KKR Quadruples Second-Quarter Profit as Brewery Leads Exits

KKR & Co., the private-equity firm led by billionaires Henry Kravis and George Roberts, said second-quarter profit more than quadrupled as it earned the most money from selling holdings in at least four years.

Economic net income after taxes and equity-based charges jumped to $454.4 million, or 57 cents a share, from $105 million, or 15 cents, a year ago, New York-based KKR said in a statement today.

KKR, like larger competitors Blackstone Group LP and Carlyle Group LP, has broadened its business beyond traditional leveraged buyouts by underwriting stocks and bonds, managing funds of hedge funds, and investing in infrastructure and real estate. The firm’s realized share of investment profits more than doubled as it sold holdings during the quarter, including South Korean beer maker Oriental Brewery Co., which Anheuser-Busch InBev NV bought for $5.8 billion, and a stake in Sunrise Senior Living LLC, a senior-residence management business that returned KKR more than five times its money.

“We have a strong pipeline of exit activity on the horizon,” Scott Nuttall, KKR’s head of global capital and asset management, said in a conference call today with analysts and investors. “There’s a lot of embedded value in the portfolio.”

Portfolio Gains

On a per-share basis, after-tax ENI was 62 cents, falling short of the 65 cents expected by 12 analysts in a Bloomberg survey. KKR’s shares fell 1.5 percent to $24.94 at the close of trading in New York, paring gains this year to 2.5 percent.

KKR said the value of its private-equity portfolio rose 5 percent during the quarter, compared with 0.9 percent in the same period last year. Blackstone’s buyout holdings climbed 8.4 percent in the latest quarter, Carlyle’s appreciated 5 percent and the Standard & Poor’s 500 Index of large U.S. companies increased 4.7 percent.

The value of a private-equity firm’s buyout holdings affects economic net income because the metric relies on quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.

Distributable earnings, or earnings available to pay out to shareholders, rose 74 percent to $701 million, the highest level since KKR went public in 2010. KKR said it will pay stockholders a dividend of 67 cents a share on Aug. 19.

KKR’s measure of ENI, a type of accounting used by publicly traded buyout firms, differs from U.S. generally accepted accounting principles. Under those rules, known as GAAP, KKR reported net income of $178.2 million, or 43 cents per diluted common unit, compared with $15.1 million, or 5 cents, a year earlier.

Lower Assets

Blackstone last week said its second-quarter ENI rose 89 percent to $1.33 billion, extending its best start to a year ever. The New York-based firm is the biggest alternative asset manager, with $279 billion in private-equity funds, real estate, credit assets and hedge-fund investments under management. Carlyle, the second-largest manager of alternatives to stocks and bonds, is scheduled to report results next week.

Total assets under KKR’s management fell to $98 billion from $102.3 billion as of March 31, after the firm returned $5.5 billion to investors in the quarter. Fee-paying assets under management fell 4.7 percent as the company completed its acquisition of KKR Financial Holdings LLC, moving the subsidiary’s assets to KKR’s balance sheet.

Brazil, Ethiopia

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.

KKR deployed $1.5 billion of equity in private-market deals during the quarter, Nuttall said on the call, and committed an additional $2.5 billion to deals that haven’t been completed. Three-fifths of the committed money is for investments outside of the U.S., he said, as valuations remain high and the firm searches for bargains in Europe and Asia.

The transactions included KKR’s first investments in South America and Africa, where competitors Carlyle and Blackstone have done deals. KKR in April agreed to buy Aceco TI, a Brazilian data-center business, and last month agreed to buy a stake in Afriflora, an Ethiopian flower farm.

“We believe we’ll find more investment opportunities on these two continents,” said Nuttall.

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