KKR posted higher-than-expected quarterly earnings as the value of its private equity investments rose, fee income increased and it benefited from taking portfolio companies such as Nielsen Holdings and HCA Holdings Inc public. Private equity firms have been benefiting from an improving economy and rising stock market valuations and seen the value of their portfolios increase.
They have also taken advantage of a rebound in M&A and improving IPO markets to exit some of their investments. "The capital markets have facilitated not just exits but acquisitions," said KKR partner Scott Nuttall, who leads the company's quarterly earnings calls. He pointed to KKR's recent deal to buy Capsugel, the world's largest maker of hard capsules, from Pfizer Inc for nearly $2.38 billion.
Private equity firms have been finding it difficult to do traditional leveraged buyout deals in the United States as stock market values have increased, pushing up purchase prices. Nuttall said KKR has been "highly selective" doing deals. "We've walked away from a far greater number than those we pursued," Nuttall said. "We continue to find opportunities on the emerging markets side. When markets get a little frothy in the US and Europe we have the ability to find opportunities elsewhere."
Nuttall said KKR is seeing opportunities across the world in all parts of companies' capital structures. KKR in April struck a $159 million deal to buy 10 percent of Vietnam's Masan Consumer Corp, a producer of fish, soya and branded noodles.
KKR's economic net income, a measure used by private equity firms to report earnings, was $742.5 million for the first quarter, compared with $674.8 million a year earlier. Fee-related earnings were $126.2 million up from $90.4 million. The value of its private equity investments rose 6.5 percent.
"The put up a pretty big number in terms of the ENI," said Michael Kim, analyst at Sandler O'Neill, who has a 12-month price target of $23 on KKR's stock and rates it as a 'buy'. "Relative to our model, the fee-related earnings were a bit below our expectations." Kim said that overall, KKR reported a good quarter, but said the actual amount of money the firm invested during the quarter was "a bit light of our expectations, as was the new capital that they raised in the first quarter".
KKR said it generated profits from taking a number of its portfolio companies public. During the quarter, KKR-backed Nielsen Holdings, HCA Holdings and Far East Horizon went public. ENI after tax per adjusted unit was 96 cents, KKR said, up from 93 cents in the same period a year ago. That was ahead of analysts' average expectations of 61 cents per unit. KKR's shares were 4 cents lower at $18.20.
KKR said assets under management totalled $61.0 billion, up from $54.7 billion a year earlier. It will pay a first-quarter distribution of 21 cents per unit. KKR has started raising money for its latest buyout fund, which has a target size of $8 billion to $10 billion, according to a recent publication by the Oregon Investment Council, which committed $525 million to the fund. Investors had been anticipating a new KKR fund for more than a year, but did not expect it to be close to the size of the global $18 billion buyout fund it raised in 2006.
KKR is also ramping up efforts in real estate - a sector where rival private equity and real estate giant Blackstone Group has led. KKR said in March it hired former Goldman Sachs partner Ralph Rosenberg to lead its real estate investing efforts.
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