KKR Third-Quarter Profit Increases 23% on Buyout Holdings

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, said third-quarter profit rose 23 percent as gains in its buyout portfolio fueled paper profits and it collected more fees for completing deals.

Economic net income after taxes, a measure of profit excluding some costs, increased to $601.8 million, or 84 cents a share, from $487.3 million, or 69 cents, a year earlier, New York-based KKR said in a statement today. The results beat the 58-cent average estimate of 13 analysts surveyed by Bloomberg.

KKR, like 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 noncash earnings rose in the quarter as investments such as HCA Holdings Inc. and Nielsen Holdings NV gained, and KKR collected more fees for completing deals such as the $3.85 billion buyout of industrial equipment maker Gardner Denver Inc.

“Investment income was much stronger and the primary driver of the beat,” said Christopher Harris, an analyst at Wells Fargo & Co. in Baltimore. “Accrued carry increased primarily due to strong portfolio mark-ups as KKR’s private-equity investment portfolio appreciated.”

KKR rose 2 percent to $23.36 in New York. The shares have gained 53 percent so far this year.

Buyout Holdings

The firm said the value of its private-equity portfolio rose 5.9 percent in the third quarter, compared with a gain of 6.1 percent in the same period last year. Blackstone’s buyout holdings climbed 4.2 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 a quarterly valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.

Those mark-to-market valuations are primarily represented in unrealized carried interest, which for KKR rose 14 percent from a year earlier to $278 million. Realized carry, which represents cash earned by selling holdings, fell 51 percent to $81.5 million as KKR sold fewer assets.

Distributable earnings, or profit available for shareholders, fell 25 percent to $251.1 million. KKR said it will pay stockholders a dividend of 23 cents a share on Nov. 19.

GAAP Results

“Realization activity seemed to slow from the second quarter’s exceptional pace,” Wells Fargo analysts led by Harris said in an Oct. 10 note to clients. “However, assuming strong equity markets and friendly capital markets, we think a healthy pace of harvesting activity will continue.”

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 $204.7 million, or 66 cents per common unit, compared with $127.4 million, or 49 cents, a year earlier.

Blackstone last week reported third-quarter net income of $171.2 million, compared with $128.8 million a year ago. 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 3 percent to $640.2 million.

Assets Increase

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 as a carried interest.

KKR’s assets under management rose to $90.2 billion from $83.5 billion at the end of the second quarter as the firm raised more money, including for its new flagship North America buyout fund. Committed capital yet to be invested, known as dry powder, was $22.7 billion as of Sept. 30.

Scott Nuttall, KKR’s head of global capital and asset management, said today on a conference call with investors that the firm has raised $8.3 billion for its North American buyout fund known as NAXI. Deal valuations in the U.S. are high, Nuttall said.

Asia, Europe

KKR is instead seeing more deal opportunities in Asia, where a pullback in stocks has resulted in cheap values for assets, and Europe, where the firm is seeking to buy companies “ahead of what we think will be a recovery in the coming years,” said Nuttall. KKR has invested about $1.8 billion in Asia so far this year, the most for similar periods in its 37-year history, he said.

Worldwide, the value of private-equity deals announced in the third quarter fell 33 percent to about $69 billion from a year ago, according to data compiled by Bloomberg. The number of deals declined 6.6 percent.

KKR’s private-markets business invested $1.8 billion in the third quarter, the highest quarterly amount in two years. That helped drive a 72 percent increase in transaction fees to $129 million from the year-earlier period.

Mitchell, Avoca

KKR last month agreed to buy insurance-technology provider Mitchell International Inc. from Aurora Capital Group for $1.1 billion including debt. The firm also explored a buyout of Neiman Marcus Inc. in the quarter, according to people familiar with the matter. Ares Management LLC and the Canada Pension Plan Investment Board agreed last month to buy the luxury retailer for $6 billion.

The company on Oct. 18 said it will acquire Avoca Capital, a European credit investor with $8 billion in assets under management, as a strategic purchase. KKR joins a number of U.S. asset managers stepping into the lending gap left by European banks as those institutions adapt to stricter capital standards.