Henry Kravis is Raising Money for Inner City NYC

Business Week
March 2, 1998
Page 86

The LBO king is raising millions for inner city NYC

By Leah Nathans Spiro in New York
(Copyright 1998 McGraw-Hill, Inc.)

Van Deward Woods, owner of Sylvia's Restaurant, a popular Harlem soul food eatery, and billionaire Henry R. Kravis don't have much in common. Woods, son of founder Sylvia Woods, serves up fried chicken and ribs on a gritty Lenox Avenue block where street vendors blast rap music. The offices of Kravis' firm, Kohlberg Kravis Roberts & Co., soar above tony West 57th Street, offering dazzling views of Central Park.

Their lives, however, have become curiously entwined. Kravis' creation, the New York City Investment Fund, has dedicated a team of executives, led by former Liz Claiborne Chief Executive Jerome A. Chazen, to consider an investment in Sylvia's. The fund also has introduced Woods to key food company executives to provide strategic advice about expanding his company, possibly putting Sylvia's canned collard greens and yams in supermarkets nationwide and bringing jobs to Harlem. ``To meet the chief executive of one of the largest food companies in the world...'' the African-American entrepreneur marvels. ``It was almost spiritual for me.''

And Kravis? He wants to create jobs in New York City and support African-American businesses. He opened the New York Fund in September, 1996, and since has collared 62 New York-based companies, including AT&T, Bankers Trust, and Pfizer, to kick in $1 million apiece. He also has enlisted a pantheon of business titans, among them Jerry I. Speyer, CEO of Tishman Speyer Properties; Richard D. Parson, president of Time Warner; and Walter V. Shipley, CEO of Chase Manhattan, to focus on their own backyard. They and their high-powered staffs ``have said to me, `I'd like to give back to the city,' yet didn't know how,'' says Kravis. ``We now have a vehicle where people are learning something and doing some good.'' PAYBACK TIME. ``Do-gooder'' is not Kravis' accustomed public role. He was pilloried through the 1980s for buying companies, including RJR Nabisco in 1988, then piling on debt and laying off thousands--all for huge fees. Kravis still co-heads KKR, which, having raised a $6 billion fund in 1996, is the world's largest leveraged buyout firm.

Yet Corporate America has long since embraced similar strategies as imperative to enhancing shareholder value. And Kravis' lofty perch--replete with money, access, and power--now affords him a unique opportunity to marshal the resources of New York's fractious business world. Financial services is the biggest industry in New York, and as the biggest financial-services client in town, KKR has paid billions in fees over the years to New York banks and brokers. Kravis is, in effect, calling in chits--and few of New York's moneymen want to turn him down. ``There is a very, very strong personality and driven person behind [the fund],'' says David H. Komansky, CEO of Merrill Lynch & Co. and a fund board member. ``Henry is not in this to fail, and neither are we.'' MISSED GOAL. Over the years, Kravis has raised millions for charities. But it was financier David Rockefeller, whose New York City Partnership brought business leaders together in 1979 to address housing and education, who inspired him. Kravis says a few years ago Rockefeller gave him this advice: ``The main thing is to be personally involved in giving. Set up something creative, innovative--and be personally involved.'' And at age 54, Kravis may have an eye on the history books. ``He would like to be remembered for more than RJR,'' says Deryck Maughan, co-CEO of Salomon Smith Barney and a fund board member.

If the fund succeeds, it could do more than burnish Kravis' image. It could provide a blueprint for other cities' elites to support business development. It will be an uphill battle, though. While some U.S. business communities, such as Cleveland, have mobilized successfully to back real estate projects, Detroit's Renaissance Center in the 1970s and Peter Ueberroth's campaign to rebuild riot-scarred Los Angeles in the 1980s both were embarrassing flops, doomed by incoherent business plans.

The New York City fund has encountered early problems of its own. Even Kravis, a consummate fund-raiser, remains short of his $100 million goal. Moreover, his staff has found it difficult to find projects that meet the fund's criteria: create jobs, earn decent returns, and nurture important industries and African-American-owned businesses. Of about 250 proposals, in fact, the fund has invested only in seven, committing just $12 million. And the projects actually under way aren't close enough to fruition to assess their success.

But Kravis' venture has several promising attributes. It is modeled after KKR, wherein Kravis and his 10 partners evaluate potential investments, then watch over them until they can be sold for a handsome return. Indeed, the fund is a for-profit operation that pledges to return its investors' principal in 15 years, albeit without interest. Says Kravis: ``We take this as seriously as KKR deals. Only we are looking for returns in job creation as opposed to huge rates of return.'' Like KKR, too, the fund diversifies its bets--across retailing, health care, media, and other industries at the local economy's core. ``They imagine a city to be like a good balanced stock portfolio,'' says Bennett Harrison, professor of urban political economics at the New School for Social Research. ``If some of the bets don't pay off, the portfolio still does well.''

The fund's biggest strength, though, is the volunteer legion of business brains that augments its small, paid staff. Below the board level, top-flight bankers and executives serve on six sector groups, from manufacturing to education. Members generate projects and, as a perk, network with others in their fields. ``It mixes business and pro bono stuff,'' says Mahmoud Mamdani, a managing director at Morgan Stanley, Dean Witter, Discover & Co. who advises Sylvia's.

The networking can blossom in unexpected ways. At an October meeting of the fund's media group, Jack Gergen, a senior vice-president at CBS Inc., noted that all three TV networks are headquartered in New York and all will spend hundreds of millions to switch to digital technology in the next few years. Why not use their clout with vendors and stations to ensure that some of the equipment be manufactured in New York? Claire Shulman, Queens borough president, responded: ``I have land''--lots in Queens for new factories. Gergen is meeting with other network executives to pursue the notion.

In another deal, Kravis pressed Komansky to recruit Merrill Lynch clients as tenants for a Brooklyn retail strip. So far, Rite Aid, State Farm, and Citicorp have signed on. And the CEO of a KKR-owned health-care company, Al Waxman, came up with the idea of backing a managed care group for Medicaid recipients in Queens and Brooklyn with a $2 million investment. It has already added more than 100 jobs.

Kravis spends a good chunk of his time overseeing the fund's work and twisting new arms. His involvement ``establishes that no matter how busy you are, no matter how important you are, this is something worth doing,'' says Kathryn S. Wylde, whom Kravis plucked from the NYC Housing Partnership to run the fund. Will it work? Kravis surely won't change New York overnight--but he may create some jobs, bankroll a few companies, and help Sylvia's collard greens go national.

Works in Progress

Some of the New York City Investment Fund's projects:

PARTNERSHIP PLAZA $2.50 David Komansky, CEO, Merrill Lynch 1000 Building six inner city shopping strips
ROYAL HEALTH CARE 2.00 Russell Carson, partner, Welch, Carson, Anderson & Stowe; Jeffrey Krauss, partner, Nazem & Co. 850 Medicaid managed care organization at two hospitals, in Brooklyn and Queens
SHOOTING GALLERY 1.50 Michael Lobdell, managing director, J.P. Morgan 250 Film production center in lower Manhattan
ERICSSON CYBERLAB EAST 0.75 Ed Horowitz, Citicorp; Clifford Friedman, Bear Stearns 10 Product-testing lab in Manhattan for New York's Internet industry


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