KKR's i-bank fees at $837m in 2006

LONDON: Kohlberg Kravis Roberts (KKR) is set to pay out more than $837 million in fees to investment banks for deals in 2006, more than any other private equity firm, in an unprecedented year for leveraged buyouts.

Henry Kravis and George Roberts’ firm spent three times more in the first 11 months of 2006 on fees to securities firms than in the whole of 2005, according to data compiled by Thomson Financial and New York-based research firm Freeman. KKR spent the money on takeover advice, arranging loans and IPOs for companies in Europe and the US.

LBO firms logged a record $699 billion of deals last year, according to data compiled by Bloomberg, fuelled by a combination of record fundraising and cheap debt, which they used to finance purchases.

The industry, which accounts for about a quarter of all takeover activity, is poised to pay $11 billion in fees for the year, Freeman says. And the deal-making is set to continue as firms target larger publicly traded companies, bankers say.

“The financing is there,” said Larry Slaughter, who heads JPMorgan Chase’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 e40 billion ($53 billion) this year, he said.

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.

Zoe Watt, a spokeswoman for KKR in London, declined to comment. Private equity firms have about $409 billion in cash to invest and can raise another $1.2 trillion in non-investment grade bonds and loans, according to Morgan Stanley.

New York-based Blackstone Group’s takeover of Equity Office Properties Trust capped a record $326 billion of takeovers announced by PE firms in the US in 2006, according to data.

The firms announced $216 billion of European purchases, including the e7.6-billion 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 $5 billion fund in May, spent $340 million on fees for stock sales in 2006.

Apollo, which raised about $1.9 billion in a fund IPO, handed out about $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 $36 billion including debt, paid the most for mergers advice in the US, handing out $165.5 million in fees, almost two-and-a-half times as much as Fort Worth-based Texas Pacific Group.

In Europe, Permira Advisers, manager of the region’s biggest fund, disbursed $305 million in fees, up from $179 million in the whole of 2005. Wall Street firms typically charge clients about 0.6% of the value of a deal for their takeover advice. They earn an average fee of about 6% of the value of IPO in the US, and about 2.3% in Europe.

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 ($3.4 billion) takeover of UK retailer Debenhams in 2003.

Morgan Stanley also received fees for arranging £1.3 billion of loans to fund the deal. The fees didn’t stop there: In 2005, the bank helped arrange new loans the PE firms used to pay themselves a dividend, and in May the following year Morgan Stanley shared about £20 million in IPO fees for taking Debenhams public again.