KKR Profit Falls 68% as Market Volatility Erodes Income From Investments

KKR & Co., the private equity firm run by Henry Kravis and George Roberts, said fourth-quarter profit fell 68 percent as investment income declined.

Economic net income after taxes, a measure of profit excluding some costs, dropped to $225.5 million, or 33 cents a share, from $697.2 million, or $1.02, a year earlier, New York- based KKR said in a statement today. Analysts had expected a profit of 75 cents, according to the average of 13 estimates compiled by Bloomberg.

“The funds grew less in 2011 than in 2010, and that’s why you see the ENI down,” Scott Nuttall, KKR’s head of global capital, said on a call with news media, referring to the firm’s private equity portfolio. “We’re really proud, given the global markets were down 5 percent and the world was as weird as it was last year.”

Market volatility slowed gains at the firm’s funds, which increased 4 percent last year, compared with 33 percent in 2010, Nuttall said. Fee-related earnings rose as KKR deployed more capital from its private equity funds, investors added new money and transaction fees rose at the capital markets unit, which it started five years ago to reduce reliance on buyouts.

KKR rose 1.3 percent to close at $15.06 in New York after falling as much as 3.8 percent earlier. The stock has gained 17 percent this year, compared with an 18 percent increase for Blackstone Group LP (BX), the world’s largest private equity firm.

Performance Fees

KKR’s economic net income excludes some expenses tied to a combination with its public fund that allowed the firm to offer shares to the public in 2010. The measure doesn’t comply with U.S. generally accepted accounting principles. Under those rules, KKR reported net income of $46.1 million, or 20 cents a share, compared with $180.6 million, or 86 cents, a year earlier.

Blackstone last week reported its net loss widened to $123.4 million, or 25 cents a share, in the fourth quarter from $11 million, or 3 cents a share, a year earlier. Like KKR, Blackstone says investors should focus on a non-standard measure of profit that excludes some costs tied to its IPO in 2007. By that measure, fourth-quarter profit fell 12 percent to $449.9 million as performance fees and investment income declined.

Investment income declined 72 percent to $171.1 million, KKR said. Fee-related earnings increased 23 percent to $116.6 million as KKR executed more deals. Nuttall said the firm will pay out a record 32 cents a unit to shareholders.

Raising Funds

KKR said it has won $6 billion so far for its next buyout fund focused on North America. The firm is targeting $10 billion for its new buyout fund, and was aiming for between $5 billion and $6 billion by the end of last year, a person with knowledge of the plans said in November.

Blackstone last month finished raising a $16.2 billion fund, the sixth-biggest buyout pool ever, according to Preqin Ltd. Carlyle Group, which is preparing an IPO, is set to begin marketing funds, according to person familiar with the plans. Buyout funds globally are seeking to raise about $165 billion, more than in 2006 at the height of the fundraising boom, according to Preqin.

KKR completed $27 billion of deals last year, with $13 billion in the fourth quarter, said Nuttall. That included the biggest buyout of the year when KKR agreed in November to purchase closely held Samson Investment Co., the Tulsa, Oklahoma-based oil and gas producer, for $7.2 billion to capitalize on increased production of shale-based oil and gas.

Biggest LBO

Earlier that month, KKR hired Claire Scobee Farley and David Rockecharlie, energy-industry bankers from Jefferies & Co., as managing directors focusing on the firm’s oil and gas investments. Farley and Rockecharlie founded Houston-based RPM Energy LLC, which helps manage those investments.

The volume of private equity deals last year increased about 29 percent from 2010 to $449.6 billion as access to credit continued to improve following the global financial crisis, according to data compiled by Bloomberg.

This year, the industry is defending itself from attacks by rivals of Republican presidential candidate Mitt Romney, who say the former Bain Capital chief executive officer enriched himself at the cost of corporations and their employees while running the firm.

Kravis and Roberts, like competitors at New York-based Blackstone and Washington-based Carlyle (CG), have sought to expand their business beyond buyouts. KKR oversees $15 billion of assets in its credit business, which invests in bank loans, mezzanine capital and special situation, and has broadened the capital-markets business it began in 2007, Roberts told a financial services conference in December.

KKR oversaw $59 billion as of Dec. 31, with 74 percent in private markets and the remainder in public markets. That excludes the commitments the firm has received for its new fund, which it expects to close next year.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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