KKR's Toughest Sell Is Its Own Shares
What is it about this earnings season that's made private equity executives feel the need to school their own investors?
First there was the math lecture Blackstone CEO Stephen Schwarzman delivered last Thursday about the true value of the firm's stock (hint, it's a lot higher than the current price). Then on Tuesday, in lieu of a typical quarterly overview on its earnings call, management at KKR & Co. took the opportunity to dispel a number of misperceptions it said investors had of the company.
KKR's stock has slumped 40 percent during the past 12 months (even with a 3.7 percent bounce on Tuesday), and a $484 million outlay on buybacks since last October has done little to bolster the firm's shares. "None of us at KKR are pleased with the performance," said Scott Nuttall, the firm's head of global capital and asset management. And it's painful, too -- especially for the insiders that collectively own just under 45 percent of the firm.
So here was their defense:
- In volatile market environments, KKR can generate cash. This quarter, for example, it did so by tapping companies it owns like Sedgwick, a provider of insurance claims services, to pay the firm a dividend (by taking on more debt). It also sold stakes in companies it owns either to strategic buyers, or through IPOs and block trades.
- With markets near all-time highs, KKR can find ways to spend the money it has raised from investors. It found a home for $993 million during the quarter and has committed another $2 billion to pending deals including WME/IMG's acquisition of UFC.
- Private equity returns aren't under pressure in periods of volatility: KKR's flagship North American, Asian and European private equity funds are outperforming their respective benchmark stock indexes by 7 percent, 26 percent and 6 percent, respectively.
- Despite an uncertain economic outlook, revenue growth can be expected in coming years: KKR's management fees have grown at a compounded annual rate of 11 percent since 2010 and it's already raised a $22 billion pile of capital that will, inevitably, earn fees.
- Since changing its distribution policy, it has returned more to shareholders: It's redirected cash from dividends to buybacks, pushing its payout ratio above 100 percent. The firm did caution, however, that investors shouldn't expect this to be the norm.
- Its business is not facing headwinds, despite the way its shares have traded: It has raised around $28 billion in the past 12 months, a record since its inception.
These are all reasonable points, but investors can justify waiting to see if the firm maintains momentum across all fronts. After all, equity and debt markets can quickly snap shut, which would make IPOs and so-called dividend recapitalizations of the companies it owns near-impossible. It'd also dampen the likelihood that it will keep shedding parts of the 40 percent of its private equity portfolio that is made up of publicly traded stocks including U.S. Foods, Walgreens Boots Alliance and GoDaddy. Plus, although the firm is proud of the $38 billion it has on hand to spend if and when opportunities arise, it faces steep competition from strategic buyers as well as rival firms, some of whom have bigger piles of capital.
It's notable that the extent of KKR's pain isn't shared by rivals like Apollo Global Management, Carlyle Group and Blackstone, whose share-price declines have been more muted. Each is trading at a price to book values of 3 or higher, compared to KKR, at roughly 1.3.
KKR may have made a good case for itself. But for investors on the sidelines, the firm's future results will resonate louder than words.
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