KKR & Co. Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; it also presents quarterly data. KKR converted from a Delaware partnership to a corporation on July 1, 2018, materially changing its tax treatment and corporate structure.
Business context
KKR is a global alternative investment manager with Private Markets, Public Markets, Capital Markets and Principal Activities businesses. It earns management and transaction fees, carried interest and investment income, and invests its own capital alongside fund investors. Approximately 78% of fee-paying AUM was not subject to redemption for at least eight years from inception.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| GAAP total revenue | $2.396 billion | $3.557 billion |
| GAAP expenses | $2.089 billion | $2.337 billion |
| GAAP investment income | $1.950 billion | $1.564 billion |
| Net income attributable to KKR Class A common stockholders | $1.098 billion | $985 million |
| Diluted EPS | $2.06 | $1.95 |
| Segment revenue | $3.863 billion | $3.254 billion |
| Segment operating earnings | $1.979 billion | $1.671 billion |
| After-tax distributable earnings (non-GAAP) | $1.597 billion | $1.356 billion |
| AUM at year-end | $194.7 billion | $168.5 billion |
| Fee-paying AUM at year-end | $141.0 billion | $117.4 billion |
| Uncalled commitments | $58.0 billion | $56.6 billion |
GAAP revenue declined 33%, principally because capital allocation-based income fell to $555 million from $2.016 billion as private-equity appreciation was lower than in 2017. Fees and other rose 19% to $1.841 billion, led by transaction fees and management fees. Net investment gains increased to $1.255 billion from $928 million. Segment operating margin was approximately 51% in both years; segment measures are non-GAAP and differ from consolidated GAAP presentation.
Segment realized performance income was $1.357 billion versus $1.272 billion, including $1.219 billion of carried interest. After-tax distributable earnings increased 18%; this measure excludes mark-to-market gains and losses, includes equity compensation under the revised definition, and is not a dividend calculation.
Cash flow, debt and liquidity
- GAAP operating cash flow was negative $7.606 billion, compared with negative $3.532 billion in 2017. KKR attributes much of the outflow to investment purchases exceeding proceeds. Consolidated cash flows include certain investment funds and CLOs, so this figure is not a direct measure of cash generated by KKR’s management business.
- Investing cash flow was negative $79 million; financing cash flow was positive $6.616 billion. Year-end cash and cash equivalents were $1.751 billion; total cash, cash equivalents and restricted cash were $2.642 billion, including cash held at consolidated entities.
- GAAP debt obligations were $22.341 billion. This includes debt of consolidated funds and financing vehicles that is generally non-recourse to KKR. On KKR’s segment basis, debt was $3.316 billion, including $949 million of KFN debt; segment cash and short-term investments were $2.502 billion. The $1.0 billion corporate revolver was undrawn and matures in 2023.
- KKR reported $5.274 billion of its own unfunded fund commitments, plus $370.5 million of purchase commitments and $663.7 million of capital-markets commitments. The company reported a $117.9 million estimated tax-receivable-agreement payable.
Material changes and unusual items
- The July 2018 conversion made KKR’s share of income subject to corporate income tax. A partial tax-basis step-up generated an estimated $257.1 million tax benefit; the company reported a $194.1 million GAAP tax benefit for 2018 and said the step-up estimate could change materially.
- Reported GAAP net income attributable to common stockholders rose 11%, despite lower total revenue, partly because of the tax benefit and higher investment gains. The $729.4 million of investment losses realized before the conversion was excluded from the 2018 segment results as an unusual conversion-related item; it remains relevant when assessing GAAP results.
- Fourth-quarter GAAP results were volatile: revenue was negative $178 million and net income attributable to Class A common stockholders was a loss of $393 million, or diluted loss per share of $0.74. The filing reports full-year results and quarterly data; these Q4 figures should not be mistaken for the annual result.
- AUM increased 16%, including growth in Public Markets and Private Markets. The April FS Investments transaction created a 50%-owned BDC advisory partnership and added $13.2 billion of AUM/FPAUM previously managed by FS Investments. KKR also increased its Marshall Wace interest to 34.6% and sold its Nephila interest.
- KKR declared a regular Class A dividend of $0.125 per quarter, an indicated annual rate of $0.50, following conversion; the prior partnership distribution policy was $0.68 annually. The board retains discretion over future dividends. KKR repurchased approximately 39.2 million shares cumulatively under its program through year-end, with about $281 million then available.
- Management cited late-2018 equity-market declines, wider credit spreads, trade tensions, Brexit uncertainty and slower expected European and U.S. growth as risks to valuations and investment exits. It does not intend to provide earnings guidance. Management noted prospective realization activity expected to generate approximately $400 million of realized performance and investment income if transactions close; completion was not assured.
Risks, contingencies and reporting considerations
- Reported results depend on volatile, sometimes unrealized investment valuations and unpredictable timing of realizations and carried interest. More than half of fair-valued investments were Level III, relying on significant management estimates.
- KKR said no carry was subject to clawback assuming funds were liquidated at year-end fair values; a zero-value liquidation scenario would imply an approximately $2.0 billion clawback. This is a stress scenario, not a recorded current obligation.
- Other material exposures include leverage and refinancing costs, rate and currency movements, energy prices, redemptions in certain Public Markets vehicles, fundraising and fee pressure, regulatory and tax changes, conflicts of interest, litigation and cyber/operational risks. A Kentucky Retirement Systems-related lawsuit remained pending; management could not estimate a potential loss range and said it had not concluded that resolution would materially affect the financial statements.
- Common-stock governance is highly concentrated: Class A shares are generally non-voting, while the sole Class B share is held by a management-controlled entity. KKR Holdings held approximately 35.9% of the business through partnership units at year-end.
Most important facts for investors to verify
- Reconcile the annual GAAP figures with segment results and assess the $729.4 million conversion-related segment exclusion and $194.1 million tax benefit.
- Review quarterly volatility, especially the fourth-quarter loss, and distinguish realized earnings from unrealized marks and carried-interest accruals.
- Assess the quality and sensitivity of Level III valuations, fund performance, exit assumptions and the potential for clawbacks.
- Separate KKR corporate debt and liquidity from consolidated fund/CLO obligations; confirm the timing and funding of unfunded commitments, underwriting obligations and the tax receivable agreement.
- Monitor whether the announced post-year-end realizations close, the sustainability of AUM/FPAUM growth and the discretionary dividend policy.