KKR 2Q Earnings Decline 74%
KKR & Co LP (NYSE:KKR) said on Friday that its second-quarter earnings declined by 74 percent as a lower appreciation in its private equity funds overshadowed a quadrupling in the cash it received from the profits its funds generated.
With KKR meeting more of the performance hurdles agreed to with fund investors, over 80 percent of its private equity assets could pay carried interest - KKR's entitlement of the fund profits. Carried interest cash jumped to $161.9 million in the quarter from $39.4 million a year ago.
But economic net income (ENI), which takes into account the market value of its assets, dropped to $144.4 million from $546.1 million a year ago, as it private equity portfolio appreciated 0.9 percent compared with 5.1 percent a year ago.
In a statement, Henry Kravis and George Roberts, KKR's co-chief executives who founded the firm in 1976 together with Jerome Kohlberg, focused on the company's dividend following a change in the company's distribution policy last quarter.
"Our realization activity in the second quarter drove the highest cash carry we have reported since going public, contributing to a quarterly distribution of 42 cents per unit," they said.
The second-quarter distribution of 42 cents per share compared with a distribution of 13 cents per share a year ago. This was not just due to a rise in carried interest but also because KKR shared with its shareholders more of its profits from its principal investments coming from its balance sheet.
In April, KKR declared a new payout policy and promised to distribute 40 percent of its balance sheet income as a dividend every quarter. This resulted in $60.1 million in principal investment income being distributed to shareholders in the second quarter of 2013 compared with no such income a year ago.
Huge by industry standards, the size of KKR's balance sheet is the legacy of the firm's merger in 2009 with KKR Private Equity Investors, a fund vehicle whose listing KKR transferred to New York from Amsterdam in 2010.
Its balance sheet profits, referred to as net realized principal investment income, halved compared with a year ago to $150.3 million, as KKR's own investments failed to match the profit growth seen by its funds.
This resulted in total distributable earnings - money available to pay dividends - falling slightly in the second quarter to $403.8 million from $406.1 million a year ago.
Fee-related earnings, mostly reflecting fees it charges to investors and portfolio companies that are not based on KKR's performance, rose to $98.2 million from $69.8 million a year ago, on the back of new capital raised as well as the acquisition of hedge fund investor Prisma Capital Partners LP.
KKR's earnings contrasted with Blackstone's results released last week. Blackstone's second-quarter earnings more than tripled as the value of its private equity and real estate funds rose more than 5 percent and it cashed out on parts of its portfolio, including SeaWorld.
KKR, however, was reversing a trend seen in the second quarter of 2012, when its earnings jumped 73 percent while Blackstone's fell 74 percent, underscoring the volatile and lumpy nature of the earnings of these complex investment firms when viewed on a quarterly basis.
KKR, whose investments include retailer Toys R Us Inc, Internet domain registration company Go Daddy Group Inc and payment processing company First Data Corp, said assets under management rose to $83.5 billion at the end of June from $78.3 billion at the end of March. Besides private equity, the assets include credit investments, hedge funds and infrastructure.
KKR also unveiled progress in real estate, a new initiative for the firm. A property fund with investor commitments of $500 million appeared in KKR's earnings statement for the first time, with 40 percent of the capital coming from KKR itself.