KKR & Co. L.P. — FY 2015 Form 10-K
Period: Fiscal year ended December 31, 2015; this is an annual report, not a standalone fourth-quarter filing. The registrant is KKR & Co. L.P. (NYSE: KKR), a global alternative asset manager and capital markets firm. Results consolidate numerous funds and financing vehicles in which KKR may hold only minority economic interests; consolidated totals therefore should not be read as KKR unitholders’ share of results.
Business context and key metrics
- Business mix: Private Markets (private equity and real assets), Public Markets (credit and hedge funds), Capital Markets, and Principal Activities (KKR’s own investments and assets). KKR reported $119.5 billion of AUM at year-end; segment AUM was $66.0 billion in Private Markets and $53.5 billion in Public Markets. Combined segment FPAUM was approximately $91.7 billion.
- Fees and expenses: GAAP fees and other were $1.044 billion, down 6.0% from $1.110 billion. Total expenses were $1.871 billion, down from $2.196 billion. Fee-related earnings (FRE, non-GAAP) were $610 million versus $631 million.
- Profit: Consolidated net income was $5.275 billion versus $5.395 billion. Net income attributable to KKR & Co. L.P. was $488 million versus $478 million; diluted earnings per common unit were $1.01 versus $1.16. Economic net income (ENI, non-GAAP) was $1.298 billion versus $1.727 billion.
- Investment income: Total investment income was $6.169 billion, down from $6.545 billion. Net gains from investment activities were $4.673 billion; dividend income was $851 million, interest income $1.219 billion, and interest expense $573 million. Private equity valuation gains were partly offset by weaker credit and real-asset results.
- Cash earnings and cash flow: KKR-reported cash earnings (non-GAAP) were $1.453 billion, or $1.78 per adjusted unit eligible for distribution, down from $1.932 billion, or $2.47. Consolidated operating cash flow was $385 million, versus $1.489 billion; investing cash flow was negative $425 million and financing cash flow positive $169 million. These consolidated cash flows include substantial fund and CFE activity and are not a direct measure of cash generated for KKR.
- Liquidity and debt: Segment cash and short-term investments were $1.288 billion, including about $0.2 billion of liquid short-term investments. Segment book value was $9.979 billion. Segment debt obligations included $2.0 billion of KKR debt and $657 million of KFN debt, plus $374 million of KFN preferred shares; KFN obligations are non-recourse to KKR beyond KFN assets. Consolidated debt obligations were $18.730 billion, including $12.365 billion of CLO/CMBS debt and $3.711 billion of fund financing, which are principally supported by vehicle assets rather than general KKR assets. KKR reported compliance with debt covenants.
- Capital commitments: KKR had $1.354 billion of unfunded commitments to active funds, plus $191 million of capital markets commitments, $129 million to Merchant Capital Solutions, and $172 million of other investment commitments. More than $25 billion of consolidated fund commitments are reported on a gross basis, including fund investors’ commitments.
Material changes versus comparable periods
- KKR-attributable net income rose modestly, but diluted earnings per unit declined as the weighted-average diluted unit count increased to 483 million from 412 million.
- ENI declined about 25%, mainly reflecting lower investment income and weaker performance income. FRE also decreased, while GAAP expenses fell, principally due to lower oil-and-gas impairment and operating costs and nonrecurring litigation accruals in 2014.
- Fees and other fell despite higher monitoring fees: 2015 included $199 million of one-time monitoring-fee termination payments, compared with about $23 million in 2014. Transaction fees and oil-and-gas revenue declined.
- Private Markets AUM increased to $66.0 billion, but FPAUM declined to $45.3 billion; equity invested fell to $5.5 billion from $7.2 billion. Public Markets AUM increased to $53.5 billion, partly due to new fundraising and the Marshall Wace stake, while performance income weakened and redemptions continued.
- Capital Markets syndicated capital fell to $869 million from $2.567 billion, partly because 2014 included approximately $1.8 billion of First Data syndication.
- KKR repurchased 9.9 million common units for approximately $162 million during 2015 under a $500 million authorization. The company issued 7.36 million units in connection with the Marshall Wace transaction.
Outlook, commentary, risks, and unusual items
- Outlook: KKR stated it does not intend to provide earnings guidance. It changed its distribution policy from variable distributions to an intended fixed $0.16 per common unit quarterly, beginning with the December 2015 quarter; the board retains discretion to change or suspend distributions. The filing noted flagship fundraising timing could reduce new AUM and related fees versus prior years.
- Market sensitivity: Management cited late-2015 market volatility, widening credit spreads, currency weakness, and falling oil and gas prices. Through February 22, 2016, equity-market declines were estimated to reduce first-quarter 2016 ENI by at least approximately $550 million if not offset, including about $350 million attributed to First Data.
- Energy and unusual items: Energy Future Holdings was written off; the approximately $2 billion consolidated realized loss related to an investment previously marked to zero and therefore did not reduce 2015 consolidated net investment gains. A separate approximately $100 million segment-level loss affected cash earnings. KKR expected a Samson Resources write-off after year-end; it was already marked to zero and was not expected to materially affect ENI, but could reduce cash earnings by approximately $250 million.
- Valuation and carry: Approximately 49% of investments measured at fair value were Level III and rely on significant unobservable inputs. Carried interest is volatile and may reverse; four private equity funds had netting holes above $50 million. No clawback was due at year-end using reported fair values, but the hypothetical clawback if applicable funds were liquidated at zero value was $2.423 billion.
- Other risks: Key exposures include investment performance and valuation uncertainty, concentrated holdings in First Data and Walgreens Boots Alliance, leverage and refinancing, oil-and-gas prices, fund-raising and redemption risk, competition and fee pressure, regulatory and litigation exposure, conflicts of interest, key-person dependence, tax treatment and potential clawback obligations. KKR also entered into agreements for new New York headquarters space at Hudson Yards, expected to be used beginning in 2020.
- Audit and controls: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Reconcile GAAP consolidated results with KKR-attributable net income, ENI, FRE, and cash earnings; confirm definitions and non-GAAP reconciliations.
- Assess how much of reported investment gains and carried interest depends on unrealized Level III valuations, and review post-year-end marks for First Data, energy assets, and other major positions.
- Distinguish KKR’s own debt and liquidity from non-recourse KFN debt, fund financing, and CLO/CMBS obligations; review maturities, collateral, and available credit facilities.
- Track actual distributions against the new $0.16 quarterly policy, unit repurchases, equity dilution, and the funding implications of commitments and planned office costs.
- Review fundraising, FPAUM, redemptions, deployment and realization trends, including whether one-time monitoring fees and episodic realizations mask recurring fee trends.
- Evaluate potential clawback and tax-receivable-agreement cash obligations, significant legal contingencies, and the effects of market movements after December 31, 2015.