KKR & Co. Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. KKR is a global alternative-asset manager with capital-markets and insurance businesses. Global Atlantic is consolidated, although KKR held 61.5% of its economic interests at period-end. Unless stated otherwise, dollar amounts below are U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| GAAP total revenue | $330 million | $3.136 billion | $1.334 billion | $7.699 billion |
| GAAP net income (loss) attributable to KKR common stockholders | $(828) million | $1.278 billion | $(902) million | $2.922 billion |
| GAAP diluted EPS | $(1.22) | $2.05 | $(1.42) | $4.73 |
| Fee-related earnings (FRE; non-GAAP) | $461 million | $470 million | $1.066 billion | $834 million |
| Segment operating earnings (non-GAAP) | $1.090 billion | $1.116 billion | $2.334 billion | $1.997 billion |
| After-tax distributable earnings (non-GAAP) | $840 million | $926 million | $1.808 billion | $1.586 billion |
KKR’s GAAP results were heavily affected by fair-value changes and carried interest reversals. Q2 asset-management capital-allocation-based income was a loss of $923 million, versus income of $1.525 billion a year earlier; H1 was a loss of $1.869 billion, versus income of $4.210 billion. KKR attributed the losses mainly to declines in underlying fund investments. GAAP revenue and earnings comparisons also reflect the unusually strong investment gains in 2021; Global Atlantic was included for only February 1 through June 30 in the 2021 six-month comparison.
Operating performance and changes
- Asset-management fees and other revenue rose 9% in Q2 to $615 million and 19% in H1 to $1.396 billion. Management-fee growth reflected newer funds entering investment periods, Global Atlantic mandates and new CLOs. Q2 transaction fees declined amid fewer and smaller capital-markets transactions.
- FRE declined 2% in Q2, primarily on lower transaction fees and higher operating costs, but increased 28% in H1. Segment operating earnings fell 2% in Q2 but rose 17% in H1. After-tax distributable earnings decreased 9% in Q2 and increased 14% in H1.
- Insurance segment operating earnings were $137 million in Q2, up from $128 million, and $253 million in H1, up from $191 million. Growth reflected higher investment income from a larger asset base and higher floating-rate yields, partly offset by increased insurance costs and expenses.
- AUM was $490.7 billion and fee-paying AUM was $384.5 billion at June 30, up from $470.6 billion and $357.4 billion at year-end 2021. H1 capital invested was $40.0 billion, compared with $25.4 billion a year earlier. Private-equity valuations fell during H1, while AUM also benefited from fundraising and the KJRM acquisition.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $(3.1) billion and investing cash flow was $(7.1) billion; financing cash flow was $12.3 billion. Cash, cash equivalents and restricted cash totaled $12.4 billion at June 30, up $1.8 billion from year-end. Consolidated cash flows include funds, CLOs and insurance entities, so they do not represent KKR parent-company cash generation alone.
- Total assets were $266.1 billion, liabilities $213.3 billion and total equity $52.7 billion. KKR common-stockholder equity per outstanding share was $20.88, down from $27.64 at year-end, primarily reflecting insurance AFS investment losses in OCI, dividends, repurchases and the KKR-attributable loss.
- Reported debt obligations were $37.2 billion in asset management and $2.0 billion in insurance. Asset-management debt includes substantial fund and CLO borrowings that are generally non-recourse beyond the relevant vehicles’ assets. KKR reported compliance with material debt covenants.
- KKR reported $11.0 billion of unfunded commitments to investment funds and vehicles, $1.0 billion of capital-markets commitments and Global Atlantic investment commitments of $2.4 billion. The remaining share-repurchase authorization was approximately $108 million at July 29, 2022.
Outlook, risks and unusual items
- Management expected realized performance income and realized investment income to exceed $500 million in Q3 2022 from completed or signed and expected sales. Some transactions remained subject to closing conditions; there was no broader earnings guidance in the provided filing text.
- Management described slowing activity, elevated inflation, rising interest rates, wider credit spreads and market volatility. It warned that these conditions could pressure investment valuations, realizations, fundraising, financing costs and insurance asset-liability results. KKR reported insignificant direct investment exposure to Russia, Ukraine and Belarus.
- Global Atlantic’s AFS fixed-maturity portfolio had $9.1 billion of gross unrealized losses at June 30, largely associated with higher rates and wider spreads. Management said it intended to hold the relevant securities to maturity as part of its cash-flow-matching strategy; this does not eliminate credit or liquidity risks. Insurance AOCI was a significant contributor to the consolidated comprehensive loss.
- The May 31 reorganization merged KKR Holdings into the new parent, issued common shares to former KKR Holdings partners and terminated most of the tax receivable agreement. A payable of $400 million remained for prior unit exchanges. KKR also completed the approximately $1.7 billion KJRM acquisition in April; its post-acquisition earnings contribution was reported as immaterial.
- KKR disclosed a potential $465 million carried-interest clawback based on fund values at June 30; approximately $185 million was recoverable from the non-subsidiary carry-pool entity. Under a zero-value liquidation scenario, the clawback estimate would be about $2.8 billion. The filing also describes ongoing Kentucky litigation and regulatory matters; management could not estimate a loss range, and said an adverse outcome could affect results in a particular period.
- KKR expects to adopt the long-duration insurance-contract accounting standard on January 1, 2023 and anticipates a material financial-statement impact, including increased earnings volatility. The board declared a $0.155 common dividend and a $0.75 Series C preferred dividend for payment after quarter-end; future common dividends remain discretionary.
Important facts for investors to verify
- How much of the GAAP loss reflects market-sensitive unrealized marks versus realized losses, and how those marks affect carried interest and future distributions.
- The definitions and reconciliations of FRE, segment operating earnings and after-tax distributable earnings; these non-GAAP measures are not substitutes for GAAP results or measures of liquidity.
- The composition and recourse of reported debt, cash availability outside consolidated funds and insurers, and funding needs for commitments and acquisitions.
- Whether Global Atlantic’s unrealized investment losses, credit quality, reinsurance exposures and policyholder cash flows remain manageable as rates and markets change.
- Whether the anticipated Q3 realizations close as expected, and the potential outcomes of the disclosed clawback, litigation and regulatory contingencies.