KKR & Co. Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. KKR is a global alternative asset manager with capital markets operations and a majority-owned insurance business, Global Atlantic. Unless stated otherwise, dollar amounts below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| GAAP revenue | $1.86 billion | $4.48 billion | $3.19 billion | $12.18 billion |
| Net income (loss) attributable to KKR common stockholders | $(91.6) million | $1.13 billion | $(993.4) million | $4.05 billion |
| GAAP diluted earnings (loss) per share | $(0.11) | $1.80 | $(1.40) | $6.52 |
| Fee related earnings (FRE; non-GAAP) | $541.8 million | $529.6 million | $1.61 billion | $1.36 billion |
| Asset management segment operating earnings (non-GAAP) | $958.9 million | $1.07 billion | $3.04 billion | $2.87 billion |
| Insurance segment operating earnings (non-GAAP) | $127.0 million | $115.0 million | $380.1 million | $305.8 million |
| After-tax distributable earnings (non-GAAP) | $823.7 million | $925.1 million | $2.63 billion | $2.51 billion |
- Asset management capital allocation-based income (loss), which includes carried interest and general partner capital income, was $(572.9) million in Q3 and $(2.44) billion for the nine months, versus positive $1.53 billion and $5.74 billion, respectively, in 2021. KKR attributed the reversals mainly to investment depreciation at carry-earning funds.
- Global Atlantic’s Q3 net investment income increased to $1.09 billion from $758.4 million; insurance segment operating earnings rose to $127.0 million. For nine months, insurance segment operating earnings increased to $380.1 million, with the comparison also affected by 2021 including Global Atlantic only from its February 2021 acquisition date.
- No conventional consolidated profit margin is presented. GAAP revenue and earnings are especially sensitive to fair-value movements and carried-interest accruals.
Cash flow, balance sheet and liquidity
- At September 30, 2022, total assets were $266.25 billion, total liabilities $214.27 billion and total equity $51.90 billion. KKR common stockholders’ equity per outstanding share was $19.00, down from $27.64 at year-end 2021; non-GAAP book value per adjusted share was $26.56, down from $28.77.
- Cash, cash equivalents and restricted cash totaled $11.63 billion at quarter-end. Nine-month operating cash flow was $(4.63) billion, investing cash flow $(10.68) billion and financing cash flow $16.65 billion; cash increased $1.10 billion. Consolidated cash flows include funds, CLOs and insurance entities, so they are not a direct measure of cash available to the parent.
- Reported asset management debt obligations were $38.26 billion and insurance debt obligations $1.92 billion. Asset management debt includes substantial fund and CLO borrowings that are generally non-recourse beyond the relevant fund, vehicle or collateral. Global Atlantic policy liabilities were $135.73 billion and are obligations of the issuing insurance companies, not generally of KKR parent.
- KKR reported no borrowings under its $1.5 billion corporate revolving credit agreement at September 30. Global Atlantic had $200 million drawn on its $800 million revolving facility. Management said it was in material compliance with debt covenants.
- Common dividends paid during the first nine months were $310.9 million; common stock repurchases were $346.7 million. A $0.155-per-share common dividend and $0.75-per-share Series C preferred dividend were declared after quarter-end.
Changes versus prior comparable periods
- GAAP results turned to losses: Q3 net loss attributable to common stockholders was $91.6 million versus $1.13 billion income in Q3 2021; nine-month loss was $993.4 million versus $4.05 billion income. The principal driver was the swing in capital allocation-based income and investment marks, rather than a comparable collapse in recurring fees.
- Management fees increased, supporting FRE growth. Q3 transaction and monitoring fees declined, particularly in capital markets, where KKR completed 47 transactions versus 87 in Q3 2021. Nine-month capital markets transactions were 194 versus 225.
- Q3 and nine-month asset management investment activity recorded net losses of $379.2 million and $1.35 billion, respectively, compared with gains of $2.12 billion and $8.03 billion in 2021. For nine months, unrealized losses were $2.51 billion.
- Global Atlantic investment-related results weakened: insurance net investment-related losses were $173.8 million in Q3 and $968.8 million for nine months, versus Q3 gains of $162.1 million and nine-month gains of $33.0 million in 2021. Higher interest rates and wider credit spreads contributed to valuation losses.
- Comprehensive loss attributable to KKR was $1.54 billion in Q3 and $5.62 billion for nine months, including substantial other comprehensive losses. Global Atlantic’s available-for-sale fixed-maturity portfolio had $11.93 billion of gross unrealized losses at September 30, 2022, primarily associated with higher interest rates. Management stated it intended to hold these investments for recovery as part of its asset-liability cash-flow matching strategy.
- KKR’s AUM was $496.2 billion at September 30, up from $470.6 billion at year-end; fee-paying AUM was $397.6 billion, up from $357.4 billion. Nine-month capital invested was $55.7 billion versus $49.8 billion. Quarterly capital invested was $15.7 billion versus $24.4 billion in Q3 2021.
Outlook, commentary, risks and unusual items
- KKR forecast no full-year earnings or revenue guidance in the supplied filing text. Management expected more than $350 million of realized performance income and realized investment income in Q4 2022 from specified completed or pending transactions and Marshall Wace incentive fees; transactions remained subject to closing conditions, with no assurance of completion.
- Management described slowing economic activity, persistent inflation, rapid central-bank rate increases, volatile equity and credit markets, and geopolitical and energy-market uncertainty. These conditions may reduce investment valuations, exits, fundraising, deployment and capital-markets fees. KKR also noted that higher rates may lift Global Atlantic’s investment yields and product demand, but may increase surrenders, hedging and new-business costs, and create losses if assets must be sold before recovery.
- Global Atlantic’s annual assumption review produced a $12.2 million unfavorable Q3 net-income impact, primarily associated with expected annuity and life policyholder surrender experience.
- KKR completed its reorganization mergers on May 31, 2022, acquiring KKR Holdings and issuing common shares in exchange for units; the transaction materially changed ownership, equity and share-count comparisons. KKR also acquired Japanese real estate manager KJRM in April 2022 for approximately $1.7 billion; its post-acquisition earnings were reported as immaterial.
- Unfunded commitments included $10.7 billion to KKR funds and vehicles, $2.5 billion of Global Atlantic investment commitments and $655.4 million of capital-markets commitments. Carried interest subject to clawback was approximately $507 million assuming liquidation at reported fair values; the filing describes a $2.6 billion stress case if all carry-paying investments were liquidated at zero.
- KKR disclosed ongoing Kentucky-related litigation and civil investigations by the Department of Justice concerning antitrust matters and the SEC concerning business-related electronic communications. Outcomes and potential losses could not be estimated; KKR said it did not then expect the investigations to materially adversely affect its financial condition or results.
- The Inflation Reduction Act introduces a 15% corporate minimum tax and a 1% excise tax on covered stock repurchases after December 31, 2022. KKR said it was evaluating future effects; it reported no impact to its financial statements as of September 30.
- KKR expects to adopt the long-duration insurance accounting standard on January 1, 2023. It did not expect a material transition-date effect on retained earnings or AOCI, but anticipated greater earnings volatility and significant systems, process and control work.
Most important facts for investors to verify
- Whether recurring fee growth and FRE can offset market-sensitive carried-interest and investment losses, and how much Q4 realization income actually closes.
- Global Atlantic’s realized credit losses, surrender behavior, reserve assumptions and ability to hold depreciated securities to recovery; distinguish unrealized AOCI losses from impairments or realized losses.
- The nature and recourse of reported debt and cash flows, separating parent-company liquidity from insurance, fund and CLO assets and obligations.
- Fundraising, fee-paying AUM, capital deployment and exit activity amid tighter financing markets; note that management’s AUM and non-GAAP measures have company-specific definitions.
- Developments in the disclosed litigation and investigations, clawback exposure, unfunded commitments, and the effects of the reorganization and new insurance accounting standard.