KKR Joins Blackstone in Stock Market Disillusioned With Buyouts
Henry Kravis, co-founder of KKR & Co. LP, walks outside the Sun Valley Inn during lunch at the 28th annual Allen & Co. Media and Technology Conference in Sun Valley, Idaho. Photographer: Matthew Staver/Bloomberg
July 15 (Bloomberg) -- Bloomberg's Iyan Adewuya discusses Carlyle Group's agreement to buy NBTY Inc. in a transaction valued at $3.8 billion, and the outlook for KKR & Co., whose shares will start trading on the New York Stock Exchange today. Adewuya talks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 15 (Bloomberg) -- Ed Butowsky, managing director at Chapwood Capital Investment Management talks about public offerings for RealD Inc., Smart Technologies Inc., Qlik Technologies Inc. and KKR & Co. Butowsky also discusses the outlook for the IPO market in 2011. He speaks with Deirdre Bolton on Bloomberg Television's "InBusiness With Margaret Brennan". (Source: Bloomberg)
KKR & Co. fell on its first day of trading in New York as rival Blackstone Group LP gained, capping a three-year journey by the buyout firm to gain a listing in its home town.
KKR dropped 30 cents, or 2.9 percent, to $10.20, after gaining as much as 5.5 percent earlier in the day. Blackstone, which beat it to the New York listing by three years, rose 28 cents, or 2.7 percent, to $10.56.
The decline translates into a loss of about $51 million for founders Henry Kravis and George Roberts, who hold a combined 25 percent stake, and may make it harder for the firm to sell new shares. Investors have shunned private-equity stocks since Blackstone, the largest buyout firm, sold shares three years ago, just as the credit crisis ended a three-year boom with $1.6 trillion in announced deals, many of which have yet to turn a profit.
“The wheels of the model need to start turning because, from an investor’s perspective, private equity is sitting idle again,” said Roger Freeman, an analyst with Barclays Capital in New York.
KKR, which depends on private equity investments for 62 percent of fee-related income, was valued at about six times estimated earnings in Amsterdam, where it traded until yesterday after combining last year with its listed fund. Blackstone Group LP, which has cut dependence on buyouts to 29 percent of fee income, has a price-to-earnings ratio of 10.
KKR’s Journey
Both firms are trading at less than half their price when they first went public, with valuations that are trailing those of more traditional asset managers such as Legg Mason Inc., whose multiple is about 19. KKR’s European fund hasn’t risen above its $25 IPO price. Blackstone’s all-time high of $35.06 came on June 22, the day after its initial offering.
KKR initially filed to sell shares weeks before the credit crisis crippled equity and debt markets in 2007. The firm scrapped that plan, opting to merge with its publicly traded European fund, a combination that was completed last year. A U.S. listing clears the way for KKR to issue additional stock and enables firm insiders to eventually cash out their stakes if they so choose.
Unlike Blackstone, KKR’s founders have currently no plans to sell their shares. Blackstone founders Stephen Schwarzman and Peter G. Peterson pocketed a combined $2.6 billion in the New York-based firm’s initial public offering.
Fee Income
KKR has filed to sell $500 million in new shares once its listing in New York is completed, to fund expansion and potential acquisitions. The firm said July 6 that such a move will be “subject to market conditions.”
Shareholders in publicly traded private-equity companies are entitled to earnings from fees that the firms charge for managing funds, and from so-called performance fees that depend on the funds’ profits.
Analysts tracking Blackstone and KKR base their estimates on a measure called economic net income, which doesn’t conform to generally accepted accounting principles, or GAAP. In Blackstone’s case, the firm uses ENI in part because it will post net losses for several years related to non-cash costs tied to its initial public offering.
KKR, which has $42.5 billion in fee-paying assets under management, said in May that it had economic net income of $674.8 million in the first quarter. Blackstone, with $98.1 billion in fee-earning assets, has reported economic net income of $360 million for the period.
Fund Losses
Both firms have posted paper losses on buyout funds raised since the beginning of the LBO boom in 2005, hurting performance fees. KKR’s funds are down $708 million and Blackstone’s have lost $861 million, according to regulatory filings.
KKR earned no performance fees from its private-equity funds during the first quarter, with all of the $12.5 million in incentive fees from its public markets unit, where it makes fixed-income investments. Blackstone said it had $54 million in realized performance fees and $131.8 million in unrealized performance fees in the first quarter across all of its businesses.
Blackstone and KKR have responded to the buyout drought by diversifying. KKR, which pushed buyouts into the mainstream with the $30 billion purchase of RJR Nabisco Inc. in 1989 and led the record buyout of energy producer TXU Corp. for $43.2 billion in 2007, has more recently expanded into areas such as capital markets, underwriting equity and debt offerings for its portfolio companies. The capital markets and principal activities business had fee-related earnings of $18.5 million, or about 20 percent of the total.
Branching Out
KKR, created in 1976, is also diversifying geographically to boost assets and diminish its reliance on large U.S.-focused investment funds. The firm is currently marketing a fund that will make investments in China and hopes to secure $800 million in commitments for it. KKR is also targeting $1 billion for a pool that will buy traditional oil and gas businesses.
The private markets segment that includes private equity accounted for 62 percent of KKR’s total fee-related earnings in the first quarter. Blackstone relies on private equity for 29 percent. Most fee-related earnings come from its fund-of-hedge- funds, which contribute 35 percent of the total.
Blackstone may report a profit of 17 cents when it published second-quarter results on July 22, based on a survey of nine analysts by Bloomberg. That would be the firm’s fifth- straight profit, after losses from the third quarter of 2008 until the first quarter of 2009, during the peak of the credit crisis.
‘Sensitive’
“Blackstone’s revenues and earnings are highly sensitive to the investment performance of the company’s underlying investment products,” Keefe, Bruyette & Woods analyst Robert Lee wrote in a July 13 note to clients previewing Blackstone and other managers’ earnings. “The sharp selloff in the stocks of alternative managers in the second quarter was way overdone and there is good value in the group.”
Lee, who rates the stock “outperform,” has a price target of $17 a share.
KKR may post a loss of $1.27 a share for the second quarter, on an economic net income basis, Michael Kim, an analyst at Sandler O’Neill & Partners in New York, told clients in a July 6 note. KKR will probably mark down the value of some of its private-equity investments, he said in the note.
To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Cristina Alesci in New York at Calesci2@bloomberg.net
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