KKR & Co. Inc. — Q1 2022 Form 10-Q
Period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. KKR operates asset management and insurance businesses, with Global Atlantic consolidated. The year-ago quarter included Global Atlantic only from its February 1, 2021 acquisition date, limiting comparability. Financial amounts below are in U.S. dollars; “bn” means billions and “m” means millions.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| GAAP total revenue | $1.00bn | $4.56bn |
| GAAP income before taxes | $1.10bn | $4.35bn |
| GAAP net income | $1.10bn | $3.92bn |
| Net income attributable to KKR common stockholders | Loss of $73.8m; diluted loss per share $0.12 | Income of $1.64bn; diluted EPS $2.68 |
| Distributable operating earnings (non-GAAP) | $1.24bn | $880m |
| After-tax distributable earnings (non-GAAP) | $969m | $660m |
| Fee related earnings (non-GAAP) | $605m | $364m |
| Operating cash flow | $917m | Use of $73m |
| Investing cash flow | Use of $2.00bn | Use of $376m |
| Financing cash flow | $4.15bn | $4.46bn |
| Cash, cash equivalents and restricted cash at quarter-end | $13.54bn | $10.98bn at prior-year quarter-end |
| Total assets / total liabilities | $266.29bn / $208.99bn | $264.29bn / $206.15bn at December 31, 2021 |
| KKR stockholders’ equity / total equity | $15.71bn / $57.22bn | $17.58bn / $58.06bn at December 31, 2021 |
GAAP asset-management revenue included a $946m capital allocation-based loss, versus $2.68bn of income a year earlier, reflecting depreciation in underlying fund investments. Insurance revenue was $1.17bn versus $1.39bn; the comparison is affected by the partial prior-year consolidation period. KKR’s segment operating earnings rose to $1.24bn from $880m, including $1.13bn from asset management and $116m from insurance. These segment and distributable earnings measures are non-GAAP and are not substitutes for GAAP results.
KKR reported a $3.34bn other comprehensive loss, primarily from unrealized losses on available-for-sale securities. Accumulated other comprehensive loss widened to $1.65bn from $210m at year-end. Non-GAAP book value was $24.96bn, or $28.45 per adjusted share, versus $25.39bn, or $28.77, at year-end.
Asset-management debt obligations were $36.11bn and insurance debt obligations were $2.03bn. Asset-management debt includes substantial borrowings of consolidated funds and CLOs, generally non-recourse beyond their assets; it should not be read as wholly corporate recourse debt. KKR reported compliance with material debt covenants. Asset-management cash was $8.32bn and insurance cash was $4.59bn, in addition to restricted cash.
Material changes and business activity
- Fee related earnings increased 66%, to $605m, primarily on higher management and transaction fees. Management fees benefited from newer funds entering investment periods; capital-markets transaction fees rose with increased transaction volume.
- Realized performance income rose to $609m from $171m, while realized investment income declined to $349m from $461m. Realized and unrealized capital allocation-based income was negative, reversing the prior-year gain.
- AUM increased to $479.0bn from $470.6bn at year-end; fee-paying AUM rose to $371.2bn from $357.4bn. Uncalled commitments were $114.8bn, and capital invested was $21.4bn versus $6.9bn in Q1 2021.
- Private Markets AUM grew to $268.2bn, while Public Markets AUM declined to $210.8bn, reflecting investment-value declines, distributions, policyholder payments and some hedge-fund redemptions.
- Global Atlantic’s net investment income increased to $813m from $445m. Insurance investment-related losses were $369m, including losses on trading fixed-maturity securities amid higher rates and wider spreads.
- Global Atlantic’s new institutional business volumes rose to $5.58bn from $1.84bn, including block, flow/pension-risk-transfer and funding-agreement activity. Individual retirement-product sales were $1.95bn versus $1.64bn.
Outlook, risks and unusual items
- KKR did not provide formal company-wide earnings guidance in the supplied filing text. Management expected more than $600m of Q2 2022 realized performance income and realized investment income from completed or signed transactions expected to close; completion and timing were not assured.
- Management described inflation, rising interest rates, market volatility, wider credit spreads, supply-chain pressures and the Russia-Ukraine conflict as risks to investment valuations, fundraising, deployment, exits and insurance investment spreads. KKR stated that its direct Russia/Ukraine portfolio exposure was insignificant and that it had no portfolio companies headquartered there.
- KKR noted that Level III valuations rely on significant unobservable inputs and may differ materially from realizable values. Approximately 90% of AUM was described as not subject to redemption for at least eight years or as perpetual capital; the filing cautions that such capital can still be reduced or terminated.
- As of March 31, 2022, KKR had $11.3bn of fund and vehicle commitments, $1.5bn of capital-markets commitments, and Global Atlantic had $2.6bn of investment commitments. These are not all necessarily funded.
- Approximately $400m of carried interest was subject to potential clawback based on quarter-end values; KKR could seek reimbursement of about $160m from KKR Associates Holdings. Under a zero-value liquidation stress, the filing estimates a $2.7bn clawback and potential reimbursement of $1.1bn.
- KKR disclosed ongoing Kentucky-related litigation and other regulatory examinations. Management could not estimate a potential loss range; it had not concluded that resolution would materially affect the financial statements, while acknowledging an adverse outcome could materially affect results in a particular period.
- After quarter-end, KKR completed the approximately $1.8bn acquisition of Mitsubishi Corp-UBS Realty on April 28, 2022. KKR also issued yen-denominated senior notes in April. A $0.155-per-share common dividend and $0.75-per-share Series C preferred dividend were declared in May.
- The reorganization agreement contemplates structural and governance changes, including acquisition of KKR Holdings and eventual one-share-one-vote governance; closing is subject to regulatory approvals and other conditions. The filing also describes a planned adoption of the long-duration insurance-contract accounting standard on January 1, 2023, expected to materially affect the financial statements and increase volatility.
Most important facts for investors to verify
- Separate recurring fee growth and segment operating earnings from volatile carried-interest, investment-mark and GAAP consolidation effects; verify the reconciliation and definitions of all non-GAAP measures.
- Assess the quarter’s large unrealized insurance-security losses, interest-rate and credit-spread sensitivity, and the liquidity and capital implications for Global Atlantic.
- Distinguish KKR corporate debt from consolidated fund/CLO borrowings and confirm the recourse, collateral and maturity profile of each material borrowing.
- Track AUM and fee-paying AUM flows, fund fundraising and deployment, realization activity, and whether expected Q2 transactions closed.
- Review unfunded commitments, potential clawbacks, litigation and regulatory matters, the Mitsubishi acquisition, and the remaining repurchase authorization (about $108m as of April 29, 2022).