Key Takeaways
- • K.K.R.'s third-quarter economic net income fell 17 percent to $508.7 million before taxes, driven by slower appreciation in its private equity portfolio, which grew 2.2 percent versus 5.9 percent in Q3 2013.
- • After-tax earnings of 50 cents per share exceeded analyst expectations of 44 cents, and K.K.R. shares rose more than 1 percent following the announcement, signaling market resilience despite weaker portfolio performance.
- • Distributable earnings before taxes—cash available for shareholder distribution—doubled to $504.8 million, and total cash revenue surged 74 percent to $800 million, reflecting significant asset sales during the quarter.
- • K.K.R. executed major exits including the $975 million sale of Ipreo Holdings to Blackstone and Goldman Sachs, plus dispositions of China Modern Dairy and Santander Consumer USA shares, capitalizing on elevated asset valuations.
- • Management adopted a more cautious investment posture given lofty current valuations, as public equity markets leveled off after strong 2013 performance, constraining new deal activity despite available dry powder.
Summary
Kohlberg Kravis Roberts reported third-quarter results on October 23, 2014, marked by decelerating portfolio growth but stronger cash generation, reflecting broader market dynamics as public equity indices stabilized after their 2013 surge. Economic net income—K.K.R.'s preferred profit metric incorporating unrealized investment gains—declined 17 percent year-over-year to $508.7 million before taxes. The deceleration was directly attributable to moderating appreciation in K.K.R.'s private equity holdings, which appreciated 2.2 percent in the quarter, compared with 5.9 percent in the third quarter of 2013, tracking the public stock market's more subdued recent trajectory.
Despite the earnings decline, K.K.R. exceeded consensus expectations on a per-share basis, reporting after-tax earnings of 50 cents against Thomson Reuters survey expectations of 44 cents, resulting in a modest 1 percent equity price gain on the day. The firm's cash generation metrics told a markedly different story, with distributable earnings before taxes—a key metric for institutional investors focused on cash available for distribution—doubling year-over-year to $504.8 million. Total cash revenue expanded 74 percent to $800 million, demonstrating K.K.R.'s ability to generate liquidity despite portfolio growth headwinds.
K.K.R. capitalized on elevated asset valuations to execute several high-profile exits during the quarter. The firm closed the sale of Ipreo Holdings, a capital markets software platform, to Blackstone and an affiliate of Goldman Sachs for $975 million. K.K.R. also liquidated positions in previously-taken-public portfolio companies, including China Modern Dairy and Santander Consumer USA, the American auto-lending subsidiary of Spanish banking group Grupo Santander, further supporting cash distributions.
Management signaled a deliberate shift toward underwriting discipline amid valuation concerns. Scott C. Nuttall, speaking on behalf of K.K.R., noted that the firm "has probably been more cautious of late" regarding new investments, reflecting concern about stretched valuations across market segments. This stance, combined with public equity market stabilization after substantial 2013 gains, created an environment in which K.K.R. prioritized portfolio optimization and shareholder distributions over aggressive new deployment, a strategic posture likely to resonate with institutional limited partners navigating an uncertain economic environment.
Despite the earnings decline, K.K.R. exceeded consensus expectations on a per-share basis, reporting after-tax earnings of 50 cents against Thomson Reuters survey expectations of 44 cents, resulting in a modest 1 percent equity price gain on the day. The firm's cash generation metrics told a markedly different story, with distributable earnings before taxes—a key metric for institutional investors focused on cash available for distribution—doubling year-over-year to $504.8 million. Total cash revenue expanded 74 percent to $800 million, demonstrating K.K.R.'s ability to generate liquidity despite portfolio growth headwinds.
K.K.R. capitalized on elevated asset valuations to execute several high-profile exits during the quarter. The firm closed the sale of Ipreo Holdings, a capital markets software platform, to Blackstone and an affiliate of Goldman Sachs for $975 million. K.K.R. also liquidated positions in previously-taken-public portfolio companies, including China Modern Dairy and Santander Consumer USA, the American auto-lending subsidiary of Spanish banking group Grupo Santander, further supporting cash distributions.
Management signaled a deliberate shift toward underwriting discipline amid valuation concerns. Scott C. Nuttall, speaking on behalf of K.K.R., noted that the firm "has probably been more cautious of late" regarding new investments, reflecting concern about stretched valuations across market segments. This stance, combined with public equity market stabilization after substantial 2013 gains, created an environment in which K.K.R. prioritized portfolio optimization and shareholder distributions over aggressive new deployment, a strategic posture likely to resonate with institutional limited partners navigating an uncertain economic environment.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.