KKR Second-Quarter Profit Tops Estimates on Sales of Assets

Updated on
  • Walgreens, HCA, GoDaddy dispositions drive higher cash gains
  • Earnings hit by First Data slump, exacerbated by Brexit rout

KKR & Co. reported second-quarter profit that exceeded analysts’ expectations, driven by the sale of shares in Walgreens Boots Alliance Inc. and appreciation in its private equity portfolio.

Economic net income, which reflects both unrealized and realized investment gains, was $191.2 million, or 23 cents a share, the New York-based asset manager said in a statement Tuesday. That exceeded 14 analysts’ expectations, ranging from a loss of 60 cents a share to a profit of 16 cents, according to data compiled by Bloomberg.

KKR, led by co-Chief Executive Officers Henry Kravis and George Roberts, mined a string of gains during a period when U.S. equity markets rose despite a late-June swoon. Dispositions included a $1.2 billion block of retailer Walgreens Boots, as well as shares of hospital operator HCA Holdings Inc., clinical research company PRA Health Sciences Inc. and web registration and hosting company GoDaddy Inc. KKR also said its private equity portfolio appreciated 4.5 percent during the quarter.

“KKR reported stronger than expected results in the quarter with private equity gains and a high level of realizations,” Chris Harris, an analyst at Wells Fargo & Co., said in a note to clients Tuesday. “Distributable earnings were solid on the back of significant exit activity.”

Distributable earnings climbed to $507.6 million for the quarter from $465.3 million in the same period a year earlier. From that pool of profits, KKR pays a fixed dividend of 16 cents a share, which it said stockholders will receive on Aug. 19.

Shares of KKR rose 4 percent to close at $14.47 in New York, the highest in three months. That pared the stock’s loss this year to 4.9 percent, including reinvested dividends.

First Data

Despite an increase in cash earnings, KKR’s economic net income, or ENI, was weighed down by the performance of some companies in its portfolio. First Data Corp., the payments processor that KKR took public in October, eight years after taking it private in a leveraged buyout, slumped 14 percent in the quarter. The decline was exacerbated when stock markets worldwide fell after the U.K. voted June 23 to leave the European Union.

First Data’s swoon has eroded $480 million in KKR’s pretax ENI this year, the firm said, highlighting the heightened exposure a private equity firm adopts when it bets its own money on a deal. In addition to investing client capital from its funds, KKR bet about $1 billion from its balance sheet on First Data from 2007 to 2014.

First Data “significantly weighed on fund and balance sheet performance,” Barclays Plc analysts led by Kenneth Hill, who have an overweight rating on KKR’s stock, said in a report to clients earlier this month. “Overall the business should be healthy, but the inherent nature of KKR’s larger balance sheet makes periods of volatility more pronounced and potentially disconcerting for investors.”

The 4.5 percent gain in KKR’s private equity portfolio compared with a 2.5 percent appreciation at Blackstone Group LP, which reported results last week. The S&P 500 index of large U.S. companies was up 1.9 percent in the quarter.

Assets under KKR’s management totaled $131 billion as of June 30, compared with $126.4 billion on March 31. The firm raised $8.9 billion during the quarter and distributed $6.4 billion to clients.

The firm is collecting money for its latest private equity vehicle, called Americas Fund XII, and expects to raise the maximum $12 billion agreed to with investors. With money from KKR and employees, the pool will probably exceed $13 billion, Scott Nuttall, the head of global capital and asset management, said on a conference call Tuesday with analysts and investors.

KKR’s current main fund, which finished raising $9 billion in 2013, was producing a 17 percent annualized return after fees and was valued at 1.4 times cost as of March 31.

(Updates with closing share price in sixth paragraph.)
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