KKR & Co. Inc. — 2020 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2020. KKR is a global alternative investment manager spanning private markets, public markets, capital markets and principal investing. The historical financial statements do not include Global Atlantic, which KKR acquired on February 1, 2021; its results were expected to be consolidated beginning in the first quarter of 2021.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Total GAAP revenue | $4.231 billion | $4.221 billion |
| Net income attributable to KKR common stockholders | $1.946 billion | $1.972 billion |
| Diluted EPS | $3.37 | $3.54 |
| After-tax distributable earnings (non-GAAP) | $1.522 billion | $1.405 billion |
| Assets under management | $251.7 billion | $218.4 billion |
| Fee-paying AUM | $186.2 billion | $161.2 billion |
| Uncalled commitments | $67.0 billion | $56.9 billion |
Fees and other revenue rose to $2.007 billion from $1.790 billion, led by management and capital-markets transaction fees. Capital allocation-based income fell to $2.224 billion from $2.430 billion, primarily reflecting lower accrued carried interest from certain older funds. Investment income was $4.429 billion, up from $3.856 billion; net investment gains were $3.643 billion, including $3.480 billion of unrealized gains. Common-stockholder net income declined despite higher total GAAP net income, reflecting lower accrued carry and Series C preferred dividends. The filing does not provide a clear consolidated operating-margin measure.
Non-GAAP distributable revenues were $3.971 billion and distributable expenses were $1.930 billion; after-tax distributable earnings increased about 8% year over year. Private Markets AUM grew to $148.7 billion from $119.3 billion, supported by fundraising and portfolio appreciation. Public Markets AUM reached $103.0 billion from $99.1 billion, with new capital and gains partly offset by redemptions and distributions.
Cash flow, debt and liquidity
GAAP cash and cash equivalents were $5.363 billion at year-end, versus $2.347 billion a year earlier. Consolidated debt obligations were $33.424 billion, versus $27.013 billion; these figures include substantial debt of consolidated funds and collateralized financing entities that is generally non-recourse to KKR. On KKR’s non-GAAP book basis, cash and short-term investments were $5.961 billion and debt obligations were $5.637 billion, including $949 million of KFN debt that is non-recourse beyond KFN’s assets.
GAAP operating cash flow was negative $5.954 billion, investing cash flow negative $153 million and financing cash flow positive $9.804 billion. These consolidated cash flows include investment funds and financing entities, so operating cash flow is not a direct measure of cash generated by KKR’s management-company operations. KKR reported $6.274 billion of unfunded commitments to its active funds, plus $232 million of investment-purchase commitments and $579 million of underwriting, debt-financing and syndication commitments.
Changes, outlook, risks and unusual items
- COVID-19 drove a sharp first-half economic contraction and market volatility. KKR said investment valuations generally recovered after the first quarter, but the pandemic’s ultimate effect remained uncertain.
- KKR issued $1.25 billion of senior notes in 2020: $500 million of 3.625% notes due 2050 and $750 million of 3.500% notes due 2050. It also issued $250 million of additional 3.750% notes due 2029.
- A $88.3 million impairment charge was recorded on an equity-method investment. KKR also incurred $20.1 million of Global Atlantic transaction costs, excluded from distributable expenses.
- KKR completed an internal reorganization and acquired KKR Capstone on January 1, 2020. Global Atlantic’s $4.7 billion acquisition closed after year-end; KKR obtained all voting interests and 61.1% of economic interests, subject to purchase-price adjustments. KKR used $2.9 billion of cash for the acquisition.
- KKR announced an intended annualized common dividend of $0.58 per share beginning with the first-quarter 2021 dividend, subject to board discretion and restrictions. The declared fourth-quarter 2020 dividend was $0.135 per share.
- KKR generally does not provide earnings guidance. Results can vary materially with investment valuations, realizations, carried interest, fundraising, redemptions and transaction activity. Risks include COVID-19, leverage and financing access, subjective Level III valuations, carry clawbacks, key-person retention, cybersecurity, regulation, conflicts, and tax and LIBOR-transition uncertainty.
- At year-end, estimated carried interest subject to clawback was $88 million assuming funds were liquidated at reported fair values; the modeled amount was approximately $2.3 billion if relevant investments were liquidated at zero value. KKR said it could not estimate a range of potential loss for certain litigation; the Kentucky Retirement Systems-related proceedings continued.
The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Level III investment valuation was identified as a critical audit matter.
Important facts for investors to verify
- How much of reported earnings and book-value growth reflects unrealized marks versus realized investment proceeds, and how sensitive carried interest is to valuation reversals.
- The distinction between KKR’s corporate debt and cash and the much larger consolidated, largely non-recourse fund and CLO balances.
- Global Atlantic’s post-acquisition contribution to consolidated earnings, capital, liquidity and debt, including purchase-accounting effects and the economics of KKR’s 61.1% interest.
- The ability to meet fund commitments, debt maturities, dividends and other liquidity needs while funding growth and the Global Atlantic business.
- Potential dilution from exchangeable KKR Holdings units, equity awards and mandatory conversion of Series C preferred stock, as well as governance implications of KKR’s controlled-company structure.
- Subsequent developments in the Kentucky litigation, other contingencies, and any changes to the estimated clawback exposure.