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KKR’s Second-Quarter Profit Doubles on Portfolio Gains

KKR & Co. (KKR), the private-equity firm run by Henry Kravis and George Roberts, said second-quarter profit more than doubled, beating analyst estimates for a decline, as the value of its holdings rose.

Economic net income after taxes, a measure of profit excluding some costs, rose to $520.3 million, or 74 cents a share, from $245.3 million, or 36 cents, a year earlier, New York-based KKR said in a statement today. Analysts had expected a profit of 16 cents a share, according to the average of 11 estimates compiled by Bloomberg.

“KKR’s publicly traded holdings had a very strong quarter,” Steven Fu, an analyst at JMP Securities LLC, said in a note to clients before the earnings were released. Fu rates KKR’s shares “market outperform.”

Holdings such as Dollar General Corp. and HCA (HCA) Inc. fueled paper gains on investments the firm makes with its own money alongside clients and lifted KKR’s share of fund profits, or carried interest. Blackstone Group LP (BX), the world’s biggest buyout company, last week reported a 74 percent decline in profit as market swings hurt performance fees. Both firms have broadened their business beyond leveraged buyouts by adding businesses such as stocks and bonds underwriting, hedge funds, and investing in infrastructure and real estate.

KKR said today it formed a $300 million venture with Stone Point Capital LLC to manage and underwrite debt and equity deals.

Portfolio Gains

During the quarter, KKR positioned itself to salvage a winning investment from last decade’s buyout boom when Walgreen Co. (WAG) agreed to buy 45 percent of Alliance Boots GmbH for $6.7 billion. The transaction valued KKR’s stake in Alliance Boots, the largest drugstore chain in the U.K., at more than twice its original equity investment.

KKR marked up the value of its Alliance Boots stake to $650.6 million as of June 30, from $391.7 million on March 31. As a result, the holding contributed $450 million of pre-tax economic net income, or 82 percent of total pre-tax profit, for the quarter, Scott Nuttall, KKR’s head of global capital, said today on a call with investors and analysts.

KKR said the value of its private-equity portfolio rose 5.1 percent during the quarter and 14.5 percent during the first six months of the year. The value of a private-equity firm’s buyout holdings affects economic net income, or ENI, because the metric relies on a quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.

Dollar General

KKR rose 0.2 percent to close at $14.28 in New York, after earlier gaining as much as 4.9 percent. The stock has risen 11 percent this year, compared with a 0.5 percent decline for Blackstone and a 7.6 percent increase for the Standard & Poor’s 20-company index of asset managers and custody banks.

“We’ve seen the U.S. consumer pull back, European sovereign concerns continue and slowing growth in Asia,” Nuttall said. “This economic and market backdrop is tough to navigate, but it is providing us with compelling investment and business-development opportunities.”

Dollar General (DG), the discount-retail chain taken public in 2009, rose 18 percent in the second quarter. Hospital company HCA, which held its IPO last year, climbed 23 percent, helped by a 14 percent jump in the last two days of the quarter after the U.S. Supreme Court upheld the core of President Barack Obama’s health-care overhaul. KKR and funds affiliated with the firm own about 31 percent of Dollar General and 20 percent of HCA, according to data compiled by Bloomberg.

Fees Decline

The holdings helped more than double other investment income to $340.1 million from a year earlier. Gross carried interest rose 40 percent to $282.9 million.

Fee-related earnings fell 8.4 percent as the fee paid to KKR for managing KKR Financial Holdings LLC (KFN), the firm’s publicly traded credit investment arm, declined. Distributable earnings, which include income generated from the firm’s balance sheet, more than doubled to $406.1 million from $142.9 million a year earlier. KKR said it will pay a dividend of 13 cents a share on Aug. 21.

KKR’s measure of ENI excludes some expenses tied to a combination with the firm’s public fund that allowed KKR to list its shares on the New York Stock Exchange in 2010. The measure doesn’t comply with U.S. generally accepted accounting principles. Under those rules, known as GAAP, KKR reported net income of $146.3 million, or 13 cents a share, compared with $39.6 million, or 11 cents, a year earlier.

Blackstone Loss

Blackstone last week reported a second-quarter net loss of $75 million, compared with a profit of $86.2 million a year earlier. Like KKR, New York-based Blackstone says investors should focus on a non-standard measure of profit that excludes some costs tied to its 2007 IPO. By that measure, profit fell to $212 million from $804 million.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, overhaul then sell them, and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.

Worldwide, the value of private-equity deals announced in the second quarter fell 36 percent to $101.5 billion from a year earlier, with leveraged buyouts declining 39 percent to $21.7 billion, according to data compiled by Bloomberg.

Prisma ‘Win’

KKR was the most active buyer during the leveraged buyout boom of 2005 to 2007, announcing takeovers valued at $220 billion, including three of the 10 biggest deals, according to data compiled by Bloomberg. Since then, Kravis and Roberts have sought to diversify.

KKR last month agreed to buy Prisma Capital Partners LP, a fund-of-hedge-funds manager, for an undisclosed amount. Prisma, which had $7.8 billion in assets under management as of April 30, will operate as part of KKR’s public markets segment to provide investment options that are more liquid than private equity, which can lock up investor capital for as long as 10 years.

“This cross-sell opportunity, which goes in both directions, is exciting for us,” Nuttall said on the call today. “It just gives us another way to win.”

KKR’s total assets under management were $61.5 billion at the end of the quarter, down from $62.3 billion at the end of the first quarter, due largely to cash distributed to investors. The figures don’t include fundraising for KKR’s 11th North American buyout fund, which is targeting $10 billion, or its second Asia-dedicated fund, which has more than $3 billion toward a target of $6 billion.

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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