KKR’s Nuttall: Big returns to be had after cycle bottom

Transactions done amid the turbulence of 2023 and into this year are going to produce “really great returns” and attractive internal rates of return, according to KKR’s co-chief executive.

Speaking at PEI Group’s NEXUS 2024 summit in Orlando on Wednesday, Scott Nuttall told attendees he disagreed that this period poses the most challenging time for fundraising, investing and exiting private equity portfolio companies.

“Our industry has always had a cycle aspect to it, especially the more traditional buyout PE part of the industry, but the actual level of cyclicality is nowhere near… the emotional cyclicality that people tend to have as we over extrapolate,” he said. “From where I sit, this all feels very normal.”

On the margin, KKR is using less debt in its transactions, Nuttall said. However, the narrative around the cost of capital is also overblown. “Typically what happens when you have interest rates go up is you have multiples come down,” he explained.

“If you can actually get a hold of that asset created at a lower multiple, what tends to happen is you’re buying the business at a period of time where everybody’s a little spooked,” he said. “We’re now buying businesses for the first time in a while at high single digit multiples of EBITDA. For a while there, that was unheard of – everything was mid-teens. Plus, it’s a question: how can you create value over that level?”

KKR has been busy on a number of take-privates and corporate carve outs, for example – “nice businesses” that the public market “doesn’t have the patience” for, he added.

If firms are able to improve the underlying value of those companies meaningfully, attractive exit multiples should follow. This will be amplified as markets recover and exit markets open. “What tends to happen coming out of periods of time like this [is] you have a higher IRR, but it’s basically the same value creation over a shorter period – and I think that’s likely to happen again.”

‘Sweet spot year’

The exit market is hampering dealmaking at a time where KKR “would love to deploy a lot because things are cheaper”, Nuttall said.

“For the same reason that a lot of people didn’t want to sell us… assets that we [would] have loved to have bought last year, we didn’t want to sell assets that we thought were mature because we didn’t think the markets were quite ready for it,” he said, adding that this, again, is a natural part of the cycle given private equity firms have fiduciary duties.

Nuttall believes there will be more exits and monetization events this year given markets “tend to bottom” when the Federal Reserve begins to level off on rising interest rates. There are strong tailwinds: the leveraged credit markets began to open back up in January, the IPO market is “trying to open up” and strategic buyers are coming back “because their stock prices are up and they’re feeling more confident in the world,” he added.

“If I think over my career, there’s years like last year [where] you’d love to deploy more, but people didn’t want to sell you [companies] and they were still expecting a 2021 price. That’s now kind of dissipated,” Nuttall said.

“This could be a sweet spot year where you’ve got a really great deployment opportunity and a really good vintage year… You have the ability to have scaled deployment because you’ve got more willing transactors on the other side.”