KKR was yet another private equity firm that managed to achieve better than expected results during the first quarter. Although the firm did suffer some damage because of its energy-related assets, it still managed to increase its quarterly profits by 29%. The firm also announced on Thursday that it is considering a new North American fund.
The First Quarter Results
KKR announced in its official statement, that it’s GAAP net income (loss) stood at $270.5 million for the first quarter of 2015. This is an increase from the $210.0 million it managed to make during the first quarter last year.
Its distributable earnings were also up from the $446.8 million in 2014. The firm managed to make $516.5 million in 2015. This is an increase of 15.6% and means KKR’s shareholders might have more reasons to smile again.
Although the above figures managed to surprise many analysts and give a positive note to the firm’s announcement, the firm’s economic net income didn’t reach the same levels a year earlier. In the first quarter of last year, the economic net income stood at $630.3 million, while this year, the firm was able to achieve $599.4 million.
The economic net income predicted by analysts at Thomson Reuters was 53 cents a share. The results announced on Thursday showed it was 62 cents a share. Therefore, the firm was able to beat the low expectations with quite a margin. The firm did announce it is going to pay a dividend of 46 cents for the first quarter. This is narrowly above the 43 cents it paid a year ago.
Henry R. Kravis and George R. Roberts, co chairmen and co-chief executive officers of KKR, told in the official statement, “We had a good start to the year with strong returns and cash flow generation, which translated in $599 million of economic net income and $517 million of total distributable earnings. Additionally, our balance sheet continues to perform, resulting in a 20% cash return on equity over the twelve months ending march 31st.”
Boost From Sales
Much of the positive results are down to sales KKR made during the first quarter in 2015. For example, KKR sold the pharmacy company Alliance Booth to Walgreen. Other notable sales of the quarter include the Fotolia sale to Adobe Systems and the Big Heart Pet Brands sale to J.M. Smucker. KKR also made profit from its sale of stock shares in the German forklift truck maker Kion Group AG.
Furthermore, the Wall Street Journal noted the firm was finally able to mark up the value of some of its assets. The article looked at the example of KKR’s stake in First Date Corp., the Atlanta-based company, which finally went above the value of its cost. According to Wall Street Journal, the firm had valued First Data at about $26 billion at 60 cents on the dollar. At the moment, the company is valued at $1.18 on the dollar.
KKR’s activity on selling assets has meant a drop in its assets under management, as the firm hasn’t been on a big shopping spree in the past year. The firm’s assets under management now stand at $99.1 billion. A year ago, they stood at $102.3 billion. Nonetheless, the assets have increased from the $98.6 billion KKR managed at the end of last year.
Private Equity Asset Appreciation
Bloomberg reported KKR’s private equity holdings appreciation was up from last year. The holding appreciated 5.1% in the first quarter of 2015, while the appreciation level in 2014 stood at 4.5%.
The results were still behind Blackstone Group, which just a few days ago reported it’s private equity portfolio made a 6.4% gain during the first quarter. Blackstone’s results were largely driven by its impressive sale results with its real estate and buyout holdings.
Michael Kim, an analyst at Sandler O’Neill & Partners in New York, told Bloomberg, the firm’s “beat was primarily driven by higher revenues, namely performance fees related to more favourable private equity marks.”
Energy-Related Assets Caused Some Problems
The private equity firm has been hit by the drop in oil prices. The energy holdings of most big PE firms have contributed to some of the poor results during the first quarter. For KKR, its energy investment value dropped from 76 cents at the end of 2014 to 73 cents. The slide in recent months has been steep, as its energy investment were valued at $1.14 last September. The assets reported do not include the assets that are purely classified as private equity.
Prospect of a New North American Fund
The Private Equity Beat blog reported on Thursday that the private equity firm might be after a new fund. This despite it having closed its last North American-focused mega fund just two years ago. The firm is looking to launch the new fund later this year. According to the blog, head of KKR’s global capital and asset management group, Scott Nuttall told the firm has yet to set a target for the fund.
Its last North America XI Fund raised $9 billion at the end of 2013. Around $4.2 billion of this raised equity is yet to be deployed. According to Mr Nuttall, “Prices are a bit elevated. But we are finding interesting opportunities to put money to work”.
Furthermore, the predecessor fund for the 2013 fund, closed in 2006, managed to raise $17.6 billion, so the firm has strong history in raising money for North America-focused investments. KKR’s earnings data shows that the 2006 fund has realised around “$15 billion of the $30 billion fair value”.
Better Than Expected Results
So far, private equity firms have managed to exceed most expectations with first quarter results. Even though the plummeting oil prices have caused concern, most firms have managed to do a lot of damage control. It remains to be seen whether companies can keep exceeding expectations as the year moves on. A lot of equity is still sitting in PE funds, so mega deals might yet be on the horizon in 2015.