KKR & Co. Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. KKR is a global alternative investment manager. The quarter reflects severe market disruption from the COVID-19 pandemic. GAAP results consolidate certain funds and collateralized financing entities (CFEs), often on a gross basis; significant portions of their results and assets belong to noncontrolling investors.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| GAAP total revenues | $(1,001.5) million | $1,187.5 million |
| Fees and other | $380.6 million | $372.5 million |
| Capital allocation-based income (loss) | $(1,382.1) million | $814.9 million |
| Net gains (losses) from investment activities | $(3,944.5) million | $1,203.9 million |
| Net income (loss) | $(4,228.0) million | $1,627.0 million |
| Net income (loss) attributable to KKR | $(1,280.5) million | $709.3 million |
| Net income (loss) per Class A share, diluted | $(2.31) | $1.27 |
| After-tax distributable earnings (non-GAAP) | $355.3 million | $314.1 million |
| Distributable operating earnings (non-GAAP) | $472.2 million | $420.9 million |
| GAAP operating cash flow | $(1,406.4) million | $156.3 million |
Balance sheet, debt and liquidity
- Total assets were $55.6 billion, down from $60.9 billion; investments were $48.6 billion, down from $54.9 billion.
- Cash and cash equivalents were $2.0 billion. An additional $1.2 billion was held at consolidated entities and generally unavailable for KKR’s general liquidity needs; restricted cash was $116.5 million. Total cash, cash equivalents and restricted cash were $3.3 billion.
- Reported debt obligations were $26.3 billion, versus $27.0 billion at year-end. This includes $15.2 billion of debt at consolidated VIEs, principally CFEs, that is generally non-recourse beyond those entities’ assets. KKR reported $6.1 billion of financing availability across listed facilities and was in material compliance with debt covenants.
- Non-GAAP operating liabilities were $5.3 billion, including $3.6 billion of KKR debt excluding KFN and $0.9 billion of KFN debt. Book value per adjusted share fell to $16.52 from $19.24; GAAP stockholders’ equity per outstanding Class A share was $15.97, down from $18.44.
- Cash flow from financing activities was $1.5 billion, including net debt proceeds of approximately $1.2 billion. GAAP operating cash flow includes consolidated fund and CFE activity and is not a direct measure of cash available to the parent.
Material changes versus the prior comparable period
- GAAP results swung from profit to substantial loss, driven by investment markdowns and negative carried interest as markets repriced amid COVID-19. Net unrealized investment losses were $4.0 billion; realized investment gains were $63.4 million. The largest loss categories included consolidated CFEs, private equity, credit and real assets.
- GAAP capital allocation-based income turned to a $1.4 billion loss from $814.9 million of income. Fees and other rose modestly, while transaction fees declined to $99.0 million from $188.2 million; management fees increased to $222.7 million from $188.4 million.
- Compensation expense included a substantial reversal of previously accrued carried-interest compensation, contributing to a reported net GAAP expense benefit. By contrast, non-GAAP operating expenses rose to $471.0 million from $429.2 million, and non-GAAP operating revenues increased to $943.2 million from $850.1 million. Distributable operating earnings were about 50% of operating revenues in Q1 2020, versus about 49% in Q1 2019.
- AUM declined to $207.1 billion from $218.4 billion. FPAUM decreased to $159.1 billion from $161.2 billion, while uncalled commitments rose to $58.2 billion from $56.9 billion. Falling portfolio values were the main drag on AUM.
- Common shares repurchased totaled 10.2 million for approximately $246.2 million. KKR raised the total authorized repurchase-program amount to $500 million.
Outlook, risks and unusual items
- Management said it could not reasonably predict the pandemic’s ultimate impact. It cited risks to portfolio valuations, exits, fundraising, transaction activity, portfolio-company liquidity and credit quality, real estate rents, and future fee and carried-interest income. Remote work also brings operational and cybersecurity risks.
- Market declines were significant: the S&P 500 fell 20% in Q1, while leveraged-loan and U.S. high-yield indices each fell 13%. KKR reported that its private-equity portfolio value fell 12.1% during the quarter. After March 31, oil prices fell further, with certain short-dated WTI futures briefly below zero; management expected potential adverse effects on energy valuations, partly mitigated by hedges.
- Level III investments totaled $24.1 billion at quarter-end, representing 57.3% of investments measured at fair value. Valuations rely on significant management estimates; KKR cautioned that realized values may differ materially, particularly under pandemic-driven volatility.
- KKR disclosed $6.2 billion of unfunded commitments to active investment vehicles, plus $200.0 million of other investment commitments and $570.8 million of capital-markets underwriting, financing and syndication commitments. It also reported $3.9 billion of commitments to unconsolidated funds.
- Carried interest subject to clawback was approximately $155 million based on quarter-end fair values, including $93 million attributable to KKR. Assuming all relevant fund investments were liquidated at zero, the estimated clawback would be approximately $2.4 billion, including $1.4 billion attributable to KKR.
- KKR issued $500 million of 3.625% senior notes due 2050 in February. Subsequent to quarter-end, it entered a $750 million 364-day capital-markets revolver and issued an additional $250 million of 3.750% notes due 2029.
- KKR announced a $0.135-per-share common dividend for June 2020 and declared the scheduled preferred dividends. The board retains discretion over future common dividends. KKR completed an internal reorganization and acquired KKR Capstone on January 1, 2020; its inclusion in non-GAAP results affects period comparability.
Most important facts for investors to verify
- How portfolio marks, particularly Level III credit, private-equity and real-asset valuations, change as pandemic effects become clearer—and how much of Q1 losses are ultimately realized.
- Whether fee income, fundraising, portfolio-company performance and exit activity can sustain non-GAAP distributable earnings while AUM and portfolio values are under pressure.
- Parent-level liquidity and debt service capacity, distinguishing KKR’s available cash from cash held in consolidated entities and debt that is non-recourse to KKR.
- Funding needs under the $6.2 billion of fund commitments and other commitments, and potential clawback exposure as fund values and netting holes evolve.
- Whether the announced dividend and repurchase activity remain consistent with liquidity, market conditions and board discretion.