Business Context and Reporting Period
Company: KKR & Co. L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Overview: KKR is a leading global investment firm offering investment management services and capital markets solutions. As of March 31, 2011, the firm reported Assets Under Management (AUM) of $61.0 billion. The firm operates through three primary segments: Private Markets, Public Markets, and Capital Markets and Principal Activities.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenues (Fees) | $231.8 million | $106.0 million |
| Total Expenses | $423.8 million | $463.3 million |
| Net Gains from Investment Activities | $2,487.2 million | $2,286.6 million |
| Net Income (Consolidated) | $2,317.4 million | $2,393.2 million |
| Net Income Attributable to KKR & Co. L.P. | $159.6 million | $113.8 million |
| Earnings Per Unit (Diluted) | $0.75 | $0.56 |
| Cash and Cash Equivalents | $1,047.5 million | $603.9 million |
| Total Debt Obligations | $1,487.0 million | $1,487.0 million |
| Assets Under Management (AUM) | $61.0 billion | $54.7 billion |
Material Changes vs. Prior Period
- Revenue Growth: Fees increased by $125.8 million (118.6%) compared to Q1 2010. This was driven primarily by a $88.1 million increase in gross monitoring fees (including $68.8 million from termination fees related to the IPOs of HCA Inc. and The Nielsen Company) and a $31.7 million increase in transaction fees.
- Expense Reduction: Total expenses decreased by $39.6 million (8.5%). The reduction was largely due to a $70.6 million decrease in equity-based payments, partially offset by a $19.0 million increase in cash-based compensation.
- Investment Income: Net gains from investment activities rose by $200.7 million (8.8%), primarily due to higher realized gains from private equity investments ($1.5 billion in Q1 2011 vs. $215.7 million in Q1 2010).
- Dividend Income Decline: Dividend income dropped significantly to $4.8 million from $442.9 million in the prior year, reflecting the absence of large dividends from HCA Inc. and Visant Inc. received in Q1 2010.
- Net Income Attributable to KKR: Increased by $45.8 million (40.2%) to $159.6 million, driven by higher fees and lower equity-based compensation expenses.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects to continue generating attractive investment returns through a disciplined investment approach. The firm anticipates sufficient liquidity to fund working capital requirements for the next 12 months.
- Legal Proceedings:
- Del Monte Foods: KKR is a defendant in shareholder class actions regarding the acquisition of Del Monte Foods. A preliminary injunction was issued in February 2011, but the transaction closed on March 8, 2011. The SEC has requested information regarding the transaction.
- Antitrust Investigations: KKR is cooperating with the U.S. Department of Justice regarding an investigation into private equity firms and antitrust laws. A class action lawsuit alleging antitrust violations in leveraged buyouts is ongoing.
- Bruno's Litigation: Long-standing litigation regarding the 1995 acquisition of Bruno's, Inc. is pending appeal in the Alabama Supreme Court.
- Contingencies:
- Clawback Obligations: If all private equity funds were liquidated at no value, the clawback obligation would be $754.1 million. Based on fair values as of March 31, 2011, the obligation is estimated at $73.5 million.
- Net Loss Sharing: If certain vehicles were liquidated at zero value, the contingent repayment obligation would be approximately $1,043.2 million. Based on fair values, there is currently no net loss sharing obligation.
- Risk Factors: Risks include the potential failure of the U.S. Congress to raise the debt limit, which could impact financing and valuations. Additionally, investments in real assets (real estate, natural resources) expose the firm to environmental liabilities and tax complexities.
Key Facts for Investor Verification
- Fee Volatility: Verify the sustainability of fee revenue, as a significant portion of the Q1 2011 increase ($68.8 million) was due to one-time termination fees from IPOs, which are infrequent.
- Investment Valuation: Approximately 57.1% of total investments are classified as Level III (unobservable inputs), requiring significant management judgment. Verify the sensitivity of net income to changes in these valuations.
- Noncontrolling Interests: Note that consolidated net income ($2.3 billion) is significantly higher than net income attributable to KKR ($159.6 million) due to the consolidation of funds where third-party investors hold the majority economic interest.
- Debt Structure: Confirm the terms of the $500 million Senior Notes (6.375% interest, maturing 2020) and the $989 million in investment financing arrangements (total return swaps and term loans).
- Legal Exposure: Monitor the status of the Del Monte Foods litigation and the DOJ antitrust investigation, as outcomes could result in material damages or operational restrictions.