KKR Finds a Sheep Warehouse to Dump Its Trash

Jun. 9.09 | About: Financial Select (XLF)

I ran across an interesting announcement that bodes well for Fidelity and KKR. But I’m willing to bet it will be a bad deal for unsuspecting Fidelity investors.

Kolberg Kravis Roberts & Co. (KKR), a large well-known leveraged-buyout firm (which I consider a corporate raider) has announced that it plans to give Fidelity access to IPOs from its portfolio companies. In turn, Fidelity plans to provide IPO shares to its customers.

Discount brokers don't normally get IPOs because they aren't involved in the underwriting process (since they don't have investment banking departments).

In addition, they really don't have the kinds of relationships with huge pension funds and other financial institutions to ensure robust demand for IPOs.

But that isn't stopping KKR. In my opinion, the firm plans to offer IPOs to Fidelity because they know the sheep (Fidelity customers) will snatch them up without doing proper due diligence. In fact, it’s virtually impossible for outsiders to do proper due diligence on IPOs. This is especially true for companies taken public by buyout firms.

Ask yourself why KKR might offer IPO shares to a discount broker when they aren't providing REAL institutional clients, credit lines and other services. Sure, Fidelity claims to have an institutional division, but it’s not a real institutional division by Wall Street standards.

It just doesn't make sense to give away IPO shares to a discount brokerage unless you consider the sheep effect. And if you know anything about these LBO firms, you know they have a habit of taking public companies private, window dressing them (often by screwing the employees) and collecting huge fees for taking them public again. Apparently, the street has caught on to their game and now they need to target the sheep at Fidelity.

Most likely, KKR wants a distribution channel to pump out trash to sheep. And the sheep will snag the shares up, thinking it's a great opportunity since many of their clients have never had access to IPOs. This is just another example of sheepherding at its best. For more examples of sheepherding, tune into CNBC and FBN.