A $US130 billion Wall Street investor is trying to muscle in on Silicon Valley

Philipp Freise of KKR. Photo: Johannes Simon/Getty Images

KKR, the private equity dealmaker that inspired Barbarians at the Gate, has a new love.

The company’s executives are wooing early stage startups in the US, Europe and Israel, targeting those in the corporate enterprise, fintech and artificial intelligence industries.

“We’re trying to invest in situations where the companies have an established product, market and technology,” Philipp Freise, head of technology, media and telecoms in Europe at KKR, told Business Insider. “They have revenue and a clear path to scalability, but still are at the stage where valuations are reasonable.”

KKR, with buyout roots dating back to 1976, has evolved into a $US131 billion firm that has a hedge fund unit, invests in infrastructure projects, and lends to distressed companies. It is now raising a “growth equity” fund dedicated to private tech investments.

Private equity’s infatuation with tech has spurred a flurry of deals this year. Apollo Global, for example, recently agreed a deal to take cloud computing firm Rackspace private in a $US4.3 billion deal. Thomas Bravo said it will buy data analytics firm Qlik Technologies for $US3 billion. And private-equity company TPG and Intel are jointly spinning out Intel Security in a deal that values the business at $US4.2 billion.

“It’s really an indication of the maturing tech PE ecosystem,” Todson Page, PwC’s US technology deals leader, told Business Insider. “These funds are getting more comfortable with what the risks are, have a better appreciation of industry trends, and get a better sense of where the disruptions are as they have companies in their portfolios.”

‘More than capital’

Before forming the fund, KKR invested in tech deals from its balance sheet, Scott Nuttall, global head of capital and asset management at KKR, said on the company’s first quarter earnings call.

Several warehoused balance sheet investments will be transferred into the fund, again illustrating the power of our balance sheet to accelerate fundraising,” Nuttall said.

Over the past year, the firm has invested in everything ranging from train tickets platform Trainline to cyber security firm Darktrace. A spokeswoman at KKR has declined to comment on the fundraising progress.

With more than 100 portfolio companies that have over $US5 billion in annual IT spending, KKR can effectively be a matchmaker, introducing companies that have a need with other portfolio companies that can meet it.

For example, Frankfurt-based firm Arago, which developed an algorithm that aims to free up time for engineers, gained early traction in Europe. It broke into the US market after KKR introduced it to portfolio company First Data.

When other portfolio companies were struggling with security issues, KKR introduced them to identity management provider Ping Identity. KKR invested in Ping in 2014, with the firm’s annual recurring revenue growing sharply thereafter. Vista Equity Partners acquired Ping earlier this year.

In short, KKR can offer more than capital, according to Freise, who cited the company’s global network of offices, portfolio companies, and hands-on support to help scale the startups.

FreisePhilipp Freise, Partner at KKR at the NOAH 2014 Conference in London. Picture: YouTube

Moonshot…or not

KKR’s growth equity team keeps a close eye on startups and on the venture capital scene.

“We can do anything under $US100 million, but $US40 million to $US60 million per investment is the sweet spot,” Freise said. “We don’t take risk for the product — it has to demonstrate it can be scaled and bring revenue.”

Aside from working directly with enterpreneurs, KKR also partners with venture capital firms like Highland Capital Partners. Often times, these VCs need good follow-on investors to take the startup to the next level, Friese added.

When asked whether KKR is making a good move, Chris Kotowski, managing director and banks analyst at Oppenheimer & Co., said the jury is out.

“In VCs, you tend to have much smaller equity checks, and the thing is in PE, you’re not looking for the 10 to 1 shot. You hope to get twice your money in 5 years for most of your investments, and you can’t afford a lot of complete failures,” Kotowski said.

“It’s probably a fairly small business [for KKR], but it’s kind of a natural extension. We’ll see what good will come out of it.”

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