KKR & Co. Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing was issued February 14, 2020. Although the request identifies 2019 Q4, this is an annual report. KKR is a global alternative investment manager with private and public markets, capital markets, and principal investment businesses. GAAP results consolidate certain funds and CLOs; their assets, liabilities, and cash flows are not generally available to KKR, so consolidated totals should not be read as standalone corporate measures.
Financial and operating results
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| GAAP revenue | $4.221B | $2.396B | Up 76%; largely higher capital allocation-based income |
| Fees and other (GAAP) | $1.790B | $1.841B | Down 3%; higher fee credits and lower transaction fees offset higher management fees |
| Capital allocation-based income | $2.430B | $555M | Up sharply with higher investment appreciation |
| GAAP expenses | $2.908B | $2.089B | Up 39%, including higher carried-interest compensation |
| Net income attributable to Class A common stockholders | $1.972B; $3.62 diluted EPS | $1.098B; $2.06 diluted EPS | Up 80% in net income |
| After-tax distributable earnings (non-GAAP) | $1.405B | $1.597B | Down 12%, mainly lower realized performance income |
| Distributable operating earnings (non-GAAP) | $1.835B | $1.979B | Down 7%; approximately 49.8% of operating revenues versus 51.2% |
| AUM / fee-paying AUM | $218.4B / $161.2B | $194.7B / $141.0B | Up 12% / 14% |
Investment income was $3.856B, versus $1.950B in 2018. Net gains from investment activities were $3.162B, comprising $497M realized gains and $2.665B unrealized gains. Private equity gains were the main driver; credit and real-asset results were weaker. FY 2019’s fourth quarter recorded $1.063B revenue, $515M net income attributable to Class A common stockholders, and $0.91 diluted EPS.
Cash flow, balance sheet and liquidity
- GAAP operating cash flow was negative $5.682B, compared with negative $7.606B in 2018. The filing explains that investment purchases and proceeds of consolidated funds and CLOs substantially affect this measure, limiting its usefulness as a corporate cash-generation indicator.
- At year-end, GAAP cash and cash equivalents were $2.347B; cash, cash equivalents and restricted cash including consolidated entities totaled $3.237B. KKR’s non-GAAP cash and short-term investments, excluding managed funds and other consolidated entities, were $2.784B.
- GAAP total assets were $60.899B, liabilities $30.397B, and debt obligations $27.013B. These figures include substantial consolidated fund/CLO balances. On KKR’s non-GAAP basis, debt was $4.046B, including $949M of KFN debt that is non-recourse to KKR beyond KFN’s assets; non-GAAP operating liabilities totaled $4.730B.
- Non-GAAP book value was $16.364B, or $19.24 per adjusted share, up from $12.981B and $15.57, respectively. GAAP stockholders’ equity attributable to KKR was $10.807B; GAAP equity per outstanding Class A share was $18.44.
- KKR had $5.241B of unfunded commitments to its active investment funds and $1.089B of capital-markets underwriting, lending and syndication commitments. A $1.0B corporate revolving credit facility was undrawn and scheduled to mature in 2023.
Changes, outlook and material risks
- Performance and fundraising: Private Markets AUM rose to $119.3B, primarily from portfolio appreciation and new capital. Public Markets AUM reached $99.1B, with fundraising and the increased Marshall Wace stake partly offset by redemptions and distributions. Capital markets transaction fees fell to $410M from $631M as transactions were smaller and fewer.
- Investment and realization outlook: KKR said certain completed or expected post-year-end sales and other realization activity could generate approximately $700M of realized performance and investment income in the first half of 2020, subject to closing conditions; completion and timing were not assured. KKR does not provide earnings guidance.
- Dividends: A $0.125 per-share Class A dividend was declared for Q4 2019. KKR announced a policy expectation of $0.135 quarterly, or $0.54 annualized, beginning with the Q1 2020 dividend, subject to board discretion and applicable restrictions.
- 2020 changes: On January 1, 2020, KKR completed an internal reorganization and acquired KKR Capstone. These events are not reflected in FY 2019 financial statements. The reorganization changed senior-note guarantee arrangements, with KKR Group Partnership remaining a guarantor.
- Valuation and earnings volatility: Investment marks and carried interest are material, variable, and partly based on management estimates; 56.7% of investments measured at fair value were Level III. A hypothetical immediate 10% investment-value decline was estimated to reduce pre-tax KKR-attributable carried interest by about $399M and net investment gains, including GP capital interest, by about $858M; these are sensitivities, not forecasts.
- Contingencies: Carried interest subject to clawback was $36.9M assuming funds were liquidated at year-end fair values; the estimated exposure would be about $2.5B if relevant investments were valued at zero. A Kentucky Retirement Systems lawsuit remained pending on appeal; management could not estimate potential loss and had not concluded the matter would materially affect the financial statements.
- Market and business risks: Management highlighted trade and economic uncertainty, COVID-19’s emerging effects, market and credit volatility, foreign exchange and commodity-price exposures, leverage, fundraising and redemption risks, and the uncertain transition from LIBOR. Tax and regulatory changes, conflicts, cybersecurity, key-person retention, and the difficulty of realizing illiquid investments are also material risks.
KKR reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements and internal controls, while identifying Level III investment valuation as a critical audit matter because of the judgment involved and its effect on carried interest and investment income.
Important facts for investors to verify
- Separate KKR’s recurring fee earnings and realized distributable earnings from GAAP gains driven by unrealized marks and carried interest; compare both measures over time.
- Review the quality and realizability of Level III valuations, especially private equity and credit holdings, and the sensitivity of carried interest to valuation changes and fund netting holes.
- Distinguish KKR corporate debt and liquidity from consolidated fund/CLO debt and cash; assess the timing of unfunded commitments, underwriting obligations, and maturities.
- Track redemptions, fundraising, fee-paying AUM, fee credits, and the decline in capital-markets fees, as these affect recurring fee revenue.
- Monitor the expected $700M first-half 2020 realizations, subsequent market conditions, and whether the announced dividend policy is supported by cash distributions.
- Assess the Kentucky litigation, potential clawbacks, tax-receivable-agreement obligations, and the effects of the January 2020 reorganization and KKR Capstone acquisition.