KKR & Co. Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; “bn” and “m” mean billions and millions. KKR acquired Global Atlantic on February 1, 2021 and owns 61.5% of its economic interests after post-closing adjustments. Its insurance results are included from the acquisition date, so comparisons with 2020 are affected by the acquisition and are not like-for-like.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total GAAP revenue | $3.14bn | $1.33bn | $7.70bn | $330m |
| Net income (loss) attributable to KKR common stockholders | $1.28bn | $699m | $2.92bn | $(590)m |
| Diluted EPS | $2.05 | $1.24 | $4.73 | $(1.06) |
| Fee-related earnings (non-GAAP) | $470m | $280m | $834m | $537m |
| Asset Management segment operating earnings (non-GAAP) | $989m | $489m | $1.81bn | $1.01bn |
| Insurance segment operating earnings (non-GAAP) | $128m | Not applicable | $191m | Not applicable |
| After-tax distributable earnings (non-GAAP) | $926m | $366m | $1.59bn | $772m |
Q2 GAAP asset management revenue was $2.20bn, including $1.53bn of capital allocation-based income. Asset management net gains from investment activities were $3.22bn, of which $2.88bn were unrealized. For the six months, those investment gains were $5.92bn, including $4.99bn unrealized; capital allocation-based income was $4.21bn, versus a loss in the prior-year period. These market-sensitive items materially contributed to reported earnings. Global Atlantic contributed $935m of Q2 revenue and $2.32bn for the post-acquisition portion of the six-month period; its six-month net income was $54m.
KKR did not provide a directly comparable consolidated operating margin. GAAP earnings include substantial investment valuation changes and carried interest, while the non-GAAP segment measures exclude specified items; the measures should not be treated as interchangeable.
Cash flow, balance sheet and liquidity
- Cash flow, six months: operating cash used was $1.31bn, investing cash used was $2.55bn, and financing cash provided was $8.89bn. Cash, cash equivalents and restricted cash ended at $12.02bn, including $5.34bn in asset management and $6.68bn in insurance. Consolidated cash flows include funds and entities whose cash may not be available for KKR’s general use.
- Assets and liabilities: total assets were $229.23bn at June 30, 2021, versus $79.81bn at year-end 2020; total liabilities were $176.74bn versus $39.01bn. The increase principally reflects the Global Atlantic acquisition and consolidation.
- Debt: asset management debt obligations were $36.32bn and insurance debt obligations were $1.44bn. Asset management debt includes obligations of consolidated funds and CLOs, many of which are non-recourse to KKR beyond the relevant entity’s assets. Management reported material compliance with debt covenants.
- Equity and book value: total equity was $52.41bn, including $36.34bn of noncontrolling interests. KKR reported non-GAAP book value of $23.84bn, or $27.03 per adjusted share, compared with $20.27bn, or $23.09, at year-end. The current-period book-value definition includes an estimated $683m tax adjustment not applied to the prior period.
- Scale and deployment: AUM was $428.9bn, fee-paying AUM $319.3bn, and uncalled commitments $112.1bn at June 30. Six-month capital invested was $25.4bn, versus $11.7bn a year earlier.
Material changes versus prior periods
- KKR’s strong 2021 earnings contrast with 2020’s six-month loss, reflecting the recovery in portfolio values and carried interest after COVID-related market dislocation, alongside the inclusion of Global Atlantic from February 2021.
- Q2 fee-related earnings rose to $470m from $280m. Management attributed fee growth principally to higher transaction fees and management fees, including new and in-period funds; capital-markets transactions increased to 81 from 35.
- Q2 realized performance income was $618m, versus $347m, and realized investment income was $369m, versus $90m. These are activity- and realization-dependent and may fluctuate between periods.
- At June 30, asset management AUM was up from $251.7bn at December 31, 2020, while fee-paying AUM rose from $186.2bn. Much of the increase reflects Global Atlantic, new fundraising and portfolio appreciation.
- KKR redeemed its Series A preferred stock in June for approximately $351m. After quarter-end, it announced redemption of all Series B preferred stock on September 15, 2021.
Outlook, commentary, risks and unusual items
- Near-term outlook: KKR expected Q3 2021 realized performance income and realized investment income to exceed $650m from completed or signed transactions expected to close. Some transactions remained conditional, and KKR cautioned that completion and timing were not assured. The filing gives no broader earnings guidance.
- Capital returns: the stated common dividend policy was $0.58 per share annually, subject to board discretion. A $0.145-per-share common dividend was declared for payment August 31, 2021. Repurchases in Q2 were 1.17m common shares; approximately $218m remained available under the program at June 30.
- Market and valuation risk: management highlighted COVID-19 and variants, inflation and supply-chain constraints, changing interest rates, equity and credit volatility, foreign exchange, commodity prices, fundraising competition and the ability to deploy or realize investments. A substantial portion of investment assets is valued using Level III inputs and management estimates; actual realizations may differ materially from reported fair values.
- Insurance risks: policy liabilities and embedded derivatives depend on actuarial assumptions, market returns, interest rates, mortality, persistency and policyholder behavior. Global Atlantic’s AFS portfolio was reported as 98% investment grade by NAIC designation; $220.6m of residential mortgage loans were over 90 days past due or in foreclosure.
- Commitments and contingencies: KKR reported $11.58bn of fund commitments, plus $525m of principal-activities commitments and $1.11bn related to capital-markets underwriting, financing and syndications. Global Atlantic had $1.1bn of investment commitments. Carried interest subject to clawback was approximately $85m assuming liquidation at reported fair values; the severe hypothetical of all relevant investments being worth zero would imply about $2.2bn, partly subject to reimbursement rights.
- Legal and control matters: litigation includes Kentucky Retirement Systems-related claims; management could not estimate a potential loss range and said an adverse outcome could affect a particular period. Disclosure controls were deemed effective, but Global Atlantic’s internal control over financial reporting was excluded from the evaluation while integration work continued; it represented about 60% of consolidated assets and 30% of revenues.
Important facts for investors to verify
- How much of earnings and book-value growth is supported by realized cash proceeds versus unrealized marks and carried interest, and how sensitive valuations are to market assumptions.
- The effect of Global Atlantic’s acquisition, ownership structure, insurance liabilities and reinsurance activity on comparable results, liquidity and risk.
- Debt composition and recourse: distinguish KKR corporate borrowings from fund, CLO and insurance-company obligations, and review the related covenants and liquidity access.
- The timing and completion conditions for transactions underlying the Q3 income expectation, alongside the durability of fundraising, fee-paying assets and capital deployment.
- Developments in the Kentucky litigation, potential clawback exposure, unfunded commitments and Global Atlantic’s ongoing internal-control integration.
Non-GAAP measures, including fee-related earnings, distributable earnings and book value, are management-defined supplemental measures and are not substitutes for GAAP results.