Deal in focus: KKR invests ‘entrepreneurial capital' in arago

Earlier this month, KKR injected $55m into arago in return for a minority stake, investing from its balance sheet in order to access a transaction outside of its fund remit.

Before arago had even decided to look for investment, KKR's technology-focused entrepreneurial network brought both parties together. Following arago's decision to roll out its product globally, which came in late-2013, the company realised it needed external funding. "Scaling the business in the US while continuing the daily running of the business here placed more demands on us than we were comfortable with," says Chris Boos, arago's co-founder. "There's so much money around if you deal with disruptive technologies that it's not hard to get an offer for funding. But it's hard to get an offer from somebody for more than just money."

arago has developed a service to automate IT operations within companies, based on requirements observed within its own business. "We felt that IT was stealing time from what we really wanted to do and thought other people might feel the same way. There is huge demand to take automation to a level that doesn't first require standardisation and consolidation of processes," says Boos.

The process of obtaining growth capital was not a quick one, which both parties appreciate. "This is indicative of where the best investments in Europe lie. It's not done overnight – you have to go out of your way to find hidden champions," says Philipp Freise, head of KKR's European media and digital investment team.

Entrepreneurial capital
"Progress is impossible without change," famously remarked George Bernard Shaw, playwright and co-founder of the London School of Economics. And KKR's first European investment using capital from its balance sheet is certainly a departure from its usual investment strategy, yet one that it plans to continue. Indeed, the buyout behemoth also recently invested in The Hut and OEG Offshore, also from its balance sheet.

Freise states KKR sees the potential to help out the families and entrepreneurs operating in areas such as the German Mittelstand, even if the value of the transaction is below the minimum threshold for KKR's funds. "This deal marks the start of the effort – a new era of growth investing. Companies like arago want something more than just capital," says Freise. "We're providing 'entrepreneurial capital' – hands-on support building and managing a company, as well as financing."

Freise details three parts to "entrepreneurial capital": first, KKR can provide access to its portfolio of more than 90 companies, which have a combined IT spend of $10bn. Second, KKR's global presence can assist in scaling arago worldwide; and third, the firm can assist in managing high growth within the portfolio company. "It's about institutionalising entrepreneurship," explains Freise. 

While Freise labels Boos as a "world-class entrepreneur", the man himself admits he and his team might be good technologists but they lack KKR's experience in growing companies: "We've had very good feedback on things we're not good at. We are benefiting from KKR's experience with the B2B sector as our clientele are so different from consumer businesses, where disruptive technologies have so far been applied. We feel that someone who understands this can really help a lot," says Boos.

Aside from taking two arago board seats, KKR stands to benefit in other ways from its first European growth equity investment: "We are investing from our balance sheet, just as we did when we established our real estate and infrastructure efforts. Once we have built a team and an investment track record, we may go out and set up a separate fund, but, as our balance sheet benefits from permanent capital, we are in no hurry to do so and will continue to focus on finding great investments like arago," says Freise.

Advisers
Equity – Hengeler Mueller (Legal).

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• Topics
• DACH
• Expansion
• Deal in focus
• KKR
• Germany