KKR & Co. Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. KKR is a global alternative investment manager across private equity, credit and real assets, with capital markets and principal investment activities. Amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total GAAP revenues | $1.90 billion | $790 million | $2.23 billion | $3.16 billion |
| Net income attributable to KKR common stockholders | $1.06 billion | $241 million | $466 million | $1.46 billion |
| Diluted GAAP EPS | $1.79 | $0.43 | $0.80 | $2.63 |
| After-tax distributable earnings (non-GAAP) | $410 million | $389 million | $1.09 billion | $1.03 billion |
| Distributable operating earnings (non-GAAP) | $551 million | $487 million | $1.47 billion | $1.35 billion |
Q3 GAAP revenue and earnings rebounded sharply year over year, driven by higher investment gains and capital allocation-based income, including carried interest. Q3 investment activity generated $2.28 billion of net gains, including $1.74 billion of unrealized gains. By contrast, nine-month GAAP revenue fell 30% and common-stockholder earnings fell 68%, reflecting weaker year-to-date investment results: net investment losses were $179 million versus $2.24 billion of gains in 2019, while capital allocation-based income declined to $888 million from $1.85 billion.
Fees and other revenue were $563 million in Q3, up from $416 million, mainly on higher transaction and management fees. For the first nine months, fees and other rose modestly to $1.34 billion; higher management fees were partly offset by lower transaction fees. Nine-month after-tax distributable earnings increased 6%, as higher distributable revenues more than offset higher expenses, interest and taxes. Distributable operating margin was approximately 52% in Q3 and 51% for the nine-month period; these are derived from KKR’s non-GAAP figures, not GAAP operating margins.
Balance sheet, cash flow and operating metrics
- At September 30, total assets were $70.7 billion, total liabilities $36.6 billion and total equity $34.0 billion. Investments were $61.0 billion, up from $54.9 billion at year-end 2019.
- Cash and cash equivalents were $4.36 billion, excluding $1.38 billion held at consolidated entities and generally unavailable for KKR’s general liquidity needs. Including consolidated-entity and restricted cash, reported cash, cash equivalents and restricted cash totaled $5.89 billion.
- GAAP debt obligations were $31.45 billion, up from $27.01 billion at year-end. This includes $16.28 billion of consolidated CLO debt and other debt of consolidated funds and vehicles; much of that debt is non-recourse beyond the relevant entities’ assets. KKR’s non-GAAP book liabilities show $4.64 billion of KKR debt excluding KFN and $949 million of KFN debt.
- For the first nine months, operating cash flow was negative $4.15 billion, investing cash flow negative $111 million, and financing cash flow positive $6.89 billion. The operating outflow chiefly reflected investment purchases exceeding proceeds; financing included debt issuance, contributions from noncontrolling interests and the Series C preferred issuance. Cash increased by $2.65 billion.
- AUM was $233.8 billion and fee-paying AUM $177.3 billion at quarter-end, up from $218.4 billion and $161.2 billion, respectively, at year-end. Uncalled commitments were $67.1 billion. Q3 capital invested and syndicated capital totaled $10.0 billion.
- KKR’s non-GAAP book value per adjusted share was $20.26, up from $19.24 at year-end; GAAP stockholders’ equity per outstanding common share was $18.72.
Material changes and notable items
- KKR issued $1.15 billion liquidation preference of 6.00% Series C mandatory convertible preferred stock and $750 million of 3.50% senior notes due 2050. The financing was associated with the planned Global Atlantic acquisition.
- KKR agreed to acquire Global Atlantic, a retirement and life insurance company, with closing expected in early 2021, subject to regulatory approvals and other conditions. The notes have a special mandatory redemption provision if the acquisition does not proceed under specified circumstances; KKR may redeem the Series C preferred stock if it does not close.
- On January 1, KKR completed an internal reorganization and acquired KKR Capstone. In August, it transferred directly held oil and gas interests into a consolidated investment fund; thereafter, those interests are measured at fair value through investment gains and losses.
- KKR reported a $88 million impairment of an equity-method investment during the nine-month period. It also disclosed approximately $100 million of carried interest subject to clawback at quarter-end fair values, including $60 million attributable to KKR; a zero-value liquidation scenario would imply a substantially larger estimated clawback.
Outlook, risks and contingencies
Management gave no broad earnings guidance. It expected more than $250 million of realized performance and investment income in Q4 from Marshall Wace incentive fees and certain completed or expected investment sales, but noted that some transactions remained subject to closing conditions.
COVID-19 remained a major uncertainty. KKR cited risks to portfolio-company operations and valuations, fundraising, exits, credit quality and liquidity, as well as potential renewed restrictions and market volatility. Approximately 56% of investments measured at fair value were Level III, relying on significant unobservable inputs; management cautioned that realized values may differ materially from estimates. KKR also noted commodity, currency, interest-rate and LIBOR-transition risks.
Commitments included $5.74 billion of uncalled fund commitments, $449 million for investment and asset purchases, and $749 million for capital-markets underwriting, financing and syndications. KKR disclosed a $100 million contingent guarantee for a managed fund’s revolving facility and stated it believed funding was remote. A Kentucky-related lawsuit and new action by the state Attorney General remain matters to monitor; management could not estimate potential loss and had not concluded the matters would materially affect the financial statements. KKR stated it was in material compliance with debt covenants and that disclosure controls were effective.
KKR announced a $0.135-per-share common dividend for payment in December 2020. Its stated common dividend policy targets $0.54 annually, subject to board discretion. The company reported no common-share repurchases in Q3; $462 million remained under the program as of October 23, 2020.
Important facts for investors to verify
- How much of Q3’s strong GAAP result reflects realized gains and recurring fee earnings versus unrealized marks and carried interest that may reverse.
- The composition and recourse of reported debt, and the unrestricted cash actually available to KKR after excluding fund and CFE cash.
- Global Atlantic’s closing timeline, final funding mix, regulatory approvals and any related mandatory redemption triggers.
- Key assumptions behind Level III valuations, including sensitivity to market conditions, and the progress of investment exits and realizations.
- Whether commitments, potential clawbacks, litigation and COVID-19 effects create additional liquidity or earnings pressure.