20VC: Inside KKR's Monster $8BN European Fund | The $500M Turkey...

Full Title

20VC: Inside KKR's Monster $8BN European Fund | The $500M Turkey Gamble That Went Wrong | Do Andreessen & General Catalyst Scare KKR? | Will AI Kill the PE Model? | Can The PE Model Survive without IPOs and Where is the Liquidity with Philip Freise

Summary

The episode features Philip Freise, co-head of European private equity at KKR, discussing the firm's investment philosophy centered on disciplined capital allocation and long-term partnerships in Europe. He shares insights on navigating market volatility, the structural shifts favoring private markets, and the broader societal implications of capital accumulation and distribution.

Key Points

• A crucial lesson from early venture investing is that in bull markets, humility and selecting long-term aligned investors are paramount, as those focused on quick returns (e.g., IPOs) often abandon founders during downturns.
• KKR experienced a significant loss of approximately $500 million in a Turkish logistics company due to the unpredictable nature of the rule of law and political risk, which solidified their strategy to exclusively focus investments on Western Europe for greater control.
• Learning from past inaction during the 2008 financial crisis, KKR made a bold decision to invest a substantial portion (30-40%) of their European fund during the COVID-19 pandemic, demonstrating a disciplined, top-down approach to deploy capital in turbulent times based on fundamental business understanding.
• KKR's $8 billion European fund strategically constructs its portfolio with around 15 investments, typically deploying $400-600 million per deal, often through partnership stakes (30-35% ownership), and unlike venture, aims for consistent multi-bagger returns across its portfolio, noting that 85% of their exits are strategic sales rather than IPOs.
• The private equity model remains robust in an AI-driven world because KKR focuses on tangible, "real businesses" like fertility clinics that require significant capital for physical expansion, rather than solely investing in high-burn AI models, affirming the enduring principles of rational capital allocation.
• While market liquidity experiences predictable cycles of exuberance and drought, a structural shift is occurring where companies increasingly prefer private ownership over public markets due to volatility, leading to new liquidity sources emerging from individual investors and insurance companies through innovative evergreen products and secondaries.
• Europe urgently needs massive capital investment (estimated at €750-800 billion annually) for innovation and competitiveness, necessitating a "capital market union" and the reform of pension systems to allow broader domestic participation in alternative investments and retain value creation within the continent.
• Despite an unprecedented global backdrop of technological, geopolitical, monetary, and demographic risks, KKR's investment strategy focuses on controllable factors: backing exceptional founders in large markets with unassailable and innovative businesses, while maintaining institutional patience for long-term holding periods.
• The US dollar is expected to remain the world's reserve currency for the next decade due to the lack of a credible alternative, although its share in global reserves might slightly decrease as the Euro and Bitcoin gain some ground, leading to a more diversified international monetary system.
• To address the concern of wealth concentration from the growth of private markets, the alternatives industry must expand access to individual investors (e.g., via 401k plans), enabling broader participation in value creation and contributing to more balanced and robust pension systems globally.

Conclusion

Long-term endurance and humility are critical for success in the investment industry, particularly when facing market volatility and major disruptions.

Focusing on strong founders, robust business models, and controllable factors is more important for investment success than trying to predict or time broader market trends.

Broadening individual investor access to alternative assets is crucial for distributing wealth creation more equitably and addressing the demographic challenges of aging societies and pension affordability.

Discussion Topics

• How can Europe effectively implement a Capital Market Union to foster innovation and compete globally, and what are the biggest challenges it faces in doing so?
• Given the cyclical nature of market liquidity and the structural shift towards private markets, what are the long-term implications for traditional public market investing?
• If the alternatives industry truly opens to broad-based individual participation, how might this reshape wealth distribution and address economic inequalities in society?

Key Terms

Limited Partners (LPs)

Investors in private equity or venture capital funds.

Temporal Diversification

An investment strategy involving spreading investments over different periods to mitigate market timing risk.

Power Law

A distribution in which a small number of observations account for a large proportion of the outcomes; in venture capital, this refers to a few highly successful investments generating the majority of a fund's returns.

Financial Repression

Government policies that keep interest rates artificially low, typically below the rate of inflation, often to reduce the burden of public debt, leading to negative real returns for savers.

Secondaries

The buying and selling of existing limited partnership interests in private equity funds or direct investments in private companies.

Evergreen Products

Investment funds or vehicles with an indefinite lifespan, allowing for continuous capital raising and investment, unlike traditional closed-end funds with fixed lifespans.

Capital Market Union

A European Union initiative aimed at creating a single market for capital across the EU, intended to facilitate cross-border investment and increase access to financing.

Timeline