KKR & Co. Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 3, 2019. KKR is a global alternative investment manager spanning private equity, real assets, credit, hedge-fund partnerships and capital markets. Comparisons with Q1 2018 require care: KKR converted from a partnership to a corporation on July 1, 2018, changing tax treatment and financial-statement presentation.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total GAAP revenue | $1.187 billion | $472.6 million |
| Income before taxes | $1.795 billion | $620.5 million |
| Net income attributable to KKR Inc. | $709.3 million | $178.4 million |
| Net income attributable to Class A common stockholders | $701.0 million | $170.1 million |
| Diluted EPS | $1.27 | $0.32 |
| After-tax distributable earnings (non-GAAP) | $314.1 million | $235.7 million |
| Operating cash flow | $156.3 million | $(2.158) billion |
- GAAP revenue growth was led by capital allocation-based income, which rose to $814.9 million from $78.2 million. Carried interest and general-partner capital interest both increased, primarily reflecting stronger private-equity portfolio appreciation.
- Net investment gains were $1.204 billion, including $1.074 billion of unrealized gains. Private equity contributed $988.2 million of total gains; debt obligations and other items generated a $267.1 million loss.
- Fees and other revenue declined to $372.5 million from $394.4 million, chiefly due to higher fee credits and lower incentive fees, partly offset by higher transaction fees and expense reimbursements. Segment fees and other, net rose 4% to $397.3 million.
- Segment operating earnings were $420.9 million on segment revenue of $850.1 million, an approximately 49.5% segment operating margin. After-tax distributable earnings increased 33%; this non-GAAP measure excludes mark-to-market gains and is not the amount used to determine dividends.
- At March 31, total assets were $52.0 billion, investments $45.8 billion and total liabilities $25.8 billion. Debt obligations were $22.3 billion, down from $22.34 billion at year-end. Consolidated debt includes fund and collateralized-vehicle obligations, many of which are non-recourse to KKR; KKR’s segment balance sheet reported $2.36 billion of KKR debt and $948.5 million of KFN debt.
- Cash and cash equivalents were $1.81 billion; cash held at consolidated entities was another $911.5 million and restricted cash was $67.0 million. Segment cash and short-term investments were $2.55 billion. Cash-flow figures include consolidated funds and vehicles and therefore do not represent only cash available to KKR Inc.
- AUM was $199.5 billion and fee-paying AUM $147.7 billion, up from $194.7 billion and $141.0 billion, respectively, at December 31, 2018. Uncalled commitments were $58.1 billion. KKR reported $5.5 billion of capital invested and syndicated capital combined, versus $4.3 billion a year earlier.
Material changes and notable items
- GAAP net income attributable to Class A common stockholders rose substantially, but results were strongly affected by valuation gains and carried interest. The company reported $700.98 million of common-stockholder income versus $170.10 million in Q1 2018.
- KKR’s private-equity portfolio value increased 11.1% in the quarter; public and publicly indexed holdings rose 31.1%, while privately held investments rose 5.5%, according to management.
- Operating cash flow swung to positive $156.3 million from negative $2.16 billion. Investment purchases and proceeds are significant components of KKR’s consolidated operating cash flows, so the comparison is not a simple measure of recurring cash generation.
- FPAUM and AUM rose, while Public Markets AUM was nearly flat. Public Markets redemptions were $3.38 billion, partly offset by $3.60 billion of new capital. Private Markets AUM growth included $5.0 billion of valuation increase.
- KKR adopted the new lease standard in January 2019, recording $153.3 million of right-of-use assets and $162.9 million of lease liabilities at adoption. It also recorded an additional approximately $45 million tax benefit following the final determination of the tax-basis step-up related to the 2018 conversion.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management described fundraising as competitive and cited risks from slower growth, market volatility, interest rates, credit spreads, currency movements, commodity prices and the ability to deploy capital and realize investments. It noted U.S. growth was expected to slow in 2019 relative to 2018 and economic momentum in Europe was weak.
- Management reported approximately $200 million of expected realized performance and investment income from post-quarter realization activity; some transactions remained incomplete and subject to closing conditions.
- Funding commitments at quarter-end included $5.09 billion to active investment vehicles, $153.7 million for Principal Activities investments and $516.2 million for capital-markets transactions, debt financing and syndications. Funding depends on contractual terms and conditions.
- No carried interest was subject to clawback assuming applicable funds were liquidated at March 31 fair values; the hypothetical clawback would be approximately $2.1 billion if those investments were instead liquidated at zero value.
- Approximately 57.3% of investments measured at fair value were Level III, requiring significant unobservable inputs and management judgment. Valuation changes can materially affect reported earnings and carried interest.
- KKR disclosed a Kentucky Retirement Systems lawsuit; plaintiffs appealed an appellate ruling vacating the trial court’s denial of a motion to dismiss. KKR said it could not estimate potential losses for the discussed proceedings and investigations; an adverse outcome could materially affect results in a particular period.
- KKR had $500 million available under its share repurchase program after increasing the program authorization. It declared a $0.125 per-share common dividend after quarter-end and declared preferred dividends; future common dividends remain subject to board discretion.
Most important facts for investors to verify
- How much of reported earnings and EPS came from unrealized investment gains and accrued carried interest, rather than realized, recurring fees and cash receipts.
- The effect of the partnership-to-corporation conversion on tax expense, future cash taxes and payments under the tax receivable agreement.
- KKR’s corporate-level liquidity and debt obligations, distinguished from consolidated fund, CLO and CMBS debt that may be non-recourse.
- Whether AUM and fee-paying AUM growth, fundraising and investment deployment continue, and whether Public Markets redemptions persist.
- Valuation assumptions and sensitivities for Level III investments, including portfolio concentration and exposure to market, credit and energy-price changes.
- Progress and final outcomes of post-quarter realizations, outstanding commitments, litigation and regulatory matters, and any potential carry clawback exposure.