KKR & Co. L.P. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2017; filed August 4, 2017. The filing identifies the registrant as KKR & Co. L.P. KKR is a global alternative investment manager spanning private equity, real assets, credit, capital markets and hedge-fund partnerships. Financial statements are unaudited.
Financial results and key metrics
Amounts below are in U.S. dollars. GAAP results consolidate certain investment funds and financing entities; their assets, liabilities and results include substantial third-party interests.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Fees and other revenue | $931.8 million | $576.8 million | $1,647.7 million | $739.6 million |
| Net gains (losses) from investment activities | $418.4 million | $9.2 million | $976.9 million | $(726.1) million |
| Total expenses | $629.7 million | $423.2 million | $1,169.7 million | $731.5 million |
| Net income (loss) | $868.5 million | $273.2 million | $1,666.4 million | $(487.1) million |
| Net income (loss) attributable to common unitholders | $405.6 million | $93.9 million | $665.0 million | $(236.0) million |
| Diluted income (loss) per common unit | $0.81 | $0.19 | $1.33 | $(0.53) |
- Q2 net investment income was $585.0 million, including $418.4 million of net investment gains, $295.7 million of interest income, $69.4 million of dividend income and $198.6 million of interest expense.
- Q2 compensation and benefits were $462.8 million, up from $296.4 million, primarily reflecting higher carry-pool allocations and cash compensation. The filing does not present a conventional operating-margin measure.
- Management’s non-GAAP segment measures: Q2 economic net income (ENI) was $830.3 million versus $248.8 million; fee-related earnings (FRE) were $214.4 million versus $137.8 million; after-tax distributable earnings were $321.9 million versus $507.6 million. For the first six months, ENI was $1,498.8 million versus a loss of $258.1 million, FRE was $436.3 million versus $278.8 million, and after-tax distributable earnings were $668.4 million versus $676.3 million. These measures are not GAAP and should not be treated as substitutes for GAAP results.
- At June 30, 2017, total assets were $42.9 billion, including investments of $36.3 billion. Cash and cash equivalents were $2.1 billion, down from $2.5 billion at year-end 2016. Segment cash and short-term investments, a management liquidity measure, were $3.1 billion.
- Total consolidated debt obligations were $19.4 billion, compared with $18.5 billion at year-end. This includes $15.7 billion of debt at consolidated financing entities, generally non-recourse beyond those entities’ assets. Segment debt was $2.0 billion of KKR debt excluding KFN and $639.8 million of KFN debt.
- For the six months, operating cash flow was $(1.86) billion, investing cash flow was $59.4 million and financing cash flow was $1.43 billion; cash declined $377.2 million. Operating cash use reflected investment purchases exceeding proceeds by about $3.0 billion. Consolidated cash flows include funds and financing entities and are not a direct measure of cash generated by KKR’s management business.
Material changes versus comparable periods
- Q2 fees and other rose $355.0 million year over year. Carried interest increased to $551.0 million from $304.8 million, while transaction fees rose to $156.5 million from $67.5 million. Q2 investment gains were driven mainly by private equity marks, including First Data, and gains in energy and consolidated CMBS; realized investment results were a net loss.
- First-half fees and other increased $908.2 million, including a $698.9 million increase in carried interest. First-half investment activities swung from a $726.1 million loss to a $976.9 million gain, largely reflecting $932.1 million of unrealized gains versus $791.5 million of unrealized losses in 2016.
- Q2 diluted earnings per unit improved to $0.81 from $0.19; first-half results turned positive from a prior-year loss. The improvement was substantially affected by investment valuations and accrued carried interest, which can reverse.
- Private Markets AUM reached $85.0 billion and fee-paying AUM (FPAUM) $62.0 billion. Public Markets AUM was $63.5 billion and FPAUM $50.6 billion. The June 1 combination of PAAMCO and Prisma created PAAMCO Prisma, which operates independently; KKR received a 39.9% interest and reports it under the equity method.
- KKR issued $375 million of KFN 5.5% senior notes due 2032 and redeemed KFN’s $115 million 7.5% notes due 2042. A new $750 million, 364-day capital-markets revolver was established; no amounts were drawn at quarter-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. KKR stated an intention to make quarterly common-unit distributions of $0.17 per unit; payment remains subject to board discretion and there is no assurance the policy will continue. A $0.17 distribution was declared after quarter-end for payment August 22, 2017.
- Management cited market, credit-spread, interest-rate, foreign-exchange and commodity-price movements as factors that can materially affect portfolio values, realizations, fundraising, deployment and carried interest. WTI long-term price assumptions declined about 4% in Q2. KKR noted that approximately 53.6% of investments measured at fair value were Level III, relying on significant unobservable inputs and management judgment.
- Carried interest is recorded using fund fair values as if investments were realized at the reporting date. It may be reversed as valuations change. At June 30, $47.3 million of carry was subject to clawback assuming fund liquidation at reported fair values; the hypothetical clawback would be $2.08 billion if applicable fund investments were liquidated at zero value.
- KKR reported $3.47 billion of its own uncalled fund commitments, plus $152.8 million of purchase commitments and $461.3 million of capital-markets underwriting, financing and syndication commitments. Consolidated contractual obligations total $33.7 billion, including fund and CFE obligations; many are limited or non-recourse to KKR.
- Legal and regulatory proceedings arise in the ordinary course. Management could not estimate a loss range for the matters described and said it had not concluded that their final resolution would materially affect the financial statements, while noting an adverse outcome could affect results in a particular period.
- KKR’s $750 million unit-repurchase authorization had $291.2 million remaining at June 30; no units were repurchased in the first half of 2017. KKR reported compliance in all material respects with debt covenants.
Important facts for investors to verify
- How much of reported earnings and distributable earnings is supported by realized cash proceeds versus unrealized marks and accrued carry, and how those amounts may reverse.
- The valuation assumptions, concentration and liquidity of Level III holdings, including sensitivity to public markets, discount rates, exit multiples and energy-price forecasts.
- The distinction between KKR’s own debt and consolidated fund/CFE debt, including recourse, collateral, maturities and liquidity needs.
- Whether fundraising, deployment, realizations and fee-paying AUM growth sustain recurring fee revenue as older funds enter post-investment periods and redemptions or distributions occur.
- Progress and closing conditions for announced realizations and investments, the PAAMCO Prisma arrangement, and any resulting effects on cash, fees and performance income.
- The sustainability of the $0.17 quarterly distribution in light of cash flows, commitments, clawback exposure and board discretion.