Bloomberg News

KKR Reports $592 Million Loss on Writedown of Investments

November 04, 2011

(Updates with comment from KKR in fourth paragraph.)

Nov. 4 (Bloomberg) -- KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, posted a third-quarter loss after writing down the value of its private-equity holdings by 8.5 percent as global equity markets tumbled.

Pretax economic net income, a measure of profit excluding some costs, swung to a loss of $592.1 million, or 91 cents a share, from a profit $317.3 million, or 39 cents, a year earlier, New York-based KKR said today in a statement. Results were better than the average loss of $1.02 a share estimated by 12 analysts in a Bloomberg survey.

The loss highlights the earnings volatility at private- equity firms caused by the quarterly “mark to market” of their buyout investments. Accounting rules require them to value their portfolio holdings each quarter, and the change -- driven in part by whether stock markets rise or fall -- can whipsaw the profit measure they highlight for investors. KKR said that because its funds hold investments for years, the mark-to-market changes don’t represent their long-term value.

“If you take out the noise, we feel really good about Q3 and the first nine months,” Scott Nuttall, the firm’s head of global capital, told reporters on a conference call. He noted that fee-related earnings rose to $98.2 million in the quarter from $69.5 million a year earlier, and that KKR was finding plenty of good investment opportunities.

‘Accounting Dynamics’

KKR’s $4.9 billion of holdings in its own private-equity deals -- mostly stemming from the combination last year with its publicly traded European fund -- accounted for the bulk of the negative investment income of $688.5 million.

“I think the volatility is understandable given the accounting dynamics of marking to market their portfolios every quarter,” Michael Kim, an analyst at Sandler O’Neill & Partners in New York, said in a telephone interview. He has a “buy” rating on the stock.

“Unfortunately, it does drive the volatility” in economic net income, a key measure used by KKR and Wall Street to track performance, he said.

Besides driving asset write-offs, global market volatility hampers efforts by KKR and rivals to sell or take public companies they own, reducing distributions to private backers. That makes it difficult for firms to raise fresh capital and increase assets under management, a key metric for public shareholders.

KKR’s assets under management fell 5.2 percent from June 30 to $58.7 billion as world stocks plunged 18 percent in the quarter.

Apollo, Fortress

Economic net income doesn’t conform to generally accepted accounting principles. Under GAAP, KKR had a net loss of $243.4 million, or $1.09 a share, compared with net income of $8.9 million, or 4 cents a share, a year earlier.

All of KKR’s publicly traded peers reported non-GAAP losses or declining profits during the third quarter.

Apollo Global Management LLC wrote down almost $1.4 billion in the value of its private-equity portfolio, including Charter Communications Inc., Noranda Aluminum Inc. and Ceva Group Plc. Fortress Investment Group LLC’s quarterly pretax distributable earnings, which exclude some compensation costs and other items, fell 45 percent to $43 million, or 8 cents a share, from $78 million, or 15 cents, a year earlier.

Blackstone Group LP posted an unexpected loss after an 11 percent drop in the value of its buyout holdings. All three firms are based in New York.

KKR fell 1.9 percent to $13.27 at 12:12 p.m. in New York trading, and is down 6.6 percent for the year. Blackstone has lost less than 1 percent in 2011, while Apollo has tumbled 31 percent since listing on the New York Stock Exchange in March.

Fundraising Effort

KKR is seeking $5 billion to $6 billion by year-end for its next private-equity fund, according to two people with knowledge of the firm’s plans, an effort whose outcome may signal how competitors will fare in attracting new cash.

“When things get cheap and people get scared, there’s opportunity for us,” KKR’s Nuttall said.

KKR, which backed into becoming a public company by merging with a publicly traded European fund in July 2010, holds investments including HCA Holdings Inc. and media ratings provider Nielsen Co. HCA, the largest U.S. hospital operator, has declined 23 percent since a group of investors including KKR and Bain Capital LLC took it public in March.

--With assistance from Devin Banerjee in New York. Editors: Larry Edelman, Steven Crabill

To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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