If Peter Knell were to express himself in music, he might try the rondo, with its main, recurring theme and contrasting motif.
Knell, 41, is an accomplished classical composer whose music one reviewer describes as "an evocation of furnace heat and intensity." Another says his work conveys both "a high energy and depth of sensitivity." His String Quartet No. 2 will have its West Coast premiere in November performed by the Doric String Quartet at, of all places, a Pasadena, Calif., printing plant.
Knell composes at night -- prime time for him is midnight to 2:00 a.m., long after his two children have gone to sleep -- and spends his days as a managing director in private equity firm KCB Management Inc. Knell speaks passionately about both endeavors, moving effortlessly from a discussion of tertiary real estate markets, cap rates and internal rates of return to Béla Bartók, John Adams and post-minimalist music.
The combination of a financial professional by day and a composer after-hours has precedent. American Charles Ives, a major 20th-century composer, was an insurance executive.
However, juggling the two activities has produced a unique existence for Knell and, it's safe to say, represents one of the most unusual couplings for any private equity practitioner around.
Based in an old Pasadena office building, KCB is a family affair. Knell's grandfather acquired a used buy-and-sell store called Ollie's Trading Post in 1948. His father, Harvey Knell, turned the operation into a 35-store chain of home centers, sold it to W.R. Grace & Co. in 1984 and, two years later, took the cash and founded KCB, establishing a mix of buyouts, property plays and investments in marketable securities. Peter's brother Lorin Knell came on board in 2001.
Peter manages KCB's more than $750 million real estate portfolio and is actively buying up property. He is responsible for a dedicated nursing homes fund he has overseen since creation. Peter revels in this financial world. "It came really easy," he says.
Lorin agrees that his brother's dual existence "isn't a stretch at all" and that Peter's position in KCB is a whole lot more than a family sinecure.
"He's done a fantastic job," says Lorin. "He excels at it."
Peter took a roundabout route to KCB. While he grew up around the family business, music was his first love and musical composition was his preferred direction. "I always thought that's what I was going to do," he says, tracing his own roots to a rock band in high school, when he would write his own material.
He fell in love with classical music during his first days at Princeton University, where he began playing bass in the school orchestra. "The first concert we played, I was just blown away," he recalls, citing a Brahms symphony as the ear-opener. "I said, 'Wow, this is what I want to do.' I spent the next four years getting my act together as a classical musician."
Peter graduated from Princeton, then the Juilliard School and finally the University of Texas at Austin, where, in 1997, he garnered a Ph.D. in musical composition. By then, he had won awards and gained commissions, no easy feat in the shrinking classical music world. But when his wife, Becky, thought she was heading for Columbia University and graduate work in English, Peter toyed with the idea of investment banking.
"I was already thinking about a dual career at that time," he says. "It was the heyday of the dot-com boom. There were plenty of jobs."
Becky instead enrolled at the University of Virginia, and Peter took a job on the music faculty of Virginia Commonwealth University. He thought his path was clear.
"It was an exciting time for me as a composer," he says. More recognition, commissions and awards came his way.
The trials and tribulations of academic life, the need to be in a major city, a feeling that he didn't belong in the "closed-in and self-referential" New York classical music scene, family and the weather all factored into a decision to head back to California. After attempting film composing for a year or so, Peter began to show up at the office part-time. His first effort involved benchmarking the firm's marketable securities portfolio.
He was hooked. "I decided I was good at this stuff, and I liked the stability. I get paid to do it. I figured I can write music in the evenings."
Part-time quickly turned into full-time. With Lorin overseeing the buyout side, Peter began to focus on real estate, which was his father's domain. In the summer of 2003, Peter had what he called his "trial by fire," negotiating the acquisition and the operating agreement of a chain of nursing homes. "At the crucial time to negotiate the deal, my dad goes on a trip out of the country. He said, 'If you want to do the deal, it's up to you.'?"
Peter consummated the transaction, which turned into a major success.
"I was at first very negative on the idea, because I thought our health system was unsustainable," he explains. But, he continues, he was won over by his own projections of internal rate of return and a belief that reimbursement rates weren't going to be cut immediately. "The thing has been cash flowing over 30% since we bought it in 2003," he says. "We've got, I think, 3 times the capital in cash, and we still own the equity."
Since then, Peter has overseen the creation and fundraising of a $50 million blind pool fund to invest in skilled-nursing facilities. Most recently, he witnessed the final closing in August of a $75 million real estate fund.
KCB sat out the real estate bubble. "We couldn't make it pencil," Peter says. Now, it appears the firm is making up for lost time. Peter is aggressively deploying capital, averaging, he says, about a property a month. He is investing in apartment buildings and retail in secondary and tertiary markets, including distressed cities such as Orlando, Fla., and Las Vegas.
"Our idea has been to buy where we think is the bottom of the market, with numbers that work even if the market doesn't improve. And if it does improve, it's gravy."
The strategy, he says, has already paid off. "Between the rising cap rates and very attractive debt, we can buy things that cash flow double-digits in year one, with high teens and low 20s IRR. Frankly at this point, the properties we have in our portfolio outperform our projections."
The conversation veers once more back to music. Has Peter considered writing for that old rock band of his?
"I've left that well behind," he says, breaking into a smile. He catches himself. "Although I went through a period where I was really running away from that and my music was focused on being classical." He says his thinking began to change when he spent time in New York after Virginia and saw other composers willing to engage in popular music. "Some of the energy I'm looking for in the music comes from that rock or modern sensibility," he says.
Energy he musters in both his day and his night jobs.