KKR & Co. L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The unaudited statements consolidate KKR-managed funds and financing vehicles; reported consolidated assets, debt and cash flows therefore include substantial third-party and non-recourse vehicle activity. Amounts below are converted from the filing’s stated units.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Fees and other | $188.6m | $344.8m | $735.8m | $897.1m |
| GAAP net income (loss) attributable to KKR | $(190.6)m | $89.9m | $456.2m | $478.2m |
| Basic earnings (loss) per common unit | $(0.42) | $0.21 | $1.03 | $1.31 |
| Economic net income (loss), non-GAAP | $(286.0)m | $508.7m | $1.153bn | $1.641bn |
| Fee-related earnings, non-GAAP | $89.9m | $125.6m | $312.8m | $371.0m |
| Total distributable earnings, non-GAAP | $349.1m | $504.8m | $1.357bn | $1.653bn |
- Q3 total investment income was a loss of $1.137bn, including $1.556bn of net losses from investment activities. KKR attributed the quarter’s loss primarily to fair-value declines, including weakness in publicly traded investments and certain Asian funds.
- Nine-month operating cash flow was $1.733bn, versus $1.518bn; investing cash flow was $(264.5)m and financing cash flow $(629.2)m. Consolidated operating cash flow includes investment purchases and sales by consolidated funds and vehicles.
- At September 30, cash and cash equivalents were $1.757bn, including $1.281bn held at consolidated entities. KKR reported approximately $2.063bn of segment cash and short-term investments, including about $0.3bn of liquid short-term investments.
- Total assets were $69.057bn and total liabilities $19.556bn. Consolidated debt obligations were $16.588bn, including $11.058bn of CFE debt and fund financing; these obligations are generally supported by the related vehicle’s assets and are not equivalent to parent-level debt. Segment balance-sheet debt included $2.0bn of KKR debt excluding KFN and $657.3m of KFN debt.
- Assets under management were $98.7bn in aggregate across Private and Public Markets; fee-paying AUM was $82.9bn. Private Markets AUM was $60.8bn and Public Markets AUM $37.9bn.
Material changes versus comparable periods
- Q3 GAAP results swung from attributable net income of $89.9m to a loss of $190.6m, primarily reflecting investment losses; nine-month attributable income declined modestly, from $478.2m to $456.2m.
- Q3 fees and other fell 45% year over year, with lower transaction fees, oil and gas revenue, monitoring fees and incentive fees. Transaction-fee-generating Private Markets investments numbered 5, versus 12 a year earlier; Capital Markets completed 27 transactions, versus 37.
- Nine-month fees and other declined 18%, largely from lower transaction fees and oil and gas revenue. Monitoring fees rose, partly due to $121.1m of infrequent termination payments tied to exits and an IPO; management cautioned recurring monitoring fees may continue to decline absent replacement portfolio companies.
- Private Markets Q3 AUM declined $2.3bn from June, reflecting distributions and weaker valuations, partly offset by fundraising. Public Markets AUM declined $0.5bn, as distributions, redemptions and valuation declines exceeded new capital raised.
- Debt obligations increased from $10.838bn at year-end 2014 to $16.588bn, mainly reflecting the consolidation of CMBS vehicles and higher fund financing. KKR early adopted ASU 2014-13, changing consolidated CFE measurement and producing a $17.2m cumulative-effect reduction to equity.
Outlook, commentary, risks and unusual items
- Management said available liquidity should be sufficient for working-capital needs for at least 12 months. It estimated approximately $1.4bn of liquidity needs over five years for Marshall Wace, unit repurchases and Hudson Yards office commitments.
- After quarter-end, KKR announced a $500m common-unit repurchase authorization and a planned fixed distribution of $0.16 per unit quarterly, anticipated to begin with the distribution for Q4 2015. The Q3 distribution was $0.35 per unit, announced October 27 and payable November 24, 2015. Future distributions remain at board discretion.
- On November 2, 2015, KKR acquired a 24.9% interest in Marshall Wace for cash and common units, with an option to increase ownership to 39.9%; the investment will use equity-method accounting.
- Market risks included elevated equity volatility, widening credit spreads, China-market and currency weakness, and falling oil and gas prices. KKR noted that energy valuations use long-term commodity forecasts that may exceed quoted market prices. A hypothetical 10% decline in its segment energy real-asset values would reduce KKR-attributable net income by an estimated $35.2m.
- Fair-value estimates involve significant judgment: 57.3% of investments measured at fair value were Level III. KKR warned that changes in assumptions or market conditions could materially affect valuations and earnings.
- KKR expects adoption of the new consolidation guidance (ASU 2015-02) to deconsolidate a significant number of funds and entities, potentially changing reported balance-sheet and income-statement scale.
- Unfunded commitments included $1.318bn to active investment vehicles, plus $125.6m for capital-markets commitments, $128.6m for Merchant Capital Solutions and $155.8m of other investment commitments. Carry clawback exposure was zero using September 30 fair values, but would have been $2.487bn if applicable funds were liquidated at zero value.
- KKR recorded $30.3m of oil and gas property impairment charges for the first nine months. The Delaware Supreme Court affirmed dismissal of litigation related to the KFN merger on October 2, 2015. Management could not estimate potential losses in other proceedings, though it had not concluded that their final resolution would materially affect the financial statements.
Important facts for investors to verify
- How much of reported investment income and cash flow reflects KKR’s own economic exposure versus consolidated funds, noncontrolling interests and non-recourse CFEs.
- The assumptions and independent valuation procedures supporting Level III holdings, particularly energy assets and large positions in Walgreens Boots Alliance and First Data.
- Whether recurring management and monitoring fees, fundraising, and fee-paying AUM can offset lower transaction activity, redemptions and portfolio realizations.
- The cash requirements and financing implications of the Marshall Wace investment, $500m repurchase authorization, new distribution policy and Hudson Yards commitments.
- The effects of ASU 2015-02 on future reported results, and the sensitivity of carried interest, fund netting holes and potential clawbacks to subsequent investment performance.