Episode Summary: Inside KKR's Monster $8BN European Fund with Philip Fries

In this insightful episode of The Twenty Minute VC (20VC), host Harry Stebbings sits down with Philip Fries, co-head of European Private Equity at KKR, to delve deep into the nuances of managing one of Europe's largest private funds. The conversation spans across investment strategies, handling failures, the evolving landscape of private equity, the impact of AI, and the future of European markets.

1. Introduction to Philip Fries and KKR's European Fund

Philip Fries brings a wealth of experience to the table, managing KKR's substantial $8 billion European private equity fund. His portfolio includes notable investments in companies like FGS Global Superstruct, Assel, Springer, BMG Rights Management, and GetYourGuide. Harry Stebbings highlights Philip’s expertise, noting that their discussion covers a broad spectrum from demographic shifts to the rise of China in European auto industries.

2. Early Venture Experiences and Lessons Learned

Philip reflects on his early days in venture investing during the late 1990s, describing it as the "wild west of venture investing in Europe" (04:49). Drawing from his experience with Venture Park, he emphasizes the importance of humility and perspective during bull markets.

Philip Fries (05:04): “In bull markets you just got to keep perspective and humility and not take yourself for a genius.”

He underscores the critical role of choosing the right investors, contrasting those who seek quick exits with corporates aiming for long-term innovation partnerships.

3. Managing Investment Failures in Emerging Markets

Philip openly discusses the challenges and losses encountered in emerging markets, notably a significant $500 million loss in Turkey due to flexible rule of law and unpredictable market dynamics (08:00). This experience led KKR to pivot strategies, choosing to focus more on Western Europe where risks are more controllable.

Philip Fries (08:00): “What we thought was a protected player... suddenly there was some other entrant... we lost our shirt.”

He parallels this with similar setbacks in Pakistan and Africa, reinforcing the decision to avoid high-risk emerging markets in favor of more stable regions.

4. Market Timing and Pandemic Investments

Discussing market timing, Philip shares KKR's bold investment moves during the COVID-19 pandemic, allocating approximately 40% of their current fund despite widespread caution (09:24). One standout investment was in Vela, L'Oréal's hair color brand, which faced skepticism about post-pandemic demand.

Philip Fries (09:24): “...there was a little bit in trouble...[...] It was a bold decision to do that in the midst of the pandemic.”

Their strategic confidence, coupled with a disciplined approach to deploying capital, allowed KKR to capitalize on opportunities that others overlooked during tumultuous times.

5. Portfolio Construction and Fund Discipline

Philip delves into the intricacies of portfolio construction, emphasizing the balance between having consistent performers and a few standout winners. Managing an $8 billion fund typically involves around 15 investments, where discipline dictates selling underperformers and nurturing high-potential assets.

Philip Fries (15:14): “We have to top down as the lead of the fund, make those calls... if somebody calls you and says hey, we would like to buy that company, you just have to force yourself to sell it.”

He contrasts this with venture capital's power law nature, advocating for a more balanced and consistent return approach in private equity.

6. Differences Between Private Equity and Venture Capital

Highlighting the distinctions between private equity (PE) and venture capital (VC), Philip notes that PE requires a more consistent return model, avoiding the extremes of having only a few massive winners or several failures. Unlike VC, which often operates on the power law where a few investments drive most returns, PE aims for steadier growth across its portfolio.

7. Impact of AI on Investment Models

Addressing the rise of artificial intelligence, Philip asserts that while AI-driven companies may require substantial capital, the foundational principles of rational and thoughtful capital allocation remain unchanged.

Philip Fries (17:44): “The underlying principles of capital allocation has to be very thought through and rational. It hasn't changed.”

He predicts that AI will create unique investment opportunities but will not overhaul the private equity model entirely.

8. Exits, Liquidity, and the Private Equity Landscape

Liquidity remains a pressing concern in the private equity realm. Philip discusses the cyclical nature of liquidity in markets, comparing current trends to past financial crises. He explains that while the IPO market may be struggling, strategic exits and secondary markets are evolving to address liquidity needs.

Philip Fries (22:13): “The hangover had to be tough. The hangover...has to clear the excesses.”

He envisions a future where secondary markets and innovative funding mechanisms like Evergreen funds provide sustainable liquidity solutions.

9. Future Growth and Capital Sources for KKR's Europe Fund

Looking ahead, Philip anticipates significant growth for KKR's European assets under management, projecting a potential tripling within the next decade. He attributes this to the expanding universe of capital sources, including retail funds and insurance capital.

Philip Fries (29:06): “The capital itself will be doubled and triple. The source of it won't be necessarily a fund. It could be those retail funds that I mentioned, or it could be some part of the insurance capital.”

10. European Market Fragmentation and Capital Market Union

Philip addresses the challenges posed by Europe's fragmented capital markets, advocating for a unified Capital Market Union to streamline investment processes across the continent. He underscores the necessity of removing artificial barriers between nations to foster a robust and integrated investment environment.

Philip Fries (40:21): “We need a capital market union. We need to come together and do away with artificial limits between 27 nation states...”

11. Currency Reserves: US Dollar vs Euro vs Bitcoin

The discussion shifts to global reserve currencies, where Philip posits that the US dollar will likely remain the dominant reserve currency for the next decade, while the euro and Bitcoin are emerging as potential challengers.

Philip Fries (35:14): “I think that it's impossible to replace reserve currencies that quickly. Will the US dollar be the reserve currency in 50 years? I couldn't tell you.”

He acknowledges Bitcoin's growing influence but remains skeptical of its immediate viability as a global reserve currency.

12. AI's Impact on Productivity and Employment

Philip contemplates the dual-edged sword of AI, recognizing its potential to boost productivity but also foreseeing significant disruptions in the labor market. He emphasizes the need for institutional mechanisms to redistribute the gains from AI-driven growth to mitigate societal imbalances.

Philip Fries (46:30): “It's too early to tell. Well, I think it will. However, productivity gains which will be extremely beneficial to the world don't mean that the challenges...will be solved.”

13. Relationship with Money

On a personal note, Philip shares his evolving perspective on money, moving from viewing it as paramount to appreciating its role as a foundation for enabling meaningful work and personal fulfillment.

Philip Fries (51:22): “It's not about making returns...It was the most incredible experience to learn...It's only an output.”

14. Quick Fire Questions and Insights

In the rapid-fire segment, Philip shares his admiration for Warren Buffett, recounts his most painful investing lesson from Venture Park, and expresses a desire to see KKR's European assets significantly grow in the next decade. He also candidly admits passing on an investment opportunity with Alibaba, highlighting the importance of disciplined decision-making.

15. Conclusion

The episode wraps up with mutual appreciation between Harry and Philip, acknowledging the depth of insights shared. Philip reiterates the importance of broad-based participation in private equity to democratize wealth creation and ensure sustainable economic growth.

Notable Quotes

• Philip Fries (05:04): “In bull markets you just got to keep perspective and humility and not take yourself for a genius.”

• Philip Fries (08:00): “What we thought was a protected player... suddenly there was some other entrant... we lost our shirt.”

• Philip Fries (15:14): “We have to top down as the lead of the fund, make those calls... you just have to force yourself to sell it.”

• Philip Fries (17:44): “The underlying principles of capital allocation has to be very thought through and rational. It hasn't changed.”

• Philip Fries (35:14): “I think that it's impossible to replace reserve currencies that quickly.”

• Philip Fries (46:30): “It's too early to tell. Well, I think it will.”

• Philip Fries (51:22): “It's not about making returns... It's only an output.”

Conclusion

This episode offers a comprehensive look into the strategic mindset and operational philosophies that drive one of Europe’s foremost private equity funds. Philip Fries provides invaluable lessons on risk management, the importance of disciplined investing, and the critical need for innovation and integration within Europe’s fragmented markets. His candid reflections on past failures and future-facing strategies offer listeners a nuanced understanding of the evolving private equity landscape.

For those interested in gaining deeper insights into venture capital and private equity, The Twenty Minute VC continues to host conversations with industry leaders shaping the future of startup funding and investment.