KKR & Co. Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions or billions for readability.
Business context and reporting period
KKR is an alternative asset manager with capital markets operations and, following its February 1, 2021 acquisition of Global Atlantic, an insurance business. KKR acquired all voting interests and 61.1% of Global Atlantic’s economic interests at closing. Global Atlantic’s results are consolidated from the acquisition date, so year-over-year comparisons are not fully comparable. The filing presents Asset Management and Insurance as separate segments.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 or prior date |
|---|---|---|
| GAAP total revenue | $4.563 billion | $(1.002) billion |
| Net income attributable to KKR | $1.670 billion | $(1.281) billion |
| Net income attributable to common stockholders | $1.644 billion | $(1.289) billion |
| Basic / diluted EPS | $2.85 / $2.68 | $(2.31) / $(2.31) |
| Asset Management segment operating earnings | $817 million | $523 million |
| Insurance segment operating earnings | $63 million | Not applicable; acquired in 2021 |
| Fee-related earnings (non-GAAP) | $364 million | $258 million |
| After-tax distributable earnings (non-GAAP) | $660 million | $406 million |
| Net cash from operating activities | $(73) million | $(1.406) billion |
| Cash, cash equivalents and restricted cash | $10.978 billion | $3.270 billion |
| Total assets / total liabilities | $216.445 billion / $170.142 billion | $79.807 billion / $39.007 billion at Dec. 31, 2020 |
| Asset Management / Insurance debt obligations | $34.669 billion / $1.400 billion | $33.424 billion / none consolidated at Dec. 31, 2020 |
| AUM / fee-paying AUM | $367.5 billion / $288.4 billion | $251.7 billion / $186.2 billion at Dec. 31, 2020 |
KKR’s GAAP results were strongly affected by investment marks and carried interest: Asset Management capital allocation-based income was $2.685 billion, versus a loss of $1.382 billion a year earlier; Asset Management net gains from investment activities were $2.696 billion, versus losses of $3.945 billion. The Insurance segment reported $1.385 billion of revenue for its first two months in KKR’s results, but Global Atlantic recorded a GAAP net loss of $204 million for that period, including investment losses. The Insurance segment’s $63 million operating-earnings measure is an adjusted segment measure, not GAAP net income.
Operating cash flow was slightly negative. The consolidated cash-flow statement includes funds, CLOs and insurance entities, and its cash balance includes restricted cash and cash held in consolidated entities that may not be available for general corporate use. Acquisition-related financing and insurance policyholder deposit flows also affect period cash flows.
Material changes versus the prior comparable period
- Results rebounded from Q1 2020, when COVID-19-related market dislocation drove significant unrealized investment losses and negative carried interest. Q1 2021 benefited from investment appreciation and positive carried interest; these items can reverse as valuations change.
- Asset Management revenue excluding capital allocation-based income increased to $493 million from $381 million, with higher management and transaction fees. Fee-related earnings rose 41% to $364 million.
- Realized performance income fell to $171 million from $363 million, while realized investment income increased to $461 million from $145 million.
- Global Atlantic added $131.4 billion of assets and $127.9 billion of liabilities at March 31. Insurance policy liabilities were $102.6 billion; these are obligations of the issuing insurance subsidiaries, not generally of KKR’s other entities.
- Book value per adjusted share, a non-GAAP measure, increased to $25.84 from $23.09 at year-end, principally reflecting investment appreciation and earnings, partly offset by dividends and repurchases.
Outlook, management commentary, risks and unusual items
- Management expected realized performance income and realized investment income to exceed $700 million in Q2 2021 from completed or signed transactions expected to close after quarter-end. Some transactions remained subject to closing conditions; there is no assurance they would close. The filing provides no formal full-year earnings guidance.
- KKR stated a common-stock dividend policy of $0.145 per share quarterly, subject to board discretion. A $0.145 dividend was declared for Q1 results. On May 4, KKR also announced it had elected to redeem all Series A preferred stock on June 15, 2021 at its $25 liquidation preference plus declared and unpaid dividends.
- The Global Atlantic purchase price was approximately $4.68 billion, including co-investor and rollover interests. Purchase accounting remained provisional; KKR recorded about $451 million of goodwill and expected a post-closing adjustment below the $150 million maximum. KKR funded $2.9 billion of the closing cash consideration.
- KKR amended carry-pool economics in February: 65% of carried interest is allocated to the pool for specified current funds with no or minimal carry accrued at year-end 2020 and for future funds; older funds generally remain at 40% or 43%. Management’s illustrative analysis said accruing compensation on unrealized carry and principal investment gains at specified assumptions would reduce reported stockholders’ equity by about $1.99 per share.
- Market risks include volatile public and private asset valuations, interest rates, credit spreads, equity markets, foreign exchange, commodities and COVID-19 developments. Global Atlantic has material interest-rate, equity and credit-spread exposures; its hedging program may not offset all effects. Insurance reserves depend on actuarial assumptions and actual policyholder behavior.
- KKR disclosed $6.447 billion of its own unfunded fund commitments, plus $310 million of investment-purchase commitments and $965 million of underwriting, financing and syndication commitments. Global Atlantic separately had $884 million of investment commitments. Carry clawback exposure was $76 million assuming fund liquidation at reported values, but approximately $2.3 billion if carry-paying funds were liquidated at zero value.
- KKR was in material compliance with debt covenants. A Kentucky Retirement Systems-related lawsuit and other legal and regulatory matters remain; management could not estimate potential losses for certain matters and said an adverse outcome could materially affect results in a particular period.
- Disclosure controls were deemed effective at March 31, but Global Atlantic’s internal controls were excluded from the evaluation while KKR assessed them following the acquisition. The filing also notes that the forthcoming long-duration insurance accounting standard is expected to materially affect Global Atlantic’s statements and increase volatility.
Most important facts an investor should verify
- How much of Q1 earnings and book-value growth reflects realized, recurring fees versus unrealized marks and carried-interest accruals, and whether those marks convert to cash.
- Whether the expected Q2 transactions closed and generated the more-than-$700-million amount management cited.
- Global Atlantic’s ongoing profitability, asset-liability matching, reserve adequacy, credit performance, and KKR’s final economic ownership and purchase-price allocation.
- The availability of reported cash for corporate use, debt maturities and refinancing needs, and funding requirements for commitments, policyholders and fund investments.
- Developments in the Kentucky litigation and other proceedings, potential carry clawbacks, and integration of Global Atlantic’s internal controls.