Could you give us an introduction of KKR, tell us about your daily business and what the characteristics of private equity are to aid those students who don’t know much about it?
KKR is one of the oldest private equity firms globally. It was established in 1976 by our founders Henry Kravis, and George Roberts, who are still co-CEO’s of the firm. Since KKR’s foundation, the firm has been transformed from a pure private equity house focused on North-America into a diversified asset manager that is also managing credit, real estate, infrastructure and hedge funds. Today, we have more than 100bn USD in assets under management which are entrusted to us by about 1,000 investors world-wide, ranging from pension funds and insurance companies to sovereign funds and high net worth individuals. We are investing all over the world and have offices in Asia, Europe, and the U.S.
I am a Director of KKR in London and lead our Digital Media Private Equity Practice as well as our growth equity business in Europe. My job involves three main components: identifying attractive businesses that we want to invest in. This can range from large online businesses – like Trainline or Scout24 – in which our private equity fund makes an investment, to smaller, fast-growing businesses – like Get Your Guide, Clicktale or Arago – in which our growth equity funds make an investment.
After identifying attractive firms that meet our investment criteria, we reach out to these companies through various channels, mostly through direct contact with the founders and venture capital firms. Once we have built a trusted relationship and shareholders and founders are willing to engage in a transaction, we do our due diligence to confirm our investment thesis.
The third aspect of the job, which for me is the most exciting part, is working with the management team once the deal is closed. We support management in executing the investment thesis and in realizing the value creation roadmap. This can involve helping with a global expansion strategy, with hiring the right people or supporting operational work in areas like pricing.
You mentioned you approach VC firms when you are interested in one of their portfolio companies. What is the biggest difference between private equity, venture capital and growth equity?
When people speak of “private equity”, they usually refer to investments in more mature businesses with an established track record of revenues and profits and often using debt to finance part of the transaction. In many cases, private equity funds acquire a controlling interest in a company, although this is not always the case. Three out of my last four private equity deals, were partnership deals where we were either in a 50:50 or a minority position alongside a corporate partner or a founder.
Venture Capital financed companies are at a much earlier stage of their development and still face substantial product, technology, and execution risk. Not only the target companies, but also the investor mindsets are different. Whereas in private equity every deal should make a good return for the fund, VCs invest smaller equity checks into many different companies. VCs accept that some of these investments will be a huge success and others will fail.
Growth equity is somewhere in between. Product and technological risk are usually less of a risk and a growth equity company usually has a meaningful revenue base with strong organic growth. Compared to private equity deals, the execution risk to scale the company is still considerable and the companies are in many cases not yet profitable.
If you have a closer look at the investment landscape in Europe and the U.S., I have the impression that while there seems to be a lot of early stage capital in both regions, there is not enough later stage capital in Europe. Is that the reason you initiated KKR’s Growth Equity initiative?
We saw a big opportunity in Europe to launch a Growth Equity effort because of the growing number of entrepreneurs and technology companies that have ample early stage funding, but are facing a lack of high quality entrepreneurial late stage funding. Growth equity is all about helping an entrepreneur to scale his company globally. We realized that there are few funds in Europe that are as local as KKR given we have operated in Europe for 20 years, but at the same time have a truly global platform and outlook. With local teams in Asia and the U.S. and an incredible global technology network, we are well positioned to help European entrepreneurs enter these markets.
We also saw a significant opportunity to leverage KKR’s existing portfolio of 100 companies. Many of our portfolio companies are interested in using new technologies and have significant budgets. Once we have made a growth equity investment, we can introduce the company to our relevant private equity portfolio companies to create win-win situations. For entrepreneurs, these contacts are really valuable as they enter new markets and our private equity companies get access to cutting-edge technology.
Lastly, the global network that we have built in our traditional private equity business is quite valuable for smaller growth equity companies. We are interacting with many large software houses, online and media companies, in our private equity activities. Having access to these companies can be important accelerators for entrepreneurs, and there are not many firms that can provide the same level of access as KKR.
So, if we come back to KKR as an investor, the reason to sell a stake to KKR is often to accelerate growth and overcome scaling challenges. Can you give us an example of how you do this?
Our funds have invested into a company called Arago – a German software business, specialized in artificial intelligence technologies used to automate the IT environment. At the time of investment, it was a purely German business, but we saw a major international roll-out opportunity. So we helped the company establish a U.S. presence. They opened an office in New York, hired a local team, and we connected them with our network and with potential customers including some of our own portfolio companies.
Another investment of ours is in a company called Get Your Guide, an online marketplace for travel activities based in Berlin. They already had a very nice international presence, but they wanted to grow into new Asian markets. We connected the company to our local teams in Japan and South Korea, who in turn were able to connect them to the local ecosystem to facilitate the market entry.
How do you search for and select the companies you want to invest in?
First of all, we identify themes that we want to invest in. This could range from automation to the rise of online mobility. We then identify which companies are likely to benefit from these overarching trends. We also work very closely with other venture capital firms as many of their companies will require funding in the future. Finally, we hold good relationships with many intermediaries that are charged with raising new funding rounds. And then, there is just a lot of general networking, going to conferences, doing research and meeting companies. We aggregate and manage all our leads in a well maintained CRM database, which is critical for a systematic sourcing effort.
When you do your research, do you come across major differences in the companies you invest in between Europe and the U.S.?
European entrepreneurs often have to deal with more structural complexities than U.S. entrepreneurs. They need to grow outside of their home market very quickly and have to deal with different languages and regulatory environments. All of that needs to happen in an environment where capital is often more scarce than in the U.S. There is an interesting article that I have co-authored and that is available on the web named “Digitalization in Europe” which sums this up quite nicely.
This means that European entrepreneurs have to watch their funds very closely and this can sometimes lead to a mindset where companies are not always scaled as fast as they could. We try to find entrepreneurs who strike the right balance between being prudent operators while smartly investing into growth.
If we stay in Europe, I guess the whole industry has changed a lot during the last couple of years. What would you say is the biggest change that took place?
First and foremost, becoming an entrepreneur has become a much more accepted and sought after career path than it was five or ten years ago. You see many more people who found a business straight out of university. The rise of incubators which can provide a relatively easy path into entrepreneurship, has helped as well.
Secondly, there is more capital available now compared to five years ago. KKR Growth Equity did not exist five years ago, and many Growth Equity firms from the U.S. were not investing in Europe yet. Additionally, there are a couple of other firms which either started more recently or have significantly scaled up their operations in Europe.
Thirdly, the availability of technology through open source projects has made it easier to found new companies from a technological perspective. Today, the product design phase is faster, because you can leverage a lot of pre-existing technologies.
The mindset shift and the ease with which you can start a company have really led to a significant increase of exciting tech companies in Europe. This creates a virtuous circle, which attracts more capital, and more capital makes it easier for future entrepreneurs to take the risk and found a company.
If we change the perspective and look at the recent trends, what do you think will drive or influence the future? FinTech for example is a big trend; Do you see any other important investment themes?
FinTech is certainly an area, particularly in London, where we see a lot of interesting activities. Financial Service firms are waking up and asking themselves: how can we leverage technology to run our operations more efficiently, and create new businesses to re-invigorate growth?
The other big trend that we are seeing is in the area of automation which we expect to grow very quickly in the coming years. Arago, our German automation software company, is a great example of how machines can run very complex IT environments in an efficient way and, thereby, allow employees to focus their time on areas with higher productivity.
What would you say is the best way into the private equity industry? A lot of students are thinking about a doing an MBA or a Ph.D. Is that the right way or should you just found a company, or go into investment banking straight out of college? Which advice would you give?
I’d say as a general rule: Whatever you do, you have to be passionate about it; if you are not, you won’t be your best and you won’t achieve your fullest potential. So, don’t squeeze yourself into certain career paths just because you think it is the highest probability career path to a certain job. Rather ask yourself, what you are truly good at, what you are truly passionate about, and then pursue this path. If you combine talent with passion, success will follow almost automatically. As for the private equity industry, most of the funds still recruit the vast majority of their talent from either top investment banks or consultancies.
With regards to whether you should do a PhD or MBA, I think it is a question of personal preferences. I did my Ph.D. in St.Gallen, but I did it purely for myself. There is in my view no career advantage that you gain from having a Ph.D., it may just give you additional perspectives. With regards to MBAs, in Europe private equity funds usually don’t require them for you to progress through the ranks, but in the U.S. many firms still require MBAs from principal level onwards.
When I look at a CV, what matters to me is whether I can see excellence and uniqueness combined with relevant practical experience: did you do relevant internships, which university did you go to, did you do well at that university? Grades to me are a proxy of how hungry you are and how much work you are willing to put into your goals. I also examine the extracurricular activities very carefully; have you founded a business or have you done unique things that give me a perspective on your skills and personality? A lot of people have done internships in banking, but that does not tell me anything about their drive or quality as a person.
To make the entry into our industry a bit easier, I am building a platform called pestudents.com, which will give students advice on how to work their way into the industry and connect them to funds and their portfolio companies.
Do you have anything to add, such as a final statement?
Really ask yourself, what is your dream and where do you see yourself in five years? Don’t consider a goal simply because it is cool or because it promises you a lot of money, but because you are passionate about it. Work your way backwards from your goal: if that’s what you are passionate about, what are the skills you already have and what else do you need to learn to get there? Then diligently fill those missing links, work as hard as you can and you will be successful.
Thank you very much for these interesting perspectives, Lucian!
Interview by Fabian Baldauf.
About Lucian Schönefelder
Lucian Schönefelder is a Director at KKR. He is focused on private equity and growth equity investments in the European media and technology sector. Since joining KKR in 2007, Lucian has been involved with KKR’s investments in Trainline, Scout24, Fotolia, GetYourGuide, Optimal+, Clicktale, Arago and BMG Rights. He also spent one year with KKR Capstone where he worked on various assignments within ProSiebenSat.1. Before joining KKR, Lucian worked in the M&A department of JP Morgan in London. He holds a Master of Science in Business Administration as well as a PhD (summa cum laude) from the University of St. Gallen (Switzerland). Lucian is also the Founder of KarmaWings, a non-profit online platform that helps NGOs to connect with donors and volunteers. He also founded PeStudents.com, which helps talented students to connect to the private equity industry.
