KKR’s dealmakers are well-acquainted with profiting from complicated circumstances.
Nonetheless, visiting Thames Water’s large Beckton Sewage Treatment site isn’t exactly a glamorous task. Originally part of the Victorian sewer system supervised by Sir Joseph Bazalgette, Beckton has grown to become the largest waste treatment facility in Europe, catering to over 4 million residents in London. It has undergone significant renovations to minimize human waste from entering the River Thames during heavy rainfall.
Executives from the U.S. private equity firm recently toured Beckton, experiencing its sights and smells, which is part of KKR’s thorough investigation as they aim to acquire the nearly bankrupt utility and avert its nationalization due to about £20 billion in debt.
With their £4 billion proposal, KKR is now the preferred bidder for Thames Water, which serves 16 million individuals across London and the Thames Valley. The company, managing $638 billion in assets, is currently in a 10-week exclusive period for raising equity for the utility, whose previous shareholders essentially abandoned ship last year. Thames Water aims to finalize a deal by June.
KKR has the difficult task of not only extracting profits from Thames Water’s aging infrastructure but also securing the approval of regulators and the competitive hedge funds holding the utility’s bonds. As if that weren’t challenging enough, KKR is navigating through a climate where Thames Water has become a focal point for public frustration regarding the condition of the country’s water systems.
Even KKR’s investigation efforts could provoke backlash since Thames Water is partially funding the estimated £15 million monthly cost for the approximately 100 individuals assessing the deal, as per knowledgeable sources.
While it is not uncommon for a company to cover some costs for prospective buyers—which for KKR includes hiring advisers from investment bank PJT Partners, law firm Kirkland & Ellis, and consultant Roland Berger—Thames Water’s restructuring bill has already drawn criticism.
Some activists have pointed to KKR’s notorious reputation, as the firm, known for its leveraged buyouts, earned the nickname “Barbarians at the Gate” for its aggressive takeover of U.S. conglomerate RJR Nabisco in the late 1980s.
Charlie Maynard, a Liberal Democrat MP who led a public-interest lawsuit against Thames Water accumulating more high-interest debt, remarked that allowing the utility to stay heavily indebted under new private equity control felt “like watching a rerun of a horror movie.”
“This is what got Thames Water into trouble in the first place,” he added.
Thames Water stated that the bid represents a “holistic and fundamental recapitalization.”
KKR representatives have noted that its infrastructure division targets lower annual returns—ranging from 10% to 15%—in contrast to its more aggressive private equity funds, while retaining assets longer than typical funds would prefer.
This $86 billion infrastructure arm has become increasingly crucial for KKR, particularly as economic fluctuations have limited deal-making opportunities, making it tougher to provide returns to investors in its private equity operations.
Infrastructure plays a significant role in KKR’s recent initiative to attract affluent investors, drawn by the opportunity to own unique, cash-generating assets. A Luxembourg-based infrastructure fund targeting individual investors reportedly has delivered an annualized return of around 13.5% since its launch in June 2023, according to recent filings.
However, not all of its recent infrastructure investments have been successful as expected.
FiberCop, the fixed-line telecommunications network that emerged from Telecom Italia last year in a prominent €22 billion deal, stands as the second-largest asset in the Luxembourg fund.
KKR has encountered disagreements with FiberCop’s leadership regarding a predicted €449 million earnings shortfall, as previously reported by the Financial Times, prompting the firm to assume greater authority over the sensitive business.
FiberCop, like Thames Water, has origins in a state-owned enterprise and previously stated that its 2025 budget aligned with the arrangements made by earlier shareholders, insisting there was no discord among its owners.
James Gordon, KKR partner and one of the masterminds behind the FiberCop deal, is also leading the Thames Water acquisition.
Gordon, along with several senior colleagues from KKR’s infrastructure team, spent significant time at Australia’s Macquarie, Thames Water’s previous owner criticized for burdening the utility with more debt before exiting in a 2017 sale.
However, none of KKR’s notable Macquarie alumni were involved in the earlier Thames Water purchase, according to insider sources.
Still, the complex legacy from the Australian firm’s ownership adds to why any bid for the utility comes under intense scrutiny.
Ofwat, the regulatory body for the sector, expressed dissatisfaction with Thames Water granting KKR a period of exclusivity that excluded other bidders, as per people familiar with the situation. Although the regulator has no authority over Thames Water’s equity raise, they perceive KKR as a credible prospective owner and would have favored a continuation of competitive offers from multiple bidders, according to sources. Ofwat declined to comment.
Thames Water asserted that “there is no certainty that a binding equity proposal will emerge as it remains subject to diligence, documentation, and regulatory and other approvals.
“Consequently, certain senior creditors continue to explore alternative transaction structures in parallel to facilitate the recapitalization of the business. Thus, inherent competition persists during this process.”
KKR’s main rival is CK Infrastructure, part of Hong Kong’s CK Hutchison group that has strong connections in Britain. CKI and KKR already share ownership of Northumbrian Water, with CKI holding the majority stake and KKR the minority.
Sources close to the discussions indicate that KKR has adopted a more collaborative strategy towards Thames Water’s influential leading creditors. In contrast, CKI’s bid has been contingent on bondholders within the nearly £20 billion debt of Thames Water accepting steeper reductions.
While the specifics of the restructuring accompanying KKR’s proposed £4 billion equity investment are still being finalized, discussions suggest that Thames Water’s senior bonds could experience write-downs of 25% or more.
KKR’s initial bid included a proposal providing these bondholders the chance to invest in Thames Water’s equity, potentially allowing them to hold up to a 50% share, according to an insider close to the negotiations. This would open the door for U.S. hedge funds such as Elliott Management and Silver Point Capital.
The holders of the debt are set to become shareholders along with KKR.
Due to the variety of bondholders, which also include major insurers and asset managers, many creditors anticipate being presented with a “Chinese menu” style option. This would allow them to choose different amounts of new debt and equity based on their individual risk preferences.
KKR intends to eliminate £1bn of lower-ranking class B bondholders associated with Thames Water, but they must show London’s courts that these reductions are being implemented justly. Just last month, the courts approved a £3bn emergency loan from senior bondholders after a lengthy legal dispute with junior creditors.
If KKR does not satisfy the bondholders, creditors might submit their own competing bid for the utility. If that does not happen, Thames Water might still undergo temporary nationalization through the government’s special administration process.
Even with an agreement in place, the real challenge of managing a struggling utility that caters to nearly a quarter of the UK population is only just beginning.
KKR executives have stressed that a complete turnaround could take between seven to twelve years, after which they might consider cashing out through a public offering.
The utility has halted its challenge against Ofwat regarding the recent decision about how much Thames Water can increase customer charges. However, KKR seeks to convince the regulator to reduce previous fines, according to sources close to the company.
KKR has shown readiness to engage with regulators in other regions. In September, the firm and other investors in a Finnish electricity network took legal action against Finland, after the Finnish Energy Authority attempted to limit rising power transmission costs. The dispute is still underway.
Nonetheless, the challenges at Thames Water are significant, even for the most seasoned investors.
“There are many simpler deals KKR could pursue and still achieve their [minimum expected return],” noted an adviser to some of Thames Water’s creditors. “Similarly large and more experienced infrastructure funds have struggled after seven years of attempting to rejuvenate Thames.”
