KKR the Latest Company to Suffer from Slow Growth in Private Equity


October 23, 2014

Kohlberg Kravis Roberts (KKR) announced its third-quarter profit on Thursday and the company showed a similar trend to other private equity firms. The company’s quarterly economic net income had slowed down, much to do with slow growth in private equity part of the company.


The quarterly economic net income, which allows to factor in the profit that includes unrealised investment gains, saw a drop of 17% compared to the same period last year. New York Times reported that the private equity investments only increased in value about 2.2% in the third quarter, while last year the quarterly performance was at 5.9%.


The slowed down growth highlights the public stock market conditions, which have slowly been normalising after the peak last year. Private equity firms have been faring a lot worse lately, as value of private equity owned companies has been dropping.


On the upside, KKR was still able to beat expectations with its net income of $508.7 million. According to the Wall Street Journal, analysts had expected the profitability measure to stand at 44 cents, but in fact, it was 50 cents per after-tax-adjusted share. The company was also able to boost its ability to generate cash, as the conditions were good for selling off investments. To total cash revenue increased by 74%.


The third quarter saw KKR closing several of its holdings. For example, it sold off the software company Ipreo Holdings, with the deal value rising reportedly to $975 million. It also got rid of other companies it had helped list in the stock market, such as the China Modern Dairy and Santander Consumer USA.


KKR executives are also hoping to increase profits in the next few months. Market Watch reports that the company is aiming to make a deal with Sysco Corp. over KKR-owned US Foods. The deal is expected to be worth $3.5 billion. In addition, KKR and other private equity owners in Bioomet Inc. are considering selling the business. This medical device manufacturer is expected to be sold to Zimmer Holdings Inc.


When analysing the performance, KKR’s Scott C. Nuttall told the New York Times that the company has “probably been more cautious of late” in regards private equity deals. According to Nuttall his peers at KKR are “more sellers than buyers in private equity”.


Indeed, KKR has changed it typical private equity investment style in the recent months. The company usually focuses on leveraged buyouts, but has recently looked beyond this market. The company has been more aggressive on investing in fast-growing companies and settling with a minority stake in the businesses.


Perhaps, the most recent of such deals is KKR’s involvement with Magic Leap. Magic Leap is a technology business focused on 3-D imaging. PE Hub quoted Nuttall saying, “Historically, we have passed on those because it didn’t fit into a private equity mandate or any of the other strategies that we manage, but we’ve found many of them to be quite interesting.”


The announcements helped boost KKR’s share prices by increasing the price by 1% at a time of writing.

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