February 5, 2014
Interviewed by: David Snow
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Managing Music: KKR’s Investment in BMG

Philipp Freise, who leads KKR’s European media industry team, shares details about KKR’s highly successful investment in music-rights management business BMG, including a key “digital first” strategy and equity stake for management.

Philipp Freise, who leads KKR’s European media industry team, shares details about KKR’s highly successful investment in music-rights management business BMG, including a key “digital first” strategy and equity stake for management.

Managing Music: KKR’s Investment in BMG

PE Value-Creation Stories with Philipp Freise of KKR

What was KKR’s thesis when it invested in BMG in 2009?

Freise: One of the things at KKR we believe in is we really work hard at understanding meta trends. We try to see them earlier than others. The way music is consumed was being transformed from the CD to much more diverse uses of music, between downloads, streaming, music being syndicated into advertising, you know music being syndicated into games, music being all pervasive. The statistic is really interesting.

Between 2000 and 2010, the actual usage of music went actually up four times.

How did the partnership with Bertelsmann come about?

Freise: So we came back in the music industry with this different approach and we did it centered around a partnership, a partnership with a management team that had been really creative and centered around Bertelsmann, the family owned media company I’ve mentioned. Because we knew that in order to grow this company fast, it was important to have a trusted brand and to have a really entrepreneurial management team.

So what we did is at the darkest hour, we actually went to that team and to Bertelsmann and said we believe there’s a big opportunity, we believe the opportunity for us as partners, here’s $50 million, let’s use that capital to buy into some catalogues, let’s form a company around a great technology and let’s grow it fast. We then ended up deploying $400 million of equity capital of which we were half and Bertelsmann was half and growing that company thirty-fold in terms of revenues over four years and becoming the largest independent music company globally.

Was there any equity ownership among BMG management prior to KKR’s involvement?

Freise: That’s a very important question, there wasn’t. So that’s exactly one of the things we said. We said let’s give that management team real ownership in the business, they ended up taking roughly a ten percent stake. In fact, I had some sleepless nights about this because I’m very close to them, I mean we worked on this every day together and they basically approached and said, “Look, I’m going to put double mortgages on my house, we really believe in this. Are you in with us, do you also believe in it?” And you know, clearly that’s a big responsibility. There’s always a risk in doing this. Did it really well and it was a pleasure working with them, but you see, that type of risk taking and entrepreneurial attitude within a large corporation was really exceptional. And that I think was the foundation of the success.

How did you get a music publishing business with such a long history focused on a digital-first strategy?

Freise: You know, I’ve seen technology companies really be successful when technology is defined not as a means in itself, but as a means to serve a larger purpose. Here it was really to serve the artist, who is the customer. And the management team wanted to achieve more transparency and more speed. So when you are the artist, let’s pick one…you know, we had Adele for instance, you want to make sure that you tell Adele every quarter, “Here’s how much you’ve earned with your songs and with your activity and you want to make sure you deliver those earnings to her faster than others can.” Because technology was central to that, management really wholeheartedly embraced that from the start. But I think the key point here is that it wasn’t the beauty in the technology, it was the beauty that they saw in actually the functionality of the technology in delivering transparency and speed, which really convinced everybody from the start.

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