market folly

Bloomberg has an excellent interview out with Henry Kravis, founder of the well-known private equity firm Kohlberg Kravis Roberts, better known as KKR.

Here are some interesting quotes on investing and hedge funds:


On the difference between hedge funds and private equity:

"So I imagine there will be many more private equity firms than there are today. It’s very hard to kill a private equity firm. You can kill a hedge fund overnight; people pull their money out as fast as they put it in. You can’t pull your money out of a private equity firm as easily. If a firm is bad, all that can really happen is that it won’t be able to raise another fund. Eventually it’ll go out of business. But that can take years."


On who make good investors:

"Because to me, people who are curious are going to be better investors and better stewards of others' money.  If there's no curiosity, you're basically doing something that's already been done by someone else."


On focusing on the downside & learning from mistakes:

"When I was in my early 30s at Bear Stearns, I’d have drinks after work with a friend of my father’s who was an entrepreneur and owned a bunch of companies. “Never worry about what you might earn on the upside,” he’d say. “Always worry about what you might lose on the downside.” And it was a great lesson for me, because I was young. All I worried about was trying to get a deal done, for my investors and hopefully for myself. But you know, when you’re young, oftentimes you don’t worry about something going wrong. I guess as you get older you worry about that, because you’ve had a lot of things go wrong."


On what he looks for in an investment:

"We focus a lot on disrupters.  What they're doing, what they could do..  When we're making an investment in a nonstartup-type company, we ask ourselves, "Who's going to disrupt this company or industry?"


On the birth of the industry-standard 20% fee:

"George’s father and my father were in the oil-and-gas business, and in those days there was something called “a third for a quarter.” If I had a lease and wanted to drill a well, I would go to the money person and say, “I’ll put up 25 percent of the cost, you put up 75 percent, and you’re going to get a two-thirds interest and I’m going to get a one-third interest for my 25 percent.” We thought 20 is close enough to 25. I’m often asked, “Why didn’t you pick 25 percent because that would have stuck and carried interest?” We were just trying to get started, so that was literally what we started from." 


On data that's interested him recently:

"Our most recent (FirstData ~ FDC) SpendTrend reports have shown that consumers’ largest expenditure, by far, has been on health care. It’s funny, you had a big dividend for the consumer with the advent of lower gasoline prices. You would think they’d go out and spend on things, go shopping at Macy’s or whatever. But they have not spent on things, except on essentials. A lot of people are saying, I want to spend my money on experiences. And we can pick that up."


Be sure to read the full interview here.