KKR Profit Falls 8.2% as Buyout Portfolio Trailed Markets

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, beat analysts’ estimates as fee-related earnings rose and gains from the firm’s investments increased.

Economic net income after taxes, a measure of profit excluding some costs, was $627.6 million, or 88 cents a share, compared with $683.8 million, or 99 cents, a year earlier, New York-based KKR said in a statement today. KKR beat the 80-cents average estimate of 14 analysts surveyed by Bloomberg. Shares rose after KKR said it would increase payouts to shareholders.

KKR, like competitor Blackstone 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, which is raising its latest buyout fund with an $8 billion target, is also seeking to access individual investors’ money through two credit funds and new potential offerings.

“We continue to scale both our private equity and non-private equity businesses, growing our assets under management,” Kravis and Roberts said in today’s statement.

KKR rose 2.2 percent to $20.64 at 9:55 a.m. in New York trading. The shares advanced 33 percent this year through yesterday, compared with the 16 percent increase in the 20-company Standard & Poor’s index of asset managers and custody banks.

Dividend Policy

Distributable earnings, which include income generated from the firm’s balance sheet investments, increased 77 percent to $290.6 million as KKR sold shares of at least five portfolio companies. KKR said it will pay a dividend of 27 cents per common share on May 21, reflecting a new distribution policy that will pay out 40 percent of earnings from the balance sheet investments each quarter, in addition to the traditional fee earnings and cash profits.

The value of KKR’s private-equity portfolio rose 5.9 percent during the quarter, compared with the Standard & Poor’s 500 Index’s 10 percent increase during the first three months of the year. Blackstone’s buyout holdings gained 7.9 percent.

The firm had “lower transaction-related fees and less aggressive fund appreciation given more modest appreciation in its privately held portfolio companies,” Howard Chen, an analyst at Credit Suisse Group AG in New York, said in a note to clients before the results were announced.

GAAP Income

KKR’s measure of ENI, 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 $193.4 million, or 69 cents per common unit, compared with $190.4 million, or 80 cents, a year earlier.

The value of a private-equity firm’s buyout holdings affects economic net income, or ENI, 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.

Private-equity firms pool money from investors including pension plans and endowments 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.

Blackstone, which oversees $218 billion in assets, last week reported first-quarter profit of $168 million, compared with $58 million a year ago. 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 rose 28 percent to $628 million.

Real Estate

KKR’s assets under management rose to $78.3 billion from $75.5 billion at the end of 2012. Dry powder, or committed capital yet to be invested, is $16.2 billion.

The firm is preparing to market its first fund dedicated to real-estate investments, starting with an initial $500 million of commitments, two people familiar with the matter said last month. KKR started a real-estate unit in 2011, following Blackstone and Carlyle Group LP, and has so far invested in property deals primarily from its balance sheet.

The firm during the quarter agreed to buy industrial equipment maker Gardner Denver Inc. for about $3.7 billion, and it lost in bidding for Life Technologies Corp., which agreed last week to be sold to Thermo Fisher Scientific Inc. for $13.6 billion. KKR also signed a deal to acquire a 24.9 percent stake in Bermuda-based hedge fund Nephila Capital Ltd., which makes reinsurance-related investments.

(Removes incorrect fund valuation in eighth paragraph of story published April 25.)
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