KKR First-Quarter Profit Beats Estimates on Fund Exits

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, posted first-quarter earnings that beat analyst estimates after selling fund holdings.

Economic net income after taxes, a measure of profit excluding some costs, decreased to $593.7 million, or 82 cents a share, from $627.6 million, or 88 cents, a year ago, New York-based KKR said in a statement today. The results exceeded the 51-cent average estimate of 15 analysts in a Bloomberg survey, including the highest forecast of 72 cents.

KKR’s realized share of investment profits more than doubled as it sold holdings during the quarter, including shares in European broadcaster ProSiebenSat.1 Media AG, NXP Semiconductor NV and media-ratings company Nielsen Holdings NV. Assets under management rose to $102.3 billion from $94.3 billion at the end of last year, with most of the increase coming from its acquisition of European credit investor Avoca Capital, which added $8.4 billion.

“The realized cash carry on the private equity side was larger than what we would have thought looking at the publicly announced transactions,” said Chris Kotowski, an analyst at Oppenheimer & Co. in New York, who rates the stock “outperform.”

KKR rose 3.3 percent to $24.41 at the close of trading in New York, reversing its loss this year to a gain of 0.3 percent. The stock rose 60 percent in 2013 as KKR and its peers took advantage of surging stock markets to sell holdings.

Exit Mix

The firm’s share sales in the quarter were done at an aggregate multiple of 2.4 times its initial investments, Scott Nuttall, KKR’s head of global capital and asset management, said on a conference call with analysts and investors.

“I would expect that you’re going to see a mix of strategics and secondaries going forward,” Nuttall said, referring to sales of holdings to corporations and offerings of stakes in the public markets. “From what we’re seeing, the market would tell us that there is more strategic dialogue going on.”

KKR and investors including Blackstone Group LP, TPG Capital and Goldman Sachs Group Inc. agreed today to sell Biomet Inc., a maker of artificial hips and knees, to rival Zimmer Holdings Inc. for $13.4 billion. KKR in January agreed to sell South Korea beer maker Oriental Brewery Co. to Anheuser-Busch InBev NV for $5.8 billion, which will be recognized in KKR’s second-quarter earnings because the deal was completed April 1.

Buyout Portfolio

KKR said the value of its private-equity portfolio rose 4.5 percent in the first three months of the year, compared with 5.9 percent in the same period last year. Blackstone’s buyout holdings climbed 7 percent in the latest quarter, Carlyle’s appreciated 8 percent and the Standard & Poor’s 500 Index of large U.S. companies increased 1.3 percent.

The value of a private-equity firm’s buyout holdings affects economic net income because the metric relies on a quarterly “mark-to-market” 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 fell 55 percent to $149 million from the first quarter last year. Realized carry, or cash earned by selling holdings, surged 120 percent to $194 million and distributable earnings, or earnings available to pay out to shareholders, rose 54 percent to $446.8 million.

KKR said it will pay stockholders a dividend of 43 cents a share on May 23.

Retail Setback

KKR, like larger competitors Blackstone 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 suffered a setback to its strategy of attracting individual investors to a pair of debt funds, liquidating the pools during the quarter after they faced competition from mutual funds and clients resisted their quarterly liquidity and burdensome paperwork.

The firm’s measure of ENI, which excludes some expenses tied to a combination with the firm’s public fund that allowed it 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 $210 million, or 65 cents per diluted common unit, compared with $193.4 million, or 69 cents, a year earlier.

Trailing Blackstone

Blackstone last week said its first-quarter ENI rose 30 percent to $814 million. The New York-based firm is the biggest so-called alternative asset manager, with $272 billion in private-equity, real estate, credit and hedge-fund assets under management. Carlyle, the second-largest manager of alternatives to stocks and bonds, is scheduled to report results next week.

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.

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