Henry Kravis, the king of rough-and-tumble leveraged buyouts, picked up a phone at his home in Palm Beach, Fla., and called the chief executive of one of Spain’s biggest producers of building materials.

It was March 2013, and Uralita, reeling from Europe’s credit crisis, had hit a wall. The company faced a loan repayment to five Spanish banks that were reluctant to keep rolling over the debt.

Kravis offered Uralita a $435 million lifeline from a $2 billion fund that invests in distressed businesses. The catch: CEO Javier Serratosa had to agree to work solely with Kravis’s private-equity firm, KKR, and turn down other offers, including one from Blackstone, trusting KKR wouldn’t pull out or change its terms.

Serratosa and Kravis spoke for an hour, bonding over people they knew in common and their love of shooting red-legged partridge in the Spanish countryside.

“He was out of ammo, and he wanted to know, ‘If I pick you, will you be there at the finish line?’ ” Kravis says, sitting in his 42nd-floor library at KKR’s Manhattan headquarters. “I tell our guys, ‘Don’t ever go in and bait and switch.’ If we tell you we’re going to do something, we’re going to do it.”

Making a call to rescue Uralita shows how far Kravis has come since his firm’s bare-knuckle 1988 takeover fight for RJR Nabisco earned him a reputation as a corporate buccaneer.

At 70, Kravis, who’s worth $4.8 billion according to the Bloomberg Billionaires Index, shows no sign of getting ready to retire. He and co-founder George Roberts, also 70, are eager to make sure they don’t miss a juicy deal. They have been using their legendary names to open doors and transform KKR into a nimble credit player that can act as lender, investor and syndicator at the same time, making it reminiscent of banks such as Goldman Sachs, minus the sales and trading, before regulators curtailed their reach.

With $102.3 billion in assets under management, KKR is underwriting and syndicating debt and equity, lending money directly to distressed companies and financing the deals of midsize private-equity firms. That’s on top of KKR’s own private-equity business, which owns or holds stakes in more than 90 companies with combined annual revenue of $200 billion.

Kravis and Roberts have survived at the peak of financial power even after blunders such as the KKR-led, $48 billion 2007 takeover of what is now Energy Future Holdings, the Texas utility that filed for bankruptcy in April.

“After nearly four decades, despite some horrendous losses, the dot-com and subprime crises, and vituperation in the media, the firm seems as bold as ever,” says Erik Gordon, University of Michigan professor of private equity, business and law.

So does Kravis. He has defended private equity from attacks that he and his peers are job destroyers and asset strippers. He and his wife, Marie-Josée, president of the Museum of Modern Art in New York, gave $100 million in May to the Memorial Sloan Kettering Cancer Center, matching the gift he made to Columbia Business School, where he earned an MBA in 1969.

KKR has a $10 billion balance sheet at its disposal to support and expand underwriting, far more than any other private-equity firm. It has managed $4.1 billion of debt and equity sales for companies since 2011. The firm, which listed on the New York Stock Exchange in 2010, has added energy and infrastructure investing, a maritime finance unit, and credit and hedge funds to its arsenal.

“Our balance sheet gives us that extra firepower,” Kravis says. “We can provide almost any kind of debt product a company may need. We can provide equity, and we can take minority or majority positions in a company.”

KKR and other asset managers have stepped into the void left by banks forced to sell assets to meet tough new capital adequacy rules in the wake of the financial crisis. In the euro area alone, banks have shrunk their balance sheets by 3.5 trillion euros since 2009 as they’ve cut lending.

Private-equity and hedge-fund managers led by Leon Black’s Apollo Global Management, Marc Lasry’s Avenue Capital Group and Stephen Schwarzman’s Blackstone have scooped up tens of billions of dollars in existing European bank loans at discounted prices since 2008. As banks take flight, companies hungry for capital are turning to firms such as KKR for loans, spurring a surge in unfettered non-bank lending that regulators are watching closely.

“They have built a large shadow-banking activity that is beyond the reach of financial regulators,” says Colin Blaydon, a professor at Dartmouth College’s Tuck School of Business. “No one has figured out if this means there is systemic risk that is not getting the same oversight as the risk that brought us 2008.”

‘Continually mutates’

Private-equity firms don’t pose dangers unless they are financing long-term lending with high levels of short-term debt, says Adair Turner, a former chairman of Britain’s Financial Services Authority. Regulators need to be alert to loan funds transforming into de facto banks with excessive leverage financed by short-term repurchase agreements, he says.

“What things are called and what they do continually mutates,” Turner says. “Non-bank lending will start out like that, but 10 years later, it will have replicated the risks of banks if you’re not careful.”

KKR says it isn’t courting the same risks as banks, because it doesn’t have deposits and doesn’t rely on short-term borrowing.

“The alternative capital markets are doing exactly what the regulators want, which is to find other sources of lending to middle-market companies to properly finance companies to grow and create jobs,” says Craig Farr, who oversees the firm’s asset-management unit.

With $10 billion of assets for loans, KKR isn’t the deepest-pocketed of this new breed of lender. Ares Management, a Los Angeles firm with $74 billion of managed capital, says it has gathered $27 billion to make corporate loans. GSO Capital Partners, Blackstone’s $66 billion credit arm, has sunk more than $20 billion since 2007 into direct loans, about 10 percent of it in Europe, and has an additional $6 billion of dry powder ready for new deals.

KKR also faces competition from about 75 publicly traded U.S. credit and lending funds known as business development companies, many tied to private-equity firms. Since 2003, their combined assets have ballooned to $67.4 billion from $5 billion, according to the Securities and Exchange Commission.

What distinguishes KKR isn’t its size as much as its model. Since 2009, it has deployed lending vehicles, from bailout loans to those used to fund leveraged buyouts or refinance midsize companies’ debt. It has lent directly to firms such as Hilding Anders, Europe’s largest mattress maker, and Excelitas Technologies, a provider of electronics products.

KKR’s debt funds are reaping big returns. Its special-situations fund had a 47 percent gross average annual return as of March 31, according to company filings. About a quarter of the fund has gone into bailout loans and most of the rest into beaten-down credits. The mezzanine, or junior debt, fund returned 19.2 percent, and the senior buyout loan fund delivered 16 percent. The first two funds use no leverage to juice returns, while the senior loan pool does.

The firm has recruited 40 capital-markets employees to offer customized debt packages to companies and mid-tier buyout firms. Like a bank — and rare among major private-equity companies — KKR is able to syndicate, or market, blocks of debt and equity to investors. It’s one of the only firms besides Blackstone and Ares flexible enough to invest across the capital structure of a company, says Jon Mattson, a partner at Trilantic Capital Management, a buyout firm with $6 billion in assets.

“KKR is much more of a merchant bank,” Mattson says, referring to the practice of advising, investing, lending and underwriting. “They are doing what investment banks in the U.S. did 30 years ago. If you ask who the new Goldman Sachses are going to be, you can see it.”

Kravis founded KKR in 1976 with Roberts, his first cousin, and their former Bear Stearns boss, Jerome Kohlberg. Three years later, they captivated Wall Street with a $380 million purchase of industrial pumps maker Houdaille Industries. The deal’s cutting-edge debt architecture, consisting of bank loans and junior debt, became the prototype for every leveraged buyout that followed. Kohlberg Kravis Roberts dominated the buyout world in the 1980s, even after Kohlberg left in 1987. Its 1988 victory in the $31 billion takeover battle for RJR Nabisco inspired the bestseller “Barbarians at the Gate.”

A decade later, the firm had fallen behind. By then, Carlyle Group and Blackstone were hatching real estate and credit businesses and Blackstone had pulled even with KKR in size. In a 1998 Businessweek story, Blackstone’s Schwarzman slammed KKR as a “one-trick pony.”

The label no longer fits. In the past decade, KKR and other major private-equity houses have branched out. The race to go public, starting with Fortress Investment and Blackstone in 2007, spurred firms to add businesses as shareholders demanded diversified earnings streams.

KKR shares have trailed those of competitors because the firm was slower to diversify. The shares are down 2 percent this year, compared with a 5 percent gain for Blackstone. The lag has persisted even as KKR’s flagship $17.6 billion private-equity fund, raised in 2006, has lodged annual average net returns of 8.5 percent, beating Blackstone’s $21.7 billion fund raised the same year, which has posted average net gains of 7 percent.

Stockholders, unlike investors in the firm’s funds, have a stake in the company, whose earnings derive from incentive and management fees the funds generate.

‘The light goes on’

Kravis traces his campaign to change KKR to 2002. Williams Cos., a pipeline operator that had talked to KKR about a buyout, needed $900 million to avert bankruptcy. KKR drew up a deal for Williams that it couldn’t do itself, because it involved debt and no equity. Warren Buffett stepped in, earning a big profit, Kravis says. “The light goes on,” Kravis recalls. “We had to figure out how we don’t throw these ideas away.”

KKR started its first debt vehicle, KKR Financial Holdings, in 2004. The reinvention kicked into high gear in 2007, after Kravis and Roberts recruited Farr, Citigroup’s co-head of North American equity underwriting, to head KCM, its fledgling capital-markets operation.

KCM grew into a potent fee machine. Last year, KKR syndicated $1.1 billion of capital in 16 equity and 112 debt offerings, garnering $146 million in fees.

Three executives at top banks say they initially viewed KKR’s muscling into their turf with alarm. A case that stands out for one was KKR’s taking more than $75 million in underwriting fees when it exited its investment in Dollar General through public stock offerings from 2009 to 2013.

The bankers say they’ve learned to live with KKR and are even grateful. The firm’s $7.4 billion buyout of Dollar General gave rise to a bonanza of fees, allowing banks to earn more from KKR than its push into underwriting has cost them, they say.

In 2009, KKR moved full tilt into lending to companies it didn’t own. The firm squared off against Blackstone’s GSO, Ares and others with lending franchises by creating a suite of financing choices for midsize companies. That year, KKR began gathering what would swell into a $6 billion special-situations pool to bail out cash-strapped companies and to buy distressed corporate debt. In 2010 it added a $1 billion mezzanine fund and in 2011 a $1.2 billion fund to provide middle-market private-equity shops and companies with senior financing.

The following year, it became the first big private-equity firm to underwrite and syndicate debt and equity offerings, similar to Wall Street banks, to unrelated buyout sponsors and companies.

KKR has clout in the underwriting business because of its balance sheet. It created the trove as a result of the unusual way it went public: In 2010, following a more than 50 percent plunge in the value of KKR Private Equity Investors’ portfolio and an even steeper dive in its stock, KKR offered to absorb the traded fund’s assets onto its own balance sheet and not simply manage them. The firm has used this war chest, whose value mushroomed as markets rebounded, to seed or acquire hedge funds, real estate and energy-investing businesses and credit funds.

Not all of its wagers have paid off. In June, KKR liquidated an equity hedge fund it started after hiring 12 Goldman Sachs proprietary traders.

KKR is betting big on Europe. Kravis, who travels there once a month, says banks in the region are behind the United States in ridding their books of bad assets.

“They kicked the can down the road,” he says. “Europe today is where the U.S. probably was a few years ago.”

KKR’s setup resembles some of what banks did before the 2010 Dodd-Frank Act and its Volcker Rule shuttered proprietary-trading desks.

“Banks like Goldman and Deutsche would originate loans on their prop desks,” says Erik Falk, KKR’s co-head of leveraged credit. “They’d take some down and syndicate the rest. The difference is, we provide long-term capital that is not backed by deposits or guaranteed by the government.”

Private-equity firms lending to already overleveraged companies suggests that credit markets may be too hot, says Jon Moulton, founder of Better Capital, a turnaround specialist. The firms “are undoubtedly buying a lot of risk at the moment,” he says. “There’s a lot of debt out there and people chasing returns.”

Kravis points to differences with banks in scale and cost. “We’re not going to bet the firm,” he says. “Banks are huge. They’ve got thousands of salespeople, and they can underwrite a lot of things we just can’t do. We are not the next Goldman Sachs or JPMorgan. We are opportunistically doing what they did.”

A one-stop adviser

KKR is trying to turn itself into a one-stop adviser. At an April meeting of the firm’s top 440 executives in Rancho Palos Verdes, Calif., Kravis and Roberts urged everyone to use the “whole brain” of the firm when talking to clients. “If you’re seeing a company, think in terms of what the company needs,” Kravis said. “Maybe it’s a growth equity investment. Maybe it’s some specific type of financing.”

Kravis and Roberts have set up a compensation system that encourages deals that pull in multiple arms of KKR. Rejecting the “eat what you kill” culture Kravis says they experienced at Bear Stearns, they have made sure pay isn’t based just on what business an executive brings in. Instead, KKR has a single pot, where profits from funds and capital-markets fees are pooled and then shared among executives who are rewarded for kicking ideas to other parts of the firm.

KKR has seized the opportunity created by European banks retreating from company financing. Last year, Arle Capital Partners, a mid-market private-equity firm in London, spoke with KKR when it was pondering whether to sell or refinance Hilding Anders, one of its portfolio companies. With 800 million euros ($1.08 billion) of debt and a syndicate of bank lenders wanting to cut their exposure, Malmo, Sweden-based Hilding got a 350-million-euro loan from KKR in September. KKR got warrants that convert into 30 percent of the mattress company’s equity.

“It’s given us breathing space,” says Alex Myers, Hilding’s CEO.

KKR drew on experience from its $1.6 billion 2004 buyout of Sealy, then the largest U.S. mattress manufacturer. The private-equity firm bolstered Sealy in 2009 with additional equity after sales fell and sold it four years later for about a 30 percent profit.

That deal gave KKR a knowledge base to advise Hilding. KKR tapped its special-situations and mezzanine funds to finance the loan. KKR’s capital-markets arm worked alongside Deutsche Bank to negotiate an extension to the company’s remaining bank debt.

“We threw the kitchen sink at this one,” says Marc Ciancimino, KKR’s global head of mezzanine debt. “Every part of the firm got involved.”

For Serratosa, the Uralita CEO, KKR’s willingness to provide long-term financing without demanding an equity stake won him over. The private-equity firm also arranged a bridge loan of 10 million euros, backed by receivables, to tide the company over until the deal got done.

“They were the most flexible,” Serratosa says. “KKR was hungry for this deal.”

For his part, Kravis sounds like he’s just getting started. Sitting next to a photo of Joe & Rose’s, the Manhattan restaurant where he had dinner with Roberts the night before setting up KKR, Kravis thinks the firm is as well positioned now for opportunities as it was 38 years ago.

“I think we’re in the second or third inning,” he says. “I’m working harder today than I’ve ever worked in my life.”

The full version of this Bloomberg Markets article appears in the July/August issue.