KKR & Co. (KKR:US), the private-equity firm run by Henry Kravis and George Roberts, said fourth-quarter profit more than doubled as appreciation in its buyout holdings fueled paper gains and its funds sold investments at a profit.
Economic net income after taxes, a measure of profit excluding some costs, increased to $773.6 million, or $1.08 a share, from $337 million, or 48 cents, a year ago, New York-based KKR said in a statement today. Analysts had expected earnings of 89 cents a share on that basis, according to the average of 14 estimates in a Bloomberg survey. KKR said it will pay stockholders a dividend (KKR:US) of 48 cents a share on March 4.
KKR was the most active private-equity firm in 2013, according to research firm Dealogic, investing more than $17 billion in 34 companies. The firm agreed to buy (KKR:US) landscape-maintenance company Brickman Group Ltd., insurance-technology company Mitchell International Inc. and a pair of industrial-lifting businesses from Melrose Industries Plc (MRO), all in deals valued at more than $1 billion.
KKR had “a strong quarter on the back of very good returns,” Christopher Harris, an analyst at Wells Fargo & Co. in Baltimore, wrote in a note to clients today. “With ENI and the dividend both above expectations, we see the stock doing well.”
KKR rose 2.9 percent to $23.89 in New York. The stock has declined 1.8 percent so far this year as the Standard & Poor’s 500 index of large U.S. companies has fallen 4.1 percent.
Among KKR’s dispositions in the quarter were share sales of hospital operator HCA Holdings Inc., European broadcaster ProSiebenSat.1 Media AG, NXP Semiconductor NV (NXPI:US) and French floor maker Tarkett SA. (TKTT) KKR also sold its remaining stake in retailer Dollar General Corp. (DG:US), a 2007 buyout that returned more than 4.5 times KKR’s money for one of its most profitable investments.
The firm said the value of its private-equity holdings rose 8.4 percent in the fourth quarter, compared with a gain of 4 percent in the same period last year. Blackstone Group LP (BX:US)’s buyout holdings climbed 12 percent in the latest quarter, Carlyle Group LP’s appreciated 9 percent and the Standard & Poor’s 500 Index of large U.S. companies increased 9.9 percent.
The value of a private-equity firm’s buyout holdings affects economic net income because the metric relies on quarterly “mark-to-market” valuations of those investments. Accounting rules require the firms to value their portfolio holdings each quarter.
Those mark-to-market valuations are primarily represented in unrealized carried interest, which more than tripled to $347 million from $101 million a year earlier. Realized carry, which represents cash earned by selling holdings, rose 49 percent to $251 million.
Distributable earnings, or cash available for shareholders, fell 6.6 percent to $510 million as lower earnings from balance-sheet investments offset increases in fee-related earnings and cash carry.
KKR’s measure of economic net income, or ENI, which excludes some expenses tied to a combination with the firm’s public fund that allowed KKR to list its shares on the New York Stock Exchange in 2010, differs from U.S. generally accepted accounting principles. Under those rules, known as GAAP, KKR reported net income of $277.9 million, or 89 cents a share, compared with $96.7 million, or 36 cents, a year earlier.
Blackstone last week reported fourth-quarter net income of $621 million, compared with $106 million a year earlier. Like KKR, New York-based Blackstone says investors should focus on a non-standard measure of profit that excludes some costs tied to its 2007 IPO. By that measure, profit more than doubled to a record $1.54 billion.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.
KKR’s assets under management rose to $94.3 billion from $90.2 billion at the end of the third quarter as the firm raised more money, including for its 11th North America buyout fund, its first real estate fund and a pool to invest in special situations. KKR recently closed the North America fund, known as NAXI, with $9 billion, three years after it started marketing the pool to clients.
KKR in October said it will acquire Avoca Capital, a European credit investor with $8.4 billion in assets under management as of Dec. 31. The purchase will be completed in the “near term,” KKR said today. The firm joins a wave of U.S. asset managers stepping into the lending void left by European banks that are adapting to heightened capital requirements.
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