Asset managers and private equity firms may not come to mind
when you think of the hottest industries this year, but this week
they notched higher again in the Zacks Industry Rank into the top
6%. And since these masters of investing are a group I really enjoy
researching and investing in, I had a hard time choosing which #1
Rank company to write about.
I decided to go with the firm that started it all: Kohlberg Kravis
Roberts & Co., now simply called
(KKR). As the company says, "The story begins on May 1, 1976, when
KKR opened its doors as a firm specializing in management buyouts,
a unique approach to investing that pioneered an entire industry:
KKR provides a range of asset management services to its investors
and delivers capital markets services to its firm, its portfolio
companies and its clients. The company operates private equity
funds that take either controlling or strategic minority ownership
positions for long-term appreciation.
They are also very active in the debt and credit markets, investing
in leveraged loans, high-yield bonds and less liquid credit
products. And, on behalf of portfolio companies, KKR arranges
equity and debt financing and offers capital market advice.
Money Flows to Expertise
With a market cap of $7 billion, KKR grew its assets under
management (AUM) to $90.2 billion as of September 30, 2013, up from
$83.5 billion in the June quarter.
Asset managers and private equity (PE) firms do especially well in
bull markets as the value of their investments rise, more dollars
are attracted to them, and more revenue is generated from fees. The
leading PE firms like KKR,
(APO) leverage specialized areas of research around the globe to
find undiscovered opportunities in non-public companies and debt
Institutional investors such as pension funds, endowments,
foundations, insurance companies, and sovereign wealth funds
allocate to these "money masters" because they trust their unique
expertise in diverse corners of global financial markets. And a KKR
can often provide the non-correlated investment exposure that these
big funds need but can't find on their own.
But as you may know, Blackstone has been a big buyer of single
family homes in the past two years with a special fund that they
allocated over $13 billion to. And the old pro KKR has not been
resting on its laurels either, noting recently...
"Our expanded focus encompasses exciting and growing areas for KKR:
energy & infrastructure, real estate, growth equity
investments, and a range of debt and public equity investing."
And another thing to keep in mind about the pursuits of PE firms is
that they generally have some of the longest time horizons on Wall
Street. They develop and nurture their non-public investments over
many years before harvesting the gains. They are the steady
elephants in a world of frenetic, high-frequency chimps.
Rising Estimates, Favorable Acquisition
After KKR's 3rd quarter earnings report, where they beat the Zacks
consensus EPS by 50%, analysts scrambled to raise estimates. The
full year 2013 consensus went from $2.19 to $2.53 and 2014 was
bumped from $2.35 to $2.50.
GAAP net income was $204.7 million for the quarter ended September
30, 2013, up from $127.4 million in the comparable period of 2012.
And over half of this haul was due to fees with fee-related
earnings of $106.0 million and $292.2 million for the quarter and
nine months, respectively, up from $90.7 million and $233.8 million
in the comparable periods of 2012.
For the quarter and nine months ended September 30, 2013, the
carrying value of KKR's private equity investment portfolio
appreciated 5.9% and 12.5%, respectively.
And this week, KKR announced a deal to acquire KKR Financial
Holdings LLC (KFN) in an all-stock deal worth $2.6 billion. KKR
Financial is currently managed by a subsidiary of KKR Asset
Management, a subsidiary of Kohlberg Kravis.
Based in San Francisco, KKR Financial was founded in 2004 as a
mortgage real estate investment trust (REIT) but later turned into
an investor in corporate debt after being hit by the sub-prime
mortgage crisis in 2007. Being a specialty finance company, it
operates a wide range of asset portfolios and primarily invests in
financial assets including private and public equity investments,
high yield bonds and distressed securities.
The purchase will be funded from a proposed new issue of 100
million shares. The deal, which is subject to a vote by
shareholders of KKR Financial, is expected to close by the first
half of 2014.
According to Kohlberg Kravis, upon closure the deal is expected to
pave the way for a 2% accretion on Kohlberg Kravis' total
distribution per unit basis while its balance sheet is expected to
grow from $7.2 billion as of Sep 30,2013 to $9.3 billion. Further,
it is expected that the acquisition will enhance liquidity,
increase return to shareholders and build capital.
Private equity firms are often structured as limited partnerships
where a certain percentage of earnings are distributed to partners
and shareholders through regular and special dividends. According
to analysts at Wells Fargo...
"The deal is accretive to most of KKR's metrics with the biggest
positive being a bump-up in cash flow and the dividend. Even though
the metrics look good in our view, we are a bit surprised by the
deal given KKR IPO'd KFN as recently as 2005."
But overall, the analysts felt that this was another positive step
in KKR's continued transformation beyond traditional PE roles. They
reiterated their Outperform rating and a $26-29 valuation range for
Whether or not you find KKR to be an worthy investment opportunity
at this point, be sure to check out the whole Investment Management
industry group on our site. With asset managers like
(VRTS) also holding the Zacks #1 Rank, while
Affiliated Managers Group
(AMG) carry the #2 Rank, there are plenty of solid financial
companies to choose from if you want exposure to the "money
masters" in this persistent bull market.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
Follow The Money
ARTISAN PTNR AM (APAM): Free Stock Analysis
APOLLO GLOBAL-A (APO): Free Stock Analysis
BLACKROCK INC (BLK): Free Stock Analysis Report
BLACKSTONE GRP (BX): Free Stock Analysis Report
KKR & CO LP (KKR): Free Stock Analysis
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