KKR Capstone Overview

Dean B. Nelson
July 16, 2012

CONFIDENTIAL

What Ill be talking to you about today

1 Context: The start of KKR Capstone

2 Todays Focus: How and where KKR Capstone operates today
3 Q&A: What questions do you have for me?
4 Time permitting: Oriental Brewery case study

In 99/00, it was clear that the PE market was changing

More PE firms with more capital

Private equity was
increasingly
competitive

Deal sourcing and

value creation
efforts had to be
redoubled

Historically high returns led to rapid increases in PE

competitors and capital

More aggressive corporate management

Corporations were running their businesses more
aggressively, making it increasingly difficult to
quickly create value in LBOs

Required additional resources with a broader set

of skills and an even tighter working
relationship with the management team
Restructuring became table stakes - necessary
but no longer sufficient

KKR responded to these market conditions by innovating on the

industry standard model with three new additions
New Additions

Portfolio
Management
Committee (PMC)
Responsible for oversight &
management of entire
portfolio

Senior Advisors

KKR Capstone

Work closely with senior

management and KKR on
operational issues and
opportunities

Works as the operating

arm of KKR to directly
improve company
performance through
targeted projects

Additional Changes
Realigned
investment teams
into 9 industry
groups
4

Hired deal
executives with
operating
experience

KKR Capstone was started to capitalize on three insights

Late 90s areas of opportunities

KKR Capstone

Belief that investing behind, and

executing against, improvementoriented opportunities would create
competitive advantage

Overall Mission: To work, in partnership with

management over the lifetime of our
investments, to address the most important
operational value-creation levers and help KKR
generate top-tier returns for our investors

More operational resources were

required to diligence opportunities and
consistently drive results

Experience and talent: all teams are led by

partner-equivalent executives, who also
possess meaningful industry experience

Focus: teams do not monitor, but rather

execute against opportunities that are critical to
KKRs investment thesis and the CEOs agenda

Approach: working with management teams

as a trusted partner

Integration: Capstone is integrated within

KKRs value creation business model

Alignment of incentives: all executives hold

KKR stock as part of KKRs One Firm
compensation model

Better results, faster: Emphasize

implementation and transfer of skills

External consulting firms couldnt

consistently meet KKRs requirements
Wide variance in the quality of teams
and output
Objective of creating dependence vs.
building capability and independence
Focus on planning & strategy, with
limited experience in implementation

What Ill be talking to you about today

1 Context: The start of KKR Capstone

2 Todays Focus: How and where KKR Capstone operates today
3 Q&A: What questions do you have for me?
4 Time permitting: Oriental Brewery case study

KKR Capstones operating model

Support late-stage due diligence

Help develop 100-Day Plan and operating metrics

Put resources on the ground, working with management

Involve outside resources with specific, deep expertise

Build capabilities to sustain improvement

Move On!

Key success factors: working with a right-sized team on the

most important initiatives in order to get better results, faster
Results

Define
Test
Implement
Move on

Focused use of outside resources

Well defined initiatives

Appropriate team size and skills

KKR Capstone priorities

In our portfolio work
Help drive profitable growth
Convert revenue growth into disproportionate EBITDA growth
Upgrade talent
Make the improvements stick

Drives
where and
what we
are working
on in the
portfolio

In our model
Build scale and expertise
Expand capabilities internally and through external relationships
Evolve and extend our model portfolio and due diligence
Extend our cross-portfolio efforts

Within KKR
Be responsive to opportunities where our expertise is helpful
Strengthen our ties to the rest of the firm

Weve partnered with ~90% of KKRs Portfolio(1)

Modern
Dairy

Note: Portfolio companies identified above may not be representative of the entire portfolio.
(1) Percentage calculated by dollars of KKR equity invested rather than by number of KKR portfolio companies. Includes companies in funds subsequent to the 1996 Fund, which was not contributed to KKR in
the Combination Transaction, excluding Harman, Legg Mason, and CICC.

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We have an intensive focus on driving revenue growth

While much of our work helps our companies with cost and capital efficiency, enormous
emphasis is placed on initiatives to grow revenues

Revenue growth is critical: you cant cost-cut your way to sustainable high returns

Material Revenue Growth Drives Higher Returns

14.0%

2.0x

9.7%

Revenue (1)

2.8x

EBITDA (1)

MOIC of
MOIC of KKR
Companies with 1
Investments
Revenue Growth
Since Inception
(1)
>4%

(1) Portfolio companies with greater than 4% revenue growth, located in the U.S. with annual revenue greater than $500mm, and original
investment made between 1/2005 and 12/2007.

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11

but we also focus on a variety of opportunities across several

portfolio companies (North America example)
FDC

Biomet

Aricent

Sealy

Academy Capsugel

Pre-2010
Pricing

Revenue

Sales Force
Effectiveness
New geo / channels

x
x

Merchandising
x

Efficiency

Manufacturing Process
Improvement

Del Monte

x
x
x

Sourcing

Ipreo

Online
x

Go Daddy

Product Innovation

Safety

Post-2010

Promotion /

Capital

x
x

IT
Working Capital
x

Process

Carve-outs
Operating Metrics

Org Design / Talen

Portfolio [ ]

KKR Capstone Deployment

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x
x
x

How to work with KKR Capstone most effectively in the portfolio

Regardless of context, we have found a few key conditions make a real
difference:

1 Advocacy from the deal team for our initial involvement

Not an alternative to McKinsey; instead, part of the KKR way
When possible, embed Year One fees in transaction close

2 Agenda focused on most important issues and Board visibility

3 Involvement in major decision-making forums (i.e. sufficiently close to the
major issues and debates and copied on all material)

4 Full members of the team and positioned that way with other sponsors and
the portfolio company management

5 If club deal, distinct initiatives from other sponsors (divide & conquer) and
expectations set upfront about our involvement

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What Ill be talking to you about today

1 Context: The start of KKR Capstone

2 Todays Focus: How and where KKR Capstone operates today
3 Q&A: What questions do you have for me?
4 Time permitting: Oriental Brewery case study

14

What Ill be talking to you about today

1 Context: The start of KKR Capstone

2 Todays Focus: How and where KKR Capstone operates today
3 Q&A: What questions do you have for me?
4 Time permitting: Oriental Brewery case study

15

Oriental Brewery: Overview

Domestic Product

International Product

Purchased from AB InBev in 2009; KKRs 1st investment in Korea

#2 beer producer in Korea; 41% national market share
One-firm KKR team, including KKR Capstone, KKR Capital
Markets, and Global Public Affairs contributed to success
KKR not highest bidder; only non-local PE firm
16Source:

Oriental Brewery data.

17

Operating Improvement Investment Thesis

KKR Capstone Role
Played key role in
diligence; identified
operational improvement
areas
On ground day 1 with OB
team executing key
initiatives

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Value Creation
Carve-out to stand up
business
Procurement practices
Wholesaler management
program
New product development

Full team engaged for 24

months post-acquisition

Sales force effectiveness

Monitoring sustainability of
initiatives

Inventory management

Green Portfolio Program

Export growth

Wholesaler Management

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No price or product
discrimination

Customer prioritized
based on:
Total OB volume with
customer
OB customer market
share

High

Every wholesaler must

buy OB product

Priority

Customers
OB Volume

Wholesale sales model

Low

Customer Focus

Market Overview

Which wholesalers should be prioritized?

Low

OB Market
Share

High

Wholesaler Management

(Manage)

(Others)

(Focus)

(Maintain)

Balanced customer prioritization based on incremental

volume by channel, customer profitability and OB total volume
Source:

20

Oriental Brewery data.

Wholesaler Management in Action

WS #1
Incremental Volume: Low
Channel: Pub

Chungbuk

Chungnam

Kyoungbuk

Jeonbuk
Kyoungnam
Busan
Jeonnam

WS #2
Incremental Volume: High
Channel:
Convenience Store
Source:

21

Oriental Brewery data.

Spend

WS #1

Seoul/
Sudo

Cases

KRW/
Case

55k

44M

800

50k

35M

700

WS #2

Gangwon

After

20k

7M

350

30k

12M

400

TOTAL

Before
Cases

Spend

KRW/
Case

75k

51M

680

80k

47M

588

7% case growth; 8% spend decline;

14% reduction in spend/case

22

Product Development
Cass Light Volume 09-11

OB Brand Volume 10-11

400

600

373

509
450
400

300

345

200

268
200

OB
Volume

2010

100

2011

Apr-Dec
2010

Apr-Dec
2011

47% volume growth from 10-11;

68% growth 9 months post-launch

Source:

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329

Oriental Brewery data.

208

198

Cass
Light
Volume
2009

2011

May '09 - May '10 Apr '10

Apr '11

79% volume growth (40% CAGR)

from 09-11;
66% growth 12 months post-launch

What Ill be talking to you about today

1 Context: The start of KKR Capstone

2 Todays Focus: How and where KKR Capstone operates today
3 Case study: How we create value in portfolio companies
4 Q&A: What questions do you have for me?

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