KKR & Co. L.P. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; this is an annual report, not a standalone fourth-quarter filing. KKR is a global alternative investment manager and capital markets firm. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| GAAP fees and other | $1.908 billion | $1.044 billion | Higher largely because an accounting change brought previously eliminated management fees and carried interest into reported revenue. |
| Net income attributable to KKR common unitholders | $287 million; $0.59 diluted per unit | $488 million; $1.01 diluted per unit | Down 41% in income and 42% in diluted earnings per unit. |
| Economic net income (ENI), segment basis | $794 million | $1.298 billion | Down 39%. |
| Fee-related earnings (FRE) | $537 million | $610 million | Down 12%. |
| After-tax distributable earnings | $1.528 billion; $1.89 per adjusted unit | $1.453 billion; $1.78 per adjusted unit | Up 5% in total and 6% per adjusted unit; non-GAAP measure, not the amount distributed. |
| Operating cash flow, GAAP | $(1.562) billion | $385 million | Negative, with cash flows materially affected by investment purchases and sales and consolidated entities. |
| Cash and cash equivalents, GAAP | $2.509 billion | $1.048 billion | Does not equal segment liquidity; some consolidated-entity cash is not available for general use. |
GAAP net income was $951 million, versus $5.275 billion in 2015. The comparison is substantially affected by adoption of ASU 2015-02: most investment funds were deconsolidated in 2016, reducing reported assets, liabilities, investment results and noncontrolling interests. Management said the change did not affect net income attributable to KKR or partners’ capital in itself; read the GAAP comparison alongside the segment and non-GAAP measures.
Business, asset base and segment developments
- Private Markets AUM rose to $73.8 billion from $66.0 billion; fee-paying AUM increased to $52.2 billion from $45.3 billion. Segment ENI declined to $667 million from $1.042 billion, primarily on lower performance income and monitoring fees.
- Public Markets AUM reached $55.7 billion, up from $53.5 billion, while fee-paying AUM reached $49.3 billion. Segment ENI increased to $228 million from $151 million. New capital raised was partly offset by $6.3 billion of redemptions and $4.7 billion of distributions.
- Capital Markets segment ENI was $132 million, versus $127 million; syndicated capital was $1.2 billion, up from $869 million.
- Principal Activities reported a $233 million ENI loss, versus a $21 million loss. KKR cited investment losses, including the effect of First Data’s share-price decline, and lower net interest and dividends. First Data was 15.7% of segment investments at year-end; its 2016 share-price reduction lowered segment ENI by approximately $142 million in the segment discussion.
- Firmwide new capital raised was $28.8 billion, up from $19.8 billion. Capital invested was $11.0 billion, versus $11.5 billion; syndicated capital was $1.2 billion, versus $0.9 billion.
Liquidity, debt and capital returns
- Segment cash and short-term investments were $3.388 billion at year-end. Segment debt included $2.0 billion of KKR senior notes and $399 million of KFN debt; KFN also had $374 million of preferred shares. KFN obligations are non-recourse to KKR beyond KFN’s assets.
- GAAP consolidated debt obligations were $18.544 billion, but included substantial fund, CLO and CMBS debt supported by those vehicles’ assets and generally non-recourse to other KKR entities. Do not treat this figure as equivalent to parent-company debt.
- KKR reported $2.585 billion of unfunded commitments to active investment funds, plus $610 million of capital-markets commitments and $71 million of other investment commitments. The segment disclosure also reported $3.388 billion of cash and short-term investments.
- Common-unit distributions were set at $0.16 per quarter for 2016. KKR announced an intended increase to $0.17 per quarter beginning with first-quarter 2017 results. The board authorized an additional $250 million for unit repurchases, beyond $41.2 million remaining under the existing program as of February 9, 2017.
Outlook, risks and unusual items
- KKR does not intend to provide earnings guidance and emphasized that results and cash flows can vary significantly with investment valuations, realizations, carried interest, incentive fees, fundraising and capital-markets activity.
- Management cited market, financing, foreign-exchange, commodity-price and regulatory risks, as well as competition for investment opportunities and fund capital. Brexit, prospective U.S. tax changes and possible restrictions on carried interest were highlighted as uncertainties.
- Most reported investment fair values were Level II or Level III; Level III represented 53.2% of investments measured at fair value. Management’s valuations rely on estimates and assumptions and may differ from eventual realization values.
- KKR adopted ASU 2015-02 in 2016, deconsolidating most funds. A $46.6 million Prisma contingent consideration liability was reversed after management concluded further payment was no longer probable. The Samson Resources realized loss was approximately $254 million, but the investment had previously been marked to zero.
- On February 6, 2017, KKR and PAAMCO announced a proposed combination of PAAMCO and KKR Prisma into an independent liquid-alternatives firm; KKR would retain a 39.9% stake. Closing remained subject to customary conditions and regulatory approvals.
- Potential fund clawbacks were nil assuming year-end fair values, but would have been $2.205 billion if relevant fund investments were liquidated at zero value. Litigation exposure was not quantified clearly; management said it could not estimate potential losses for certain matters.
Most important facts for investors to verify
- Separate the effect of the 2016 consolidation change from underlying operating trends; reconcile GAAP results to ENI, FRE and distributable earnings.
- Review the quality and realization prospects of fund valuations, especially Level III assets, and the concentration in First Data and energy investments.
- Assess whether fundraising, fee-paying AUM growth and realizations can offset redemptions, declining monitoring fees and fund fee credits.
- Distinguish parent-level liquidity and debt from non-recourse fund, CLO, CMBS and KFN obligations; evaluate unfunded commitments, preferred distributions and other cash needs.
- Confirm the status and economics of the PAAMCO–Prisma transaction, the proposed distribution increase, and the expanded repurchase authorization.