KKR the Latest Private Equity Firm to Suffer from the Oil Slump


February 11, 2015

Private equity firms are releasing their final quarter results and it seems none of the big firms have been able to escape the slump in oil prices. KKR announced it’s final quarter results on Tuesday, showing over 90% drop in its profits.


KKR’s Performance
The newspapers all reported on the private equity firm’s performance during the fourth quarter of 2014. The economic net income dropped from $780 million in 2013 to $86.6 million last year. Furthermore, the Financial Times pointed out, among others, the profit share after tax didn’t manage to hit even close to the analysts’ expectations. The profit stood at 5 cents after tax, while the analysts earlier predicted it would be around 45 cents.


KKR’s broader private equity portfolio gave a bit better results. The value increased by 2.7% in the fourth quarter. Although in the same period in 2013, the value went up by 8.4%, meaning the private equity portfolio also took a hit. Bloomberg’s data shows the firm’s shares fell by 3.4% to $24.14 right after the news came out in the early hours of trading in New York. This drop was the biggest decline since December 1st.


Better Expectations
The reason many analysts were expecting better results from the private equity firm was down to it not owning as many publicly-listed companies. The US-based private equity firm still has many assets in the oil and gas industry and these assets have seen the valuations drop significantly in recent months.


The economic net income takes into account these assets in hold in calculations, which naturally means KKR wasn’t able to dodge the bullet. One of the biggest companies causing problems to the private equity firm’s profits was Samson Resources Corp, the US oil and gas producer. KKR bought the company in a leveraged buyout in 2011 for $7.2 billion.


Reuters further reported the firm sees the “drop in the value of its collateralized load obligations and other credit investments” behind the decline in profits.


Positive Outlook for the Future
But the experts point out private equity firms are often investing in the long-term and therefore, much cannot yet be said about the results. KKR, for example, didn’t sell its energy-related assets during the period. It’s also looking to change the focus of Samson Resources Corp from natural gas production to oil, but the slump in prices naturally made the efforts difficult.


KKR co-founder, Henry Kravis, told last year that the distressed energy companies are going to provide lucrative opportunities for the private equity firms. “It’s going to be a great opportunity,” Kravis said. KKR’s assets under management increased to $98.6 billion at the end of December and the firm announced it has been able to fundraise $700 million for its second special situations fund. Bloomberg analysts expect the firm to seek a total investment of $3 billion with the fund.


The oil prices have definitely hit the big private equity firms hard, but it seems the optimism about the opportunities this also provides remains high among investors. It remains to be seen when they first start their spending spree to buy distressed energy companies.

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