KKR’s Fourth-Quarter Profit Rises 49% as Holdings Climb

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, said fourth-quarter profit rose 49 percent as the value of its holdings climbed.

Economic net income after taxes, a measure of profit excluding some costs, increased to $337 million, or 48 cents a share, from $225.5 million, or 33 cents, a year earlier, New York-based KKR said in a statement today. Fee-related earnings fell as the firm did fewer deals.

Exit opportunities in the near term will be “lumpy and hard to predict” because some of the firm’s portfolio companies still have room to grow, Scott Nuttall, global head of capital and asset management, said on a conference call today with investors and analysts.

KKR, like competitor Blackstone Group LP, has broadened its business beyond traditional leveraged buyouts, or LBOs, by underwriting stocks and bonds, managing funds of hedge funds, and investing in infrastructure and real estate. A 13 percent gain in global stocks last year helped lift the value of fund holdings for both firms, boosting the fees they earn for managing their portfolios.

KKR fell 0.3 percent to close at $17.72 in New York, matching the decline of the Standard & Poor’s 20-company index of money managers and custody banks. KKR has gained 16 percent this year, as Blackstone has risen 15 percent, Carlyle Group LP has increased 19 percent and Apollo Global Management LLC has gained 28 percent.

Portfolio Value

KKR said the value of its private-equity portfolio rose 4 percent in the quarter and 24 percent last year. By comparison, the Standard & Poor’s 500 Index of large U.S. stocks declined 1 percent in the fourth quarter and gained 13 percent in 2012.

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, which include income generated from the firm’s balance-sheet investments, more than tripled from the year-earlier quarter to $546.3 million. KKR said it returned $9 billion to investors in 2012, the most in its 36-year history.

Net Income

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, differs from U.S. generally accepted accounting principles. Under those rules, known as GAAP, KKR reported net income of $96.7 million, or 70 cents per common unit, compared with $46.1 million, or 32 cents, a year earlier.

Blackstone last week reported fourth-quarter net income of $106.4 million, compared with a loss of $22.7 million a year earlier. Like KKR, New York-based Blackstone says investors should focus on a nonstandard measure of profit that excludes some costs tied to its 2007 IPO. By that measure, profit rose 43 percent to $670 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, 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.

KKR said it closed on $7.5 billion for its latest flagship buyout fund, North America XI, and is extending the fundraising period for the pool to the second half of 2013. KKR began marketing the fund at the start of 2011 with a target of $8 billion, about half the size of the 2006 predecessor.

Asia Fund

The firm’s second Asia-dedicated fund has gathered more than $5 billion and is expected to reach its hard cap of $6 billion in the next two months, Nuttall said on today’s call. He also said he feels “very comfortable” that North America XI, known as NAXI, will reach the high end of the $7 billion to $8 billion range he cited on last quarter’s earnings call.

KKR’s assets under management rose to $75.5 billion from $66.3 billion at the end of the third quarter. Committed capital yet to be invested, known as dry powder, was $16.1 billion.

Fee-related earnings fell 26 percent in the fourth quarter from a year earlier to $86 million as KKR did fewer deals. Transaction fees, which portfolio companies pay KKR for closing deals, dropped 40 percent to $76.8 million.

Worldwide, the value of private-equity deals announced in the fourth quarter fell 3 percent from a year earlier to $88 billion, according to data compiled by Bloomberg.

KKR said it will pay a dividend of 70 cents per common share on March 5.

Before it's here, it's on the Bloomberg Terminal.