KKR Gains Momentum Among Rivals After Switching to a Corporation

(Bloomberg) -- KKR & Co. posted strong second-quarter results in its debut as a corporation.

The company said in a statement Thursday that profit rose 46 percent and assets under management expanded. That growth comes as KKR’s stock price has risen 29 percent since announcing its plans in May to switch from a partnership to a C-corp. The shares were little changed at 11:18 a.m. in New York after the earnings report.

KKR made the change on July 1 following passage of the U.S. tax law, which reduced the corporate tax rate to 21 percent from 35 percent. The new structure enables firms to be included in indexes, potentially boosting stock valuations and mutual fund ownership.

Co-Chairmen Henry Kravis and George Roberts said in the earnings report that the transition, designed to broaden the firm’s investor base, increases their ability to generate long-term equity value for shareholders. “In terms of our results, operating fundamentals across the firm remain strong,” they said.

Some analysts are watching to see if KKR’s gains from the conversion last.

Hedge Fund Money

“The question has become in the short-term, does some of the nimble hedge fund money move from KKR to another conversion candidate, or has that dynamic already occurred?” said Sandler O’Neill analyst Andrew Disdier. “Over the longer term, at what point do we see mutual funds start to buy KKR and does that really provide enough new demand to drive share prices higher?”

Shares of Apollo Global Management LLC, Carlyle Group LP and Blackstone Group LP have also risen since early May. Ares Management LP, the first major publicly traded private-equity firm to make the switch, has seen its stock fall in the period.

Like its peers, KKR continues to benefit from a robust fundraising market. It expects to close its latest infrastructure fund at $7 billion, which would be more than double the size of the prior pool that closed in 2015. The new fund will start investing this quarter, with $600 million of deals already signed, William Janetschek, chief financial officer, said during the earnings call.

KKR Gains Momentum Among Rivals After Switching to a Corporation

Following the conversion, New York-based KKR has changed the way it reports results. Starting with the second quarter, the firm said it’s using distributable earnings as the main profit metric because stockholders will find it more useful than economic net income.

KKR also redefined distributable earnings, which typically reflect cash profits on asset sales and fund management fees. KKR is including equity-based compensation in the calculation as well.

  • In the second quarter, KKR’s distributable earnings rose to $404.7 million, or 49 cents a share, from $276.9 million, or 34 cents, a year earlier, according to the statement. The results beat analysts’ estimates of 45 cents a share.
  • Realized performance income on private markets investments jumped to $342 million from $264.7 million in the year-ago period. Management fees rose to $261.5 million from $229.6 million.
  • Total segment revenue increased to $926.2 million from $707.5 million in the year-ago quarter.
  • KKR’s AUM expanded to $191.3 billion as of June 30, compared with $176.4 billion at the end of the first quarter. The gain was mostly from the closing of the FS Investments deal in April and inflows of capital into leveraged credit and infrastructure strategies.

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