KKR & Co. Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless noted otherwise, amounts below are rounded; the filing presents financial statement amounts in thousands. KKR operates asset management and capital markets businesses and, following its February 1, 2021 acquisition of Global Atlantic, an insurance business. Comparisons with 2020 are affected by Global Atlantic being included only from the acquisition date.
Financial and operating highlights
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total GAAP revenue | $4.48 billion | $1.90 billion | $12.18 billion | $2.23 billion |
| Net income attributable to KKR common stockholders | $1.13 billion | $1.06 billion | $4.05 billion | $466 million |
| Diluted GAAP earnings per share | $1.80 | $1.79 | $6.52 | $0.80 |
| Fee related earnings (non-GAAP) | $530 million | $324 million | $1.36 billion | $861 million |
| After-tax distributable earnings (non-GAAP) | $925 million | $453 million | $2.51 billion | $1.22 billion |
| Distributable operating earnings (non-GAAP) | $1.18 billion | $594 million | $3.18 billion | $1.61 billion |
GAAP net income before taxes was $3.66 billion for Q3 and $12.62 billion for the nine months. The respective effective tax rates were 10.4% and 9.2%; KKR says the rates primarily reflect the substantial share of income attributable to noncontrolling interests. Non-GAAP measures are supplemental and are not substitutes for GAAP results.
- Asset management: Segment operating earnings were $1.07 billion in Q3 and $2.87 billion year to date, versus $594 million and $1.61 billion in the comparable 2020 periods. Q3 fee related earnings rose mainly on higher management and transaction fees. Realized performance income and investment income also increased.
- Insurance: Global Atlantic contributed $115 million of segment operating earnings in Q3 and $306 million for the nine months. Its GAAP revenues were $2.24 billion and $4.56 billion, respectively, from the acquisition date through September 30. GAAP insurance results include market-driven investment and derivative effects that the segment operating measure adjusts for.
- Assets under management: $459.1 billion at September 30, up from $251.7 billion at December 31, 2020; fee-paying AUM was $349.1 billion and uncalled commitments were $111.0 billion. The increase includes Global Atlantic and fundraising, investment appreciation, distributions and other activity.
- Investment performance and earnings quality: Asset management net gains from investment activities were $8.03 billion for the nine months, including $6.50 billion of unrealized gains. Capital allocation-based income was $5.74 billion, substantially above the prior-year period, reflecting appreciation in carry-earning funds. These valuation-sensitive items can reverse.
- Cash flow: For the nine months, operating cash flow was negative $3.56 billion, investing cash flow negative $7.02 billion, and financing cash flow positive $16.13 billion. Cash, cash equivalents and restricted cash increased $5.52 billion to $12.51 billion. KKR cautions that consolidated cash flows include investment funds, CLOs and insurance entities and do not represent cash freely available to the parent.
- Balance sheet and debt: Total assets were $265.8 billion and total liabilities $208.7 billion at September 30, compared with $79.8 billion and $39.0 billion, respectively, at year-end 2020; the change largely reflects Global Atlantic and consolidation. Asset management debt obligations were $39.0 billion, including debt of consolidated funds and CLOs, some of which is non-recourse to KKR; insurance debt was $2.16 billion. Global Atlantic also reported $124.6 billion of policy liabilities, which are obligations of its insurance subsidiaries.
- Equity and distributions: KKR-reported common stockholders’ equity per outstanding common share was $27.13, versus $21.15 at December 31, 2020. KKR declared a $0.145 common dividend per share for Q3, payable November 30, 2021; its stated policy was $0.58 annually, subject to board discretion.
Material changes and management commentary
- Global Atlantic was acquired on February 1, 2021. KKR holds all voting interests and 61.5% of its economic interests after post-closing adjustments. Its addition materially changes KKR’s scale and makes year-over-year consolidated comparisons less comparable.
- Management attributed higher asset management fees to new and expanding fund investment periods, higher fee-paying assets and Global Atlantic-related fees. Capital markets transaction activity also rose: 87 transactions in Q3 2021 versus 47 a year earlier, and 225 for the nine months versus 125.
- KKR said private equity portfolio values increased 9% in Q3 and 38% year to date, according to its reported measure. The filing notes that private investment valuations use judgment and unobservable inputs, and realized values may differ materially from reported fair values.
- Management expected more than $1.0 billion of realized performance income and realized investment income in Q4 2021, tied to incentive fees and completed or signed sales, partial sales or secondary sales. Some transactions remained subject to closing conditions; KKR gave no assurance they would close on schedule or at all.
- On October 11, 2021, KKR announced an integrated corporate reorganization, including a new parent, a planned end to KKR Management’s control no later than December 31, 2026, future KKR control of the employee carry-pool entity, and termination of the tax receivable agreement except for specified prior exchanges. The transactions were subject to completion under the reorganization agreement.
Risks, contingencies and unusual items
- KKR identified COVID-19 and possible new variants, inflation and supply-chain constraints, interest-rate and credit-spread changes, equity-market volatility, foreign exchange and commodity movements, geopolitical and regulatory developments, and fundraising and exit-market conditions as risks to valuations, deployment, realizations and insurance economics.
- Global Atlantic’s policy reserves and embedded derivatives depend on actuarial assumptions and policyholder behavior. Changes in interest rates, equity markets, credit spreads, mortality, lapses and withdrawals may materially affect results. Its investment portfolio also includes credit and mortgage exposure; $197.7 million of residential mortgage loans were over 90 days past due or in foreclosure at September 30.
- KKR reported $10.9 billion of unfunded commitments to its investment funds, $1.2 billion of capital-markets commitments and Global Atlantic commitments of $1.6 billion to purchase or fund investments. These are subject to contractual conditions and may not all be funded.
- Carry clawback exposure was approximately $78 million assuming applicable funds were liquidated at September 30 fair values; in an assumed zero-value liquidation, the estimate would be approximately $2.4 billion. KKR could seek reimbursement of part of the amount from the separate carry-pool entity.
- KKR disclosed ongoing Kentucky-related litigation and regulatory inquiries. Management could not estimate potential losses for the discussed matters and said an adverse outcome could materially affect results in a particular period, although it had not concluded that final resolutions would materially affect the financial statements.
- KKR completed its annual goodwill impairment assessment using a qualitative review and concluded it was more likely than not that reporting-unit fair values exceeded carrying values. The filing also says the forthcoming long-duration insurance accounting standard, expected to be adopted in 2023, is anticipated to materially affect the financial statements and increase volatility.
- Disclosure controls were deemed effective, but Global Atlantic’s internal control over financial reporting was excluded from the September 30 evaluation while KKR continued its integration review. Global Atlantic represented about 60% of consolidated assets and 35% of nine-month revenues.
Important facts for investors to verify
- How much of earnings and book-value growth depends on unrealized investment gains, carried interest estimates and Level III valuations, and how those amounts compare with cash realizations.
- Whether the expected Q4 2021 performance and investment income was realized, given transaction closing conditions and market sensitivity.
- Global Atlantic’s investment returns, policyholder liabilities, reinsurance recoverables and counterparty exposures, and the progress of its control integration.
- The composition and recourse characteristics of reported debt and cash, distinguishing KKR parent liquidity from fund, CLO and insurance balances.
- Progress and final terms of the announced reorganization, including tax-receivable-agreement effects, governance changes and the timing and conditions of closing.
- Developments in the disclosed litigation, regulatory matters, commitment funding needs and potential carried-interest clawbacks.