we've seen them under pressure. Believe me, its totally different picking a person who you've seen in the firing line, as opposed to picking him off a piece of paper.

What do you look for in the people you hire?

Henry Kravis: I'm looking for people who are bright, have the highest ethical standards, will not compromise one iota for that. I'm for people who are creative. I want people who will stand up to me. People who are not afraid to say exactly what's on their minds, even though that's probably not what I want to hear. That's what I want.

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I'll give you an example. It really came to light when we were buying RJR. We were deciding to bid or not to bid, and what price we wanted to bid. We'd have sessions. There was George Roberts and myself, Paul Raether, one of my other partners, and four or five associates. We'd sit in my office and, after we'd run all the numbers, we'd talk the thing through. I'd always start with Scott Stuart and Cliff Roberts, they were the two youngest members of the team. I'd say, "What do you think?" I wanted to hear what they thought as opposed to them hearing what we thought. Everything comes from the bottom up. I have a very good interchange. We'd always be the last, George and I, to say what we thought. So, its not a directive saying, "We will buy this company. Run the numbers and prove that we are doing the right thing." It's "Should we buy it? What do you think?" And letting them say what's on their minds.

We want the members of this firm, whether they are associates, or whether they are a partner, to put their own money up in every transaction, just like we ask the management to have their money at risk. We do the same thing here. Everyone at KKR, from the receptionist up front, to all the secretaries. They own stock in every one of our companies. Now, granted, they have it on options, but our people here who work on the transactions put their own money up. You think differently. We want people who are not afraid to take risks, who are not afraid of a challenge. And I want people who are going to be diligent. They are going to ask the tough questions, and they are going to keep probing and keep probing until they are satisfied. Not just "Well, he told me this so it must be right." A little bit like a reporter sometimes, asking questions all the time.

You talk about luck, you talk about principles, and you talk about risk. These are all important areas, I think, for young people to understand something about. I don't think they necessarily think of a Henry Kravis in terms of risk, and in terms of creativity. How important is risk, and do you ever have any self-doubts, and worries about failure or seeing a risk go wrong?

Henry Kravis: Oh, all the time.

We have a fear all the time. But that's what keeps us going, that's what keeps us focused. You have to have a fear. People who say, "I have no fear. I'm not afraid of ever failing," are kidding themselves. Sometimes it's the fear of failure, of not wanting to fail, that makes people as great as they are. I know that's what pushes me, a lot. I've always said -- I say it to my children, "I'm the kind of person who could fall out of a window, land on my head, I might bounce a couple times, and I'm going to come up on my feet. Because I'm going to make myself come up on my feet."

You have to be a little bit of an optimist too, but a realist. And risk is important to take. Not foolishly, not blind risk. But I love the word entrepreneur. I ask students up at Columbia -- I'm on that board, "How many of you want to be an entrepreneur?" A lot of hands go up. I say, "OK, you explain to me, what does that mean?" "Well, I'd like to go to work at IBM." And I say, "You just failed, that doesn't count. How about you?" "Well, I'd like to work at Procter and Gamble," and I say, "You failed." A real entrepreneur is somebody who has no safety net underneath them. That really truly has an idea and has a vision, and sticks to his/her convictions. You've got to have the courage of your convictions. If you did everything by consensus you wouldn't do anything at all. Look at the people that started Kodak. Certainly Mr. Land at the Polaroid company. They all thought he was nuts. The Kodak people went door to door to raise money. And most people slammed the door in this man's face. But he stuck to it.

It would have been very easy for us to shut up shop here at KKR and just say, "Look, it's just too difficult and it's not going to work." But no. We've had some failures of course. Not everything works. I'm in a high risk business. But thank God we've had a lot more successes than we've had failures, and we've only had a couple that haven't worked out. And the jury is still out on those.

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One day, my wife said, "Tell me the three words, that are how you would describe your life. Things that are very important to you." I thought about it for a minute, and I said to her, "Courage, integrity, and commitment." Those are three things that I basically live my life by. She had a seal made, and a box made, engraved in silver, which had those three things written on it. And those three words have worked for me. They don't work for everybody.

But you talk about courage, having the courage of your convictions, the ability to face failure. As I said there is nothing wrong with failing. Pick yourself up and try it again. You never are going to know how good you really are until you go out and face failure.

Integrity, that's a gift. If you don't have integrity, you have nothing. You can't buy it. You can have all the money in the world, but if you are not a moral and ethical person, you really have nothing. You only have one thing to sell in life, and that's yourself.

Commitment, to me, is the ability to stick to something. You make up your mind. I hate people that always say they are going to do this, they are going to do that, and they never do it. I say, "Quit talking about it, just go do it. I don't want to hear about it. When you've done it or you've made an attempt to do it, that's fine."

You know, kids always say "I can't do it." They don't know whether they can do it or they can't do it, until they try it. But its easy to say. "I can't do it? I can't ski? I can't ride a bike?" I tell my kids, "Let's just take the word out of your vocabulary," until you've really made an attempt to try it. If you've really tried something, and you've given it your best effort, that's all I ever ask of you.

But make a commitment to do something. You have a vision? Fine. Its not going to be a straight road to the goal line. Its going to be a lot of zigs and zags, and you know, throwing for some losses. I say to my children, "Be on that field. Don't sit on the sidelines and focus on what other people are doing. And don't be on that side line putting your leg out trying to trip the runner as he comes down the side. You get on that field and you play, and you wear the same uniform, and you get banged up just like everybody else. And then you are going to know what it's like." It's easier to criticize. Anybody can criticize. But you get on that field, and you play, and you are going to have a totally different respect for yourself, and a different sense of worth. very important to do that.

I tell my children, "Don't worry about what the other person is doing." A lot of people are always worried about what somebody else is doing. I love people to worry about what I'm doing. People seem to know more about what I'm doing than I know about what I'm doing. I hear it all the time. I guess as you get luckier, and a little more successful, you hear a little more of that. I just quit worrying about what other people are doing. Because if you are worrying about what other people are doing, you are not doing anything yourself. You're on the sideline, and you are just watching. You need to know what your competition is doing, you need to know what the environment is like, but don't dwell on what other people are doing. I love people who dwell on what I'm doing, particularly if they are in our field. Because I'm out there behind the wheel driving along, and they are trying to catch up, and that's great.

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Someone who is in your position is subject to criticism. What you do is often questioned. How do you handle criticism?

Henry Kravis: At first not very well. I took everything very personally. I'd read every word. Finally, I said, "Most people don't remember what they've read to begin with. They only remember a trend. As long as you are honest, and as long as you are reasonably successful, they will remember that." I remember someone called me one day, right after the heat of battle at RJR. We were getting beaten up pretty badly, in the press, because the other side had really gone after us, planting all these stories. We had always taken an attitude of not talking to the press. We just said, "Look, our record speaks for itself, and we will just let it stand." I think that was probably a mistake in RJR, because there was no rebuttal from our side. Pretty soon, people started to believe the other side, and we learned a lot from that. It was very hard. People would tell me, "Forget about it. Day-old newspaper is good to wrap fish in."

It was hard. It was very hard for me. I want people to like me. You know? I wanted people to like what we did. Because we worked hard at it. It's like any creative person -- you want everybody to feel like you feel about it. Well, not everybody is going to have the same feeling, and so, it was a very hard thing for me to learn to live with.

Today, I've learned to try to educate a few good reporters. If I've got a few good reporters that really understand what we do, as opposed to pulling something that was wrong out of a computer, and then compounding it by writing something more that's wrong. Pretty soon the whole story is all wrong. If we can educate these people, then I'm going to have a fair chance at getting my point across.

But the press hasn't changed. I've gone back and read stories about J.P. Morgan, and how he hated the press. Here was a man that was enormously successful. J.P. Morgan was an incredible financier in his time. People didn't like him. They thought what he was doing was wrong. He was making very large acquisitions, and also bailing out a lot of companies by being the provider of last resources, practically. He lived with it. I'll live with it. Nothing is going to change.

Who were your heroes? Who are your role models?

Henry Kravis: One person that is my role model is my father. I just beam with pride about him. He is now 89 years old. He plays golf all the time, and he's got lots of friends, He's a man who taught me something very important. And that was -- give back to society what you've taken out. I've been really fortunate that way, glad I learned it at a very young age.

Yes, I've been successful, and I've been lucky. Maybe I've made more money than I deserve, but some of the most important moments in my life, and moments that have given me the most pleasure, have been the times that I've been able to make a major contribution in money or time and effort to those less fortunate. Whether it's a drug program that I've started here in New York, with funding from the federal government plus my own money -- and if it works we will roll it out nation-wide -- to being chairman of the public television station here, and being involved in education, which is very important to me. Our future in this country is in educating children. I'm very involved with the arts, whether it be the Metropolitan Museum or the New York City Ballet. I've also been very involved with Central Park, trying to make it more beautiful for the people who live here. It's our 834 acres of green space, we've got to have it for everybody.

My father is my hero because he taught me the joy of giving. The joy of people, of getting to know a lot of people and having binding friendships. That's important.

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Another hero, whom of course I've only read about, is Winston Churchill. A real renaissance man, incredible leader, incredible thinker, prolific writer, great orator, artist. Just a wonderful, wonderful man. They don't make them like Winston Churchill any more.

I don't have a lot of role models, per se. I've set my own goals and my own objectives. What's really important to me is that foundation that my mother gave me. That's what I try to live by, as opposed to saying "I want to be like that person." I don't want to be like anybody. I want to be like me. I just like the fact that I can read about these other people, or I have this wonderful input from my father, that enabled me to be the way I am. That's what's important.

I had a teacher who was a great influence on me, when I was in boarding school at Loomis, Jim Wilson. He was my economics teacher and he was also my dorm head. I didn't know what economics was before I took this course. I was really moved by the course, I was moved by him. That's probably one of the reasons I chose the field of business. I enjoyed this course that I had and the challenge he gave me to learn about economics, learn about supply side economics, and demand by the consumer, and wage push, inflation, and so forth.

I saw him last night. Every year, he brings his economics class down to New York, and I give them a dinner after they've spent the day going around to see the investment banks. I talk to them for a couple hours, and let them ask questions, and I really just enjoy doing that. That's another person who had a great influence in my life.

What were you like as a school kid?

Henry Kravis: I wasn't a great student. I was all right. In the courses I liked I did very well. But the courses I didn't really care about, I don't think I did quite as well as my parents probably would have like me to have done. I did very well in the political science classes, very well in the economics and finance courses. I was eager to learn everything that I could.

More importantly, I was eager to apply what I learned. That's why this job at the Madison Fund was so important to me. I look back at how much I really learned as I was on the job. There is no substitute for on-the-job training.

I loved athletics in school. In my boarding school days, I played football, was captain of the wrestling team my last year in high school, and I ran track. I've always been very competitive. The more competition, the happier I am. Just tell me I can't do something, and that's all I need to hear, and I can really get fired up to do it. It's the easier things that maybe I get a little lax on. I always liked the competition at school, I like the competition in sports. I liked the team work. I loved being a member of the team.

If you look at track, and you look at wrestling in particular, they were individual sports, but part of a team. I didn't have to rely on anybody else. Nobody else let me down there. As fast as I was going to be as fast, and I wrestled as well as I could wrestle, and if I lost, that was my own fault, I had nobody to blame but myself. That was something I learned in school. Don't look for excuses, you know? You have nobody to blame but yourself. Don't try to say it was his fault or her fault, because, in the end, you have to be held accountable.

I had a lot of friends in school. I loved friends, I was very social in school, and as I got to college, I probably spent more time going to parties than I probably should have, but it was all part of it. I got out to California, and I loved to play golf. When I was in high school, the school didn't have a golf team, so out at Claremont, I went out for the golf team my freshman year, and I made it. I played four years of competitive golf in Southern California. They elected me captain my last two years, and I loved that challenge, playing 25 to 30 matches a year, and four or five tournaments. I wasn't great, but I was all right. I guess I got down to sort of a one handicap. These kids today are scratch or better. It was a great experience. It was also a humbling experience to play against schools like Southern Cal, and Stanford and UCLA. We played against them every year. Many of those kids went on and turned pro. But being able to beat them sometimes, that was a challenge that I always loved.

Looking back, do you have any favorite books, books that had an impact on you?

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Henry Kravis: There was a book called Escape from Freedom, that I read in school. It talks about people thinking they want total freedom, wanting to do whatever they want to do. In reality, people want bounds, people want to be able to hold on to something. They want to know that this is the outer limit. It's like a child growing up. A child wants direction. They tell you, "You know, dad, you don't know what you are talking about." But in reality, they want you there. That book had a huge impact in the early part of my life. Just talking about what freedom really means to different people. I had a chance to think through what that meant to me.

I love reading history books. I was reading about Napoleon, and all of his great conquests, or reading about Churchill, and the leadership that he provided during the war and after to Britain. Those are books that had an impact on me. I try to relate. I wonder, how would I have acted. How would I react during the times that they were in if I had the same challenge that they had. I just marvel at how President Bush is handling the war. That takes guts. I've got a lot of admiration for him and how he's handled this.

Do you ever take a step back and second guess yourself? Do you have any regrets, looking back on your career so far? Things you would do over again or would do differently?

Henry Kravis: My life, yes. My career, no.

My career, I have really just loved it. It has been a challenge. There is something new every day for me. I mean, the fantastic thing about the career, it's not just buying and selling companies. It's the fact that we've got a portfolio of companies, that range all the way from hotels and motels, to television stations and cable TV companies, and oil and gas, and consumer products, and industrial products. And anything that I want to know more about, I have that opportunity. It's right there, it's in our portfolio. And I can spend the time at a factory or with the management and learn as much as I want. And so that's wonderful, and that's a real challenge. You can't get bored doing that.

When I went through school, I was in a hurry. I was an economics major as an undergraduate, and I was a finance major in graduate school. I was in a hurry to succeed when I got out in the business world. I'm sorry I didn't take more courses in the humanities and in history and in the arts. I'm trying to make up for it now. I have a reasonable art collection, and I try to study 18th and 19th century European painters and art. I spend time with the New York City Ballet, and I enjoy the ballet. I'm sorry I didn't read more history. Things always repeat themselves. History is a great teacher. It's a great lesson for the future.

What keeps you going?

Henry Kravis: I like to succeed. I don't want to fail. And I said to you earlier, the fear of failure drives a lot of people. That probably is part of what drives me. I know there will be things that I'll fail at, but overall I don't want to be a failure. And I come back to the challenge again. You know, why am I in a hurry? Why do I work as hard as I work? I do it because I enjoy it. I don't have to do it, obviously. But I enjoy it. I enjoy creating something -- financial creation. I'm not an artist or a musician, but creating something that hasn't been done before, I enjoy that. We have a lot of people at this firm, and we are all built more or less alike. We love to succeed. There is nothing that gives greater pleasure than success.

How do you measure success? How do you measure achievement?

Henry Kravis: I measure it by accomplishing the goals I set out for. They can be goals that are monetary goals. They can be goals that are personality-related. I'm going to get this person, this manager, to think differently. I'm going to get this person to start thinking longer term. I'm going to get this person to be more competitive, to have a different purpose. If I can accomplish those kinds of goals, that's success. Money? That's a way to keep score. Its important, but believe me, its not the end-all at all. You get to a certain level, and how much money can you spend? What's more important is, I don't want to let down our people here. I don't want to let down the people in the field. We have owned 38 different companies.

Today, we have a portfolio of some 15 or 16 companies. We have hundreds of thousands of employees in these different companies, with about 40 billion dollars in revenue. They are counting on us. These people's livelihood depends, in part, upon decisions that we make. I don't want to let those people down. I want to do what I hope is the right thing. Yes, there is some pain going through it. Yes there is some terminations early on, but in the long run, if we can make a company more competitive, and leaner, and more profitable, they eventually are going to hire more people, because they are going to grow. And they are going to be able to make acquisitions, down the road, sensible acquisitions.

That's another success. That's another goal we set out for ourselves. If we can accomplish that, and make even a handful of companies more successful, and more competitive, then those can be used as models as we go forward.

Why the leveraged buyout? What inspired that role you seem to have assumed in American economic life?

Henry Kravis: I wanted to pick a niche. When we started in the late '60s. we bought family companies that said, "Look, I've got an estate problem. I've got a son in the business, maybe he's good, maybe he's not good, I really don't want to sell out to big XYZ company because I like the fact that our company has been a family company for 50 years. I don't want to go public, I don't want to have a public company."

We created this concept, letting the management basically have their cake and eat it too. Let its owner sell out and, at the same time, continue on in a management role, with an ongoing equity stake. The family may have owned 100 percent of the company initially, and we may buy the company and let him and his family own 20 percent of it and continue to run it. He's solved his estate problems, he's solved the succession problem in part, because we are there now, and he doesn't have to make the tough decision. A lot of fathers can't make that decision. They know their son or daughter is not really up to the task, but they don't want to be the one to make that decision. They want somebody in between to make that decision. They can say, "It wasn't my decision. I sold the company, and it really was up to KKR, or whoever else bought the company." So LBOs in those days were called management buyouts, because the management was such an integral part of it. The concept was really developed to take care of estate problems.

From that point, it grew to buying divisions and subsidiaries of public companies, when a public company decided it didn't want a business any more, but they didn't want to sell it to a big company. It was a way for the management to become an owner, run their own show. That led to the first public company buyouts. was Our first acquisition of a publicly owned company was A.J. Industries on the New York Stock Exchange in 1977. The purchase price was $26 million. That's how it developed.

You made some of the biggest deals in the history of this country. What were you thinking about? In RJR Nabisco, you were sitting around the table talking about billions of dollars. What's going through your mind?

Henry Kravis: It's funny. I never thought that was such a big deal when we made the offer. It wasn't until I woke up after we bought it and thought, "That was really a big deal." That wasn't the issue. That isn't how we look at things. We didn't say, "Gee, we want to buy the biggest company in the world, so we've got to own this company." No. If the company didn't make sense, or the price didn't make sense, or we couldn't do the financing on the proper terms, we wouldn't have done it. It would have been as simple as that. We had other issues on our minds.

First of all was the smoking issue. No one at KKR smoked. And so we had to wrestle with that. Did we want to own a company that was in the tobacco business? If we end up buying a company of this size, and this visibility, it had to work. Because it is under a microscope, and everybody in America is waiting for this thing to fail. And we never doubted that it would succeed. We knew that it would succeed. We wanted to make sure the capitalization of the company was proper so that if there was a hiccup in the earnings, it had a fallback.

The companies that have gotten into trouble are those that have razor thin margin for error. Murphy's law -- something is going to go wrong. Things never work out exactly as you plan them. You've got to make room for the possibility that things will not be exactly as you had hoped or as you had planned. We built that into that capital structure. Visibility was a big issue with us. What did it mean to our families? What did it mean to our private life? Particularly George Roberts and myself. It was something that both of us wrestled with a lot. How was Washington going to view this? How would this be accepted by senators and congressmen? Were they going to be after us because we had made this large acquisition? We didn't start it. It was started by the management of the company. We came in and succeeded in buying it. These were the things that went through our minds, much more than "Gee, it's $25 billion." We said, "Because it's $25 billion, and because we are borrowing $14 billion from the banks in bank debt, then if this fails, we don't want to be the ones known to brought down the banking system. We have to make this work."

On that day, at that moment, when the bid was accepted, when the deal was closed, how did you feel?

Henry Kravis: There really were two days, two points in time that were very important. One was the day after a very long, long day and all night we had been up. We thought we had an agreed-upon deal. The other group came back and started raising their bid. That threw the board of directors into turmoil. They spent from eight in the morning until seven that night debating. Did they want to take Ross Johnson/Shearson's offer, or did they want to take the KKR offer. I felt enormous relief whey came out and said alright. You won. They'd come out earlier and said, "We will pay you an enormous fee (I think it was something like 250 million dollars) to give us two more weeks to decide who to pick." We didn't blink an eye. We said, "Absolutely not. You've got until today and that is it. We want to own this company. We are not in it for the fee business. We are in it because we want to own this company. We are not giving you any more time at all." That was all documented in Barbarians At The Gate. In hindsight, we stuck to our principles. We are in the business of buying companies and owning the equity, and putting our own money up, and making the company better. That's the opportunity we wanted. We stuck to it, and we ended up being successful in buying the company. I felt great relief and great excitement for our whole team, because this firm was brought so much closer together. Our advisors were brought much closer together with us. Particularly Dick Beattie, who was our lead counsel. He's the chairman of Simpson, Thatcher, and Bartlett, and just a wonderful human being. And that was great pleasure for us. Our accountants lived with us, from Deloitte, Haskins and Sells. So that was all great excitement and relief. The second time was the day that the tender offer was actually accepted and we had enough shares in and we actually took control of the company.

I guess there was a third period, which was in between, which was the day that the bank financing had to be in, and we were concerned. Would we get enough bank financing? I had gone all over the world. I was in Europe, and I had been in Japan, and in the States with a couple of my associates, raising this bank financing. And it was the day that that had to come in, and we had large amounts of commitments coming in. And we far exceeded what we had thought, and that was a great revelation. Because if we didn't get that, we didn't know what we were going to do. We went to every bank in the world practically of size.

What did you say to your father that day, when the deal was done?

Henry Kravis: The day that the bid was accepted was the day before my mother's 80th birthday. I was supposed to go down to Florida, and I had to call them, and I said, "I can't come down the night before, because we are in the middle of this thing, but we will be down for your birthday." It was just great joy, and great excitement for me to call them, and to tell them that the bid had been accepted. And to call my wife and my children and tell them. That brought to me a great emotional feeling from within. That the people I love most in the world, were as excited as I was about that.

When you have a bid accepted, or you get a transaction closed, the actual closing is anticlimactic. It's the time that the bid is accepted, or the time that you get the financing, as in the case of RJR. In the others it wasn't as big a concern because they were smaller, and there was a lot of money available in those days. How times have changed today. I remember we were buying Storer Communications, and we had a bid that had been accepted, and a signed contract, and out of left field comes another group, and they made a higher bid and started a tender offer.

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The board called a halt to both of us, and said we are going to have you both down to Miami, and we are going to decide. We changed our bid, and I said to the board, you have until five o'clock today to accept our offer. One of the directors of Storer said to me, "What happens if we go past five? I said, "You go past five, our offer is withdrawn. Because at five o'clock, I am leaving here and getting on an airplane to Nairobi. My wife has been in Africa five days ahead of me., I was supposed to have gone with her. Because you have now opened the bidding up again, after we had a signed contract with you, she has gone ahead." This was a vacation that we planned for several years. And I said, "You can make your decision, you make up your mind in that period of time." If you give them more time, they are just going to fill the time anyway. So they said, "We will do the best we can."

Sure enough, at five o'clock they came back and said, "You won." And I said to our attorneys who were down there and a couple of my associates, "You've got to stay and get the contract signed again," and they said, "Fine, we'll do that." And I went out to the airport, and got on the British Airways flight, and I was sitting down, and just ordered a drink, and was just feeling great. Finally this big load off my shoulders. The stewardess came up to me, and she said, "Mr. Kravis, the captain would like to see you in the cockpit." So I went up to the cockpit, and the captain said to me, "The pilot of your plane is right off your wing, and he's got the group of your people from KKR and they want to talk to you." The captain, our plane came on the radio and said,

"Henry, I just wanted to let you know, the guys said we've got the transaction signed up and go have a great vacation, and relax." And it's a feeling, obviously, you can see, I get choked up even re-telling the story. Every time I talk about that. Or just that feeling, you know, up there in the air and that camaraderie, and just that excitement of wanting each other to know. It's all part of the teamwork. And it's one of the great pleasures I get as that team, and that teamwork.

I like to describe KKR as a football team with a two-headed quarterback George Roberts and myself call the plays. Everybody has got a position to play. Some play tackle and guard, and some play halfback. Not everybody can carry the ball, but if the people that are on the line don't play their positions, then the quarterback or the halfback or the ends are going to get tackled, and we are not going to go to the Super Bowl. If everybody knows the role they've got to play, and everybody is compensated according to how the team does, not just according to how you do as an individual, we're going to do much better. That's exactly how we've run this firm. We run it as a team. Not only does everybody have a say, but everybody knows what they have to do. We don't have to be telling people all the time what they have to do, these are self-starters at this firm.

You come out of Tulsa, Oklahoma, and you end up at 57th and Fifth in New York. What have been the obstacles. What have you had to overcome to get here?

Henry Kravis: The first thing I had to do was learn how to use the subway system. I couldn't even figure out how to get from Wall Street back uptown. When I was first down there, I took the wrong subway and ended up in Queens. That is a mechanical obstacle that I had to overcome.

I think one of the most important things that I've had to overcome is jealousy from the outside. Of learning that not everybody is going to be my friend. They will tell you they are, they will look at you and say one thing and then turn right around and do something exactly the opposite. Or stab you in the back. Sure, there are disappointments. There are disappointments in life. That's life.

Coming to a big city, the best background I could possibly have had is growing up where there is green grass. Growing up where family counts, where friends really count. And growing up as a kid, out on a playing field. Being on that playing field is so important, and that has given me the foundation for what I have today.

I like to tell the story about how I sold magazines as a kid in the seventh grade in Tulsa, Oklahoma. I'd go door to door, and I always had to be the best salesman. I wanted to go back to my junior high school and win the prize for the day of having sold the most magazines. That was a challenge for me. Or collecting waste paper, old newspaper. I'd go around, and I'd collect, and keep them in the garage. And my mother would say, "When are you going to get rid of that stuff?" and I said, "Well, when you take me down to the waste paper dump, we'll get rid of it then." And I'd collect it in my wheelbarrow, and go around the neighborhood, and she'd take me down and we'd load it on the scales, and they'd pay me $1.36, or whatever it was, for my newspaper, and I'd go back and do it again.

I guess that's where I learned inventory control, and marketing, and a little finance as a kid. Just pretty common sense kinds of things. It was building those blocks, slowly, one after another. Taking one foot and putting it in front of the other. Always keeping my eye on what I wanted to accomplish. Where did I want to be?

What about as a young guy showing up on Wall Street or in Texas?, You had to sell yourself to these people. You had the smarts and the maturity and the judgment. How do you do that?

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Henry Kravis: Sometimes it's not easy. It doesn't matter whether you've got a card that has a certain title. As long as they know you are in a position of authority. Don't ever belittle yourself. You'd be surprised what you can do if you set your mind to it. I always had this attitude. I said, "I can sell. I can sell myself." If my ideas made sense, and it wasn't outlandish, and it wasn't crazy, and I wasn't being cocky, I got people to trust me. I remember one time, we were buying a brick company down in North Carolina. It was called Boren Clay Products. The owner of this brick company was about 75 years old. He refused to sell this company to his son-in-law. Even though the daughter's husband was running the company, and was doing a great job, he had to have somebody else to sell it to. We became that person. I must have looked to him like some kid right out of school. But at the end he says, "You are a pretty bright kid." We hit it off.

I didn't tell him everything he wanted to hear. But I was honest. I gave him my best judgment of how we could buy his company. That was one smart man because he sold his brick company to us right at the top of the cycle. He almost hit it to the day. The minute we bought it, we went out of the gate backwards. That was a challenge for me. I always liked that -- to convince somebody who was much older that, even though I may not have their gray hair or their maturity, I knew what I was talking about. I knew when to bring in the people with the gray hair at the right time. It was never "do this all on your own." Don't be afraid to have somebody who can get the job done. If it takes two people to get the job done, bring in two people to do it.

What are the responsibilities that go with wealth, with the kind of achievement that you have realized?

Henry Kravis: There are enormous responsibilities. My father taught me a lot about giving back to society. But often, because you make a large contribution to one organization, people just assume you will do the same to their organization. I give a lot of money to a lot of different organizations because I believe in so many different things. As the federal government and the states are cutting back, there is enormous pressure on the private sector to do more and more for these charitable organizations, and the not-for-profit organizations. I push our companies very hard to spend an enormous amount of their money each year on the not-for-profit sector. We've got to do that in every community which we serve, and some which we don't serve.

One of my hardest things has been to focus my efforts, and not be all over the yard. So I've focused them on drugs and education, which I put together, because I think they are interrelated very much. I've done some major things for Mt. Sinai Hospital, but that's one hospital, that's where I focused my efforts. So yes, there are pressures. Everybody wants me to be head of the capital campaign, or chairman of the board of whatever institution, and its always hard to say no.

I remember when Jim Evans and Lawrence Rockefeller came to me. Jim was the chairman at Union Pacific, and retired and became chairman of Central Park Conservancy. They asked me to be the chairman of a $50 million capital campaign. I got busy and I forgot about it. Three weeks went by, and at this point I felt so guilty I said, "Yes, I'll do it." The best thing he did was not push me, and not put any pressure on me. We've raised $47.5 million at this point, and we will get there. We have until June to do it. We will pull in the last part, I hope. But that's the pressure. If you do a good job at it, everybody else wants you to do it too.

What do you say to a young person who says, "Mr. Kravis, how can I go about achieving something in this life?"

Henry Kravis: First of all, pick a goal that is within reach. Not too low, and not too high. You can always raise the bar as you go along. I've long passed my early goals. Make a commitment to that. Believe in it. If you don't believe it, you are never going to get there, because you are never really going to make the effort. Be honest with yourself. Is this something that really interests me, or am I doing it because my father or my mother wants me to do it, or somebody else is doing it, so its sort of cool.

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Stay off drugs. Get a good education. Because if you don't have the education, there is no way you are going attain that goal you set for yourself. And lastly, have the courage of your convictions. Stick with it, believe in what you have set out for yourself, and be honest with yourself and with others. Those are the things that I think are very important for any youngster today going through school. It's very hard. The world is a huge challenge, and there are so many pockets to look into. There are so many avenues to success. It doesn't have to be business, it can be anything. I tell my children, "You don't have to come into my business. Don't do something just because I did it. In fact, maybe it's better you didn't do that. But whatever you do, promise me one thing, give it your best effort." That's what I'd tell them.

What gives you the most fun?

Henry Kravis: Oh, I have a lot of pleasures. I love the being outdoors. I love fly fishing, particularly for salmon. I love to ski. My love is going to our house in Vail and trying new trails, and skiing the powder. I love to shoot, I love hunting, bird hunting in particular. Horseback riding. We've built a stable and indoor riding arena. So those four things, plus golf, which I don't play as much anymore, those are my passions. You have to do something like that to get rid of the tension, take your mind off what you are doing. I try to work out at least three times a week, early in the morning with a trainer. Got to do that to get rid of the stress and tension, and keep my body in somewhat reasonable shape. I feel better, my mind feels better. I enjoy doing that as well.

How do you balance personal and professional lives?

Henry Kravis: If you don't have a personal life, as far as I'm concerned, you are missing half of your life. There is nothing more important to me than my children and focusing on them. It's the quality of time with my children, not the quantity of time that I've found to be important. One of my sons is a very good wrestler in high school, and I try to get to as many meets as I can, and to his tournaments. I get as nervous and as excited as he does. If you don't have that, you can have all the money in the world, and you really don't have anything. In the end it's your family that counts. You have to make sacrifices on either side. You also to have an understanding family, to know that there are going to be some sacrifices. I'd rather be with them many times than out in the middle of nowhere meeting with some lender.

And you have to work at that too, your personal life and family?

Henry Kravis: Absolutely. Very important.

Thank you, its been a pleasure.

Henry Kravis: Its been nice to be with you. Good luck.




This page last revised on Oct 22, 2010 18:09 EDT