The alternative asset manager’s Strategic Holdings unit, launched a little over a year ago, is a key part of KKR’s plan to more than quadruple earnings per share over the next decade. The firm sees a chance to build a portfolio that kicks off more than $1 billion a year in dividends.

What the firm is trying to create “is in some ways a mini Berkshire Hathaway,” Co-Chief Executive Officer Joe Bae said at the Bloomberg Invest conference in New York earlier this month.

While Warren Buffett’s $1 trillion conglomerate has drawn many imitators, KKR’s gambit is a break from its closest rivals, who’ve prioritized steady fees over direct bets.

A small group of executives overseeing KKR’s balance sheet decide which investments make the cut, according to a person with knowledge of the matter. It includes Kravis and Roberts, Bae and co-CEO Scott Nuttall, Chief Financial Officer Rob Lewin and balance sheet Chief Investment Officer Henry McVey, said the person, who asked not to be identified discussing confidential information.

The unit currently holds stakes in 18 long-term investments that are expected to compound over time instead of being flipped for a quick profit. Bae said this month that the firm intends to add infrastructure and real assets to the mix.

KKR says the upside for patient investors could be massive. The firm has pointed out that Berkshire is worth almost as much as all the publicly traded asset managers in the world combined. But it’s a long-term bet that will require capital now. KKR cut its share buybacks to zero last year and paid out a lower portion of its earnings as dividends than any of its major competitors.

It also makes the firm a different investment case than many of its rivals, which have pitched themselves to shareholders as asset-light. KKR has more than $100 billion of investments on its balance sheet, not including its insurance unit. Apollo had $6 billion outside its insurance division, and Carlyle had less than $11 billion across its whole firm. Brookfield Corp. spun out its fund unit in 2022 to separate the businesses of holding assets and earning management fees.

Strategic Holdings is “a unique, one-off approach to long-term ownership of high-quality assets to drive balance sheet compounding,” Mike Brown, a Wells Fargo & Co. analyst who follows KKR, said in an interview. The unit “introduces a new earnings engine.”

A representative for KKR declined to comment.

Buyout DNA

KKR stands out for leaning into buyouts at a time when others are pulling back. Private equity has been pressured in recent years by higher interest rates, which have led to fewer deals getting done and less capital being returned to investors. But at KKR, private equity tied with infrastructure to generate the best returns — 14% — of the firm’s various asset classes last year. 

The strategy has been enabled, in part, by its massive balance sheet. Paying out fewer dividends and buying back fewer shares allowed it to hoard cash, reinvest gains and seed various businesses. 

Strategic Holdings traces its roots to 2017, when a small team working under Lewin used KKR’s balance sheet to make strategic acquisitions and invest in core private equity deals with partners that could produce double-digit returns over the long term. The first bet was on USI Insurance Services, a consulting and brokerage firm, led by partner Chris Harrington.

KKR subsequently launched its first Core Private Equity fund to gather outside capital from those who wanted to invest alongside it. The business is now overseen by an investment committee including private equity co-heads Pete Stavros and Nate Taylor and seeks out lower-risk, cash-flowing companies that don’t necessarily make sense in a traditional closed-end private equity fund. Webster Chua, an Americas private equity partner, works closely with key Core Private equity clients while originating some deals. 

For now, Core Private Equity and Strategic Holdings are essentially synonymous. Its current lineup of 18 investments includes lens retailer 1-800 Contacts, cybersecurity company Barracuda Networks and Australian snack food manufacturer Arnott’s Group. 

“This is a segment for us that’s really an unconstrained addressable market,” Lewin said at a financial services conference last month. The firm owns an average 20% stake in the 18 firms, representing $3.7 billion of revenue and $900 million of adjusted earnings, he said. 

KKR has told investors the creation of Strategic Holdings represents no meaningful additional costs because it’s run entirely by existing staff.

But there is at least one glaring difference between alternative asset managers and Buffett’s 60-year-old conglomerate: fees and carried interest. Strategic Holdings pays management fees and a share of gains to professionals who work on the deals, according to the firm’s filings. 

For now, Strategic Holdings represents a small share of KKR’s operating earnings, although it predicts it will generate $1.1 billion by 2030. How the firm will fund that growth remains a major question for investors.

When KKR issued nearly $2.6 billion in mandatory preferred convertible equity this month to fund additional investment in three long-term holdings, the market was caught off guard, according to Well’s Fargo’s Brown. The move will dilute existing shareholders and cut into a projected increase in earnings from the new investments.

“The market was definitely not ready or prepared for that,” Brown said.