KKR’s Berkshire Dreams

How Private Equity's Pioneer Is Reinventing Itself

When KKR founders Henry Kravis and George Roberts sought to convince institutional investors that private equity deserved a place in their portfolios in 1981, they found an unlikely ally 2,800 miles from Wall Street. The Washington State Investment Board, managing money for the state’s public employees from its offices in Olympia, took a bet on their vision that would develop into one of the industry’s most durable partnerships.

For KKR, pension fund capital represented a dramatic shift. “The institutions that invested in our funds – our clients – were mostly a handful of financial institutions like insurance companies,” Kravis later recalled. The Pacific Northwest would help change that. The state of Oregon committed $10 million of retirement funds to KKR in 1978 – the first “alternative investment” by any US public pension. When it followed with a $178 million commitment to KKR’s buyout of Portland-based grocer Fred Meyer in 1981, Washington saw similar potential. At a time when pension funds were restricted to traditional securities and struggling with single-digit returns, both states recognized that KKR’s consistent double-digit gains offered a path to meeting mounting obligations.¹

The driving force behind Washington’s move was John Hitchman, the Investment Board’s forward-thinking head who shared KKR’s view that many of America’s largest corporations had become unwieldy and inefficient. An introduction from a contact at the Oregon Investment Council led to a meeting with KKR. “I was immediately very favorably impressed,” Hitchman would later recall. His initial $13 million commitment to KKR would return three times its money after fees. By 1984, convinced of the strategy, Hitchman committed $130 million to KKR’s next fund, making Washington its largest investor.

Word spread through Hitchman’s network. He shared KKR’s track record with counterparts in Utah, Minnesota, and Michigan, who all subsequently signed on. What started as a Pacific Northwest experiment soon became an institutional movement. By 1989, half of all large public pension funds in the US had gained authorization to invest in leveraged buyouts.

In the decades since, Washington’s commitment to KKR has grown dramatically. The pension fund has now invested $13.5 billion across 27 KKR funds, receiving $21 billion in distributions while maintaining $3.5 billion in unrealized value, for a cumulative return of 1.8 times invested capital net of fees. The partnership remains active. KKR began marketing its latest flagship North America fund last year, targeting around $20 billion, and by year end, Washington – now managing $211 billion in total assets, with nearly a quarter allocated to private equity – had agreed a commitment of up to $600 million.

But it comes at a tricky time for private equity. The model depends on a steady recycling of capital – money from successful exits flowing into new investments. Washington advises its stakeholders to expect a 10-12 year wait for full value, and still has capital tied up in KKR funds from 2008. Recent data suggests this recycling process may be starting to clog. For two years running, the money coming back to Washington from its KKR investments hasn’t been enough to fund its new commitments.

To understand what’s driving this slowdown and what it means for the future of private equity, read on.