KKR & Co. L.P. (KKR)

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(KKR)

Q2 2013 Earnings Call

July 26, 2013 10:00 am ET

Executives

Craig Larson - Managing Director of Investor Relations

William J. Janetschek - Chief Financial Officer of Kkr Management Llc, Member of Other Committee, Member of Risk Committee, Member of Valuation Committee and Member of Balance Sheet Committee

Scott C. Nuttall - Head of Global Capital and Asset Management Group, Principal and Member of the Management Committee

Analysts

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

David J. Chiaverini - BMO Capital Markets U.S.

Roger A. Freeman - Barclays Capital, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

William R. Katz - Citigroup Inc, Research Division

M. Patrick Davitt - Autonomous Research LLP

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Danielle. Welcome to our second quarter 2013 earnings call. Thank you for joining us. As usual, I'm joined by Bill Janetschek, our CFO; and Scott Nuttall, Global Head of Capital and Asset Management.

Given how recently we held our Investor Day and the detailed nature of those presentations, our prepared remarks this quarter are actually a little shorter than usual, so we'll have ample time for Q&A.

Before we begin, I'd like to remind everyone that this call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our SEC filings for cautionary factors related to these statements. And we'll also refer to non-GAAP measures on the call, which are reconciled to GAAP figures in the press release.

This morning, we reported second quarter economic net income of $144 million, which equates to $0.18 of after-tax economic net income per unit. Fee related earnings for the quarter were $98 million, representing a 41% increase relative to the $70 million reported for the second quarter of 2012.

We continue to be active on the realization front, so I'd like to highlight some of our cash metrics. Total distributable earnings were $404 million, up almost 40% quarter-to-quarter. This increase was driven by the $162 million of realized cash carry in the second quarter, over 3x the $53 million we reported in Q1.

During our Investor Day in late May, we highlighted a few times that over 80% of the remaining fair value in our private equity funds is in position to pay carry, and we're seeing the benefits of this in these quarterly results. We announced a distribution this quarter of $0.42 per unit, which is comprised of $0.10 of fee related earnings, $0.09 of net realized balance sheet income and $0.23 of realized cash carry. In fact, this is the highest quarterly cash carry figure we reported as a public company, and it's the 13th consecutive quarter where we've seen cash carry in the distribution.

And with that, I'll now turn it over to Bill to discuss our performance in depth, and then Scott will walk through what we've been focused on across our segments. Bill?

William J. Janetschek

Thanks, Craig. We ended the second quarter with record assets under management of $84 billion, an increase of 7% from last quarter and 36% on a year-over-year basis. The majority of the AUM growth this quarter was attributed to the close of our Asia II Fund, at a $6 billion hard cap. And as of June 30, our financials now include $5.75 billion of third-party capital committed to that fund.

Our fee paying AUM was also the highest we've reported, totaling $68 billion, up 9% from last quarter. Similar to AUM, the addition of Asia II drove the increase in our fee paying AUM.

Turning to our segment results. In Private Markets, fee related earnings were $43 million, up 5% from last quarter and 18% from last year, where again, the activation of our Asia II Fund drove an increase in management fees. Higher fee related earnings in the quarter, together with the 1% write-up in our private equity portfolio, translated into ENI of $72 million. Our publics were down 3% this quarter, while the private companies in our PE portfolio were up about 2%. Overall, the 1% appreciation in our PE portfolio was in line with the MSCI World and slightly below the S&P 500, which were up 1% and 3%, respectively.

Moving to Public Markets. Fee related earnings were $34 million in the second quarter, compared to $37 million last quarter and only $12 million for the second quarter of last year. The year-over-year growth was driven by higher management and incentive fees, as fee-paying AUM continued to scale in this segment, both organically and inorganically through Prisma and our stake in Nephila.

Year-to-date performance reflects the same trends, resulting in fee related earnings of $72 million for the first half of the year, up sharply from the $28 million in the first half of '12. ENI in this segment was $40 million for the quarter and $90 million for the first 6 months of this year, which includes $19 million of net accrued carry. This figure continues to become more significant as we put more capital to work in carry-eligible funds.

Touching on capital markets and principal activities. Fee related earnings were $21 million for the quarter, flat from the second quarter of 2012, but meaningfully ahead of last quarter's figure. The results this quarter demonstrate the global nature of our capital markets business, as 75% of revenue came from outside of the U.S. Additionally, over 25% of our revenue was derived from our third-party platform.

Second quarter ENI in the segment was $32 million, down significantly from last quarter and last year. Our balance sheet was up only 1% this quarter, compared to 7%, both last quarter and Q2 of last year. Our June 30 book value per unit is $9.65, which is down slightly from last quarter, since cash distributions paid out during the second quarter exceeded the increase in the carrying value of our balance sheet investments in the quarter.

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