KKR Has $487 Million Profit as Holdings Gain in Value

KKR & Co. (KKR), the private-equity firm run by Henry Kravis and George Roberts, reported a third-quarter profit after a loss a year earlier as the value of its holdings rose.

Economic net income after taxes, a measure of profit excluding some costs, was $487.3 million, or 69 cents a share, compared with a loss of $621.7 million, or 91 cents, a year earlier, New York-based KKR said today. Fee-related earnings fell and fundraising for a new flagship buyout fund is still trailing the firm’s target, sending the shares lower.

“Overall, the economic backdrop is more of the same, just kind of blah,” Scott Nuttall, KKR’s global head of capital and asset management, told investors and analysts on a conference call today. “We’re encouraging our management teams to focus on what they can control and invest for the future.”

KKR, like larger rival Blackstone Group LP (BX), has diversified into areas such as underwriting stocks and bonds, managing funds of hedge funds, and investing in infrastructure and real estate as traditional buyouts remain subdued. The firm’s 11th North American buyout fund has gathered just $700 million since February, bringing the total gathered since 2011 to $6.2 billion, as the prior fund underperforms and investors scale back private-equity commitments.

KKR seeks $8 billion for the fund, about half the size of its 2006 pool. The amount raised so far includes commitments from KKR’s balance sheet and employees.

Shares Decline

KKR fell 0.7 percent to $14.74 at the close of trading in New York. The stock has gained 15 percent this year, compared with an 18 percent increase in the 20-member Standard & Poor’s index of asset managers and custody banks.

Of the so-called limited partners in the new buyout pool, 27 percent are new to KKR, contributing 10 percent of capital committed so far, Nuttall said on the conference call.

“They tend to start out smaller when it’s a new relationship, so we’re seeing that dynamic a bit,” he said of new investors in the fund.

As buyout funds decrease in size and deal-making sinks from boom-time levels, private-equity managers have sought new ways to make money. Since 2007, KKR has invested from Asia buyout funds, a China growth fund, a direct lending fund, a mezzanine pool, and infrastructure and natural resource funds. In July, KKR announced plans to open two debt funds for individual investors.

Assets Rise

The company’s total assets under management rose 7.8 percent since the second quarter to $66.3 billion, and fee- paying assets rose 6.6 percent to $50.3 billion, KKR said. Neither measure includes $4 billion of capital committed to its second private-equity fund dedicated to Asia, which is targeting $6 billion.

KKR’s fee-paying assets under management have risen 26 percent since 2007, according to the firm’s regulatory filings.

The value of KKR’s private-equity portfolio rose 6.1 percent during the quarter and 20 percent this year through Sept. 30, it said, fueling paper gains on investments it makes with its own money. The Standard & Poor’s 500 Index, a benchmark for large U.S. stocks, gained 5.8 percent in the third quarter and 15 percent during the first three quarters.

The firm’s economic net income was driven by so-called investment income, which includes the paper value of gains on its portfolio holdings. Fee-related earnings, which include fees investors pay KKR for managing their money and fees for completing deals, fell 7.7 percent to $90.7 million.

Blackstone’s Earnings

Distributable earnings, which include investment income that KKR has realized, were $332.9 million, compared with $185.4 million a year ago. The company said it will pay a dividend of 24 cents a share to holders of its common stock, payable on Nov. 20.

KKR’s measure of economic net income, which 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, doesn’t comply with U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company reported net income of $127.4 million, or 49 cents a share, compared with a loss of $243.4 million a year earlier.

Blackstone last week reported third-quarter profit of $129 million, compared with a loss of $275 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 initial public offering. By that measure, the firm had a profit of $622 million, compared with a year-earlier loss of $380 million.

Carlyle, Apollo

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 investment profits.

Carlyle Group LP (CG) and Apollo Global Management LLC (APO), two of the largest publicly traded alternative-asset firms, are scheduled to announce results next month. Carlyle is headquartered in Washington, and Apollo is based in New York.

Worldwide, the value of private-equity deals announced in the third quarter fell 29 percent to $95.1 billion from a year earlier, with leveraged buyouts rising 62 percent to $39.3 billion, according to data compiled by Bloomberg.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; Saumya Vaishampayan in New York at svaishampaya@bloomberg.net

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

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