KKR & Co. L.P. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The filing is for KKR & Co. L.P., a global alternative investment manager spanning private equity, real assets, credit, hedge funds and capital markets. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Fees and other revenue | $576.8 | $255.9 | $739.6 | $547.2 |
| Net gains (losses) from investment activities | $9.2 | $3,110.6 | $(726.1) | $5,030.4 |
| Net income (loss) attributable to common unitholders | $93.9 | $376.3 | $(236.0) | $646.8 |
| Basic earnings (loss) per common unit | $0.21 | $0.84 | $(0.53) | $1.47 |
| Economic net income (loss), non-GAAP | $248.8 | $839.9 | $(258.1) | $1,439.4 |
| After-tax distributable earnings, non-GAAP | $507.6 | $465.3 | $676.3 | $952.9 |
Q2 total expenses were $423.2 million, down from $554.2 million; six-month expenses were $731.5 million, down from $1,069.2 million. The filing does not present a conventional operating-margin measure. The non-GAAP measures are management-defined and should not be treated as substitutes for GAAP results.
- Cash flow, six months: Operating cash flow $(1.19) billion, investing cash flow $75.4 million and financing cash flow $1.58 billion. Cash and cash equivalents ended at $1.51 billion, up from $1.05 billion at year-end 2015. An additional $1.98 billion was held at consolidated entities and is not equivalent to unrestricted corporate cash.
- Balance sheet, June 30: Total assets $37.51 billion; total liabilities $21.82 billion; investments $30.38 billion; and KKR common-unitholder capital $5.00 billion. Reported total assets fell from $71.04 billion at year-end, primarily reflecting the accounting change described below.
- Debt and liquidity: Consolidated debt obligations were $17.89 billion, including $13.82 billion of consolidated CLO and CMBS debt supported by those vehicles’ assets and non-recourse to KKR beyond those assets. KKR’s segment balance sheet separately reported $2.00 billion of KKR (excluding KFN) debt and $657.3 million of KFN debt. The corporate and capital-markets revolving facilities had $1.5 billion of stated capacity and no borrowings outstanding at period-end.
- Assets under management: Private Markets AUM was $75.4 billion and Public Markets AUM $55.6 billion. Their respective fee-paying AUM was $46.0 billion and $48.6 billion. Private Markets uncalled commitments were $31.2 billion; Public Markets uncalled commitments were $7.2 billion.
Material changes versus comparable periods
- KKR adopted ASU 2015-02 on January 1, 2016, deconsolidating most investment funds. This reduced reported assets by approximately $36.3 billion and noncontrolling interests by approximately $34.2 billion at adoption; prior-year GAAP periods were not restated. Management said adoption did not affect net income attributable to KKR or partners’ capital, but materially changed presentation and comparability.
- Deconsolidation caused previously eliminated management fees and carried interest to appear in 2016 fees and other. Accordingly, the reported revenue increase does not represent a directly comparable increase in underlying activity. Consolidated investment gains and losses also exclude amounts attributable to third-party fund investors that were included in prior periods.
- Six-month investment activity swung from $5.03 billion of gains in 2015 to $726.1 million of losses in 2016, including $791.5 million of net unrealized losses. Management cited mark-to-market losses, particularly in First Data, certain special-situations assets and CMBS debt, partly offset by gains in consolidated CFE holdings.
- Investment-related performance income was weaker: six-month Private Markets unrealized carried interest was a loss of $184.7 million versus income of $439.3 million a year earlier. KKR cited lower appreciation and reversals associated with realizations. First Data’s share-price decline reduced segment ENI by approximately $480 million for the first half.
- Fee trends were mixed. Six-month management fees rose, partly because of deconsolidation and new capital, while Private Markets monitoring fees and transaction fees declined. Prior-year monitoring-fee termination payments were unusually high. Public Markets AUM grew year over year, while its performance income weakened.
Outlook, commentary, risks and unusual items
- KKR intended to make equal quarterly common-unit distributions of $0.16 per unit, or $0.64 annually, subject to board discretion and other restrictions. A $0.16 common distribution was declared after quarter-end. Series A and B preferred units were issued in 2016 at annual rates of 6.75% and 6.50%, respectively; preferred distributions are discretionary and non-cumulative and can restrict common distributions and repurchases.
- Management reported approximately $2 billion of announced Private Markets transactions pending closing as of July 26, 2016. It also noted that expected management fees on uncalled commitments are not assured and can be offset by lower fee bases or rates on older funds. No formal earnings guidance was provided in the supplied filing text.
- Brexit, currency volatility, slower growth, market dislocations, interest rates, credit spreads and commodity prices could affect investment valuations, financing, fundraising and exits. KKR said direct pound exposure was hedged such that Brexit’s immediate impact on investment values was modest, but hedges may not remain effective and do not address indirect effects.
- Valuation risk is significant: 52.0% of investments measured at fair value were Level III, relying on significant unobservable inputs and management judgment. KKR cautioned that changes in assumptions or market conditions could materially alter reported values and earnings.
- Carried interest is recognized using estimated fund liquidation values and may reverse as performance changes. No carry was subject to clawback assuming fund liquidation at June 30 fair values; the hypothetical clawback would be $2.43 billion if applicable fund investments were liquidated at zero value. KKR also disclosed $155.2 million of potential principal exposure relating to pre-2009 guaranteed clawbacks, with no amount due under June 30 valuations.
- Unfunded commitments included $2.62 billion to investment vehicles, $148.2 million for capital-markets commitments, $128.6 million for Merchant Capital Solutions and $87.7 million of other investment commitments. Litigation and regulatory matters were ongoing; management could not estimate potential losses, though it had not concluded that their resolution would materially affect the consolidated financial statements.
- KKR repurchased approximately 19.4 million common units during the first half for $265.2 million; cumulative repurchases under the $500 million program were approximately $427.2 million through June 30. The program is discretionary and may be suspended or discontinued.
Most important facts for investors to verify
- How much of the apparent revenue growth reflects the ASU 2015-02 presentation change rather than underlying fee and performance trends.
- Subsequent investment marks, realizations and carried-interest reversals, especially for First Data and other major portfolio exposures; validate Level III assumptions and the concentration of segment investments.
- Cash available to the management company versus cash held in consolidated funds and financing vehicles, and the recourse status of reported debt and commitments.
- Whether announced transactions close, uncalled commitments are deployed, and AUM growth translates into fee-paying assets and recurring management fees.
- The sustainability of common distributions and repurchases given preferred-unit priorities, fund commitments, potential clawbacks and market volatility.