KKR & Co. L.P. (KKR)

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Kohlberg Kravis Roberts & Co. L.P. (KKR)

Q3 2013 Earnings Call

October 24, 2013 11:00 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

William R. Katz - Citigroup Inc, Research Division

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

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

Howard Chen - Crédit Suisse AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

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

Patrick Davitt

Christopher Harris - Wells Fargo Securities, LLC, Research Division

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

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the KKR's Third Quarter 2013 Earnings Conference Call. [Operator Instructions]

I would now like to hand over the call to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Catherine. Welcome to our third 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.

We'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 back of our press release.

We're pleased to give this update, and I've been looking forward to this call. It's been quite an active quarter for us. As you will hear, we reported record AUM and fee paying AUM this morning. We raised over $6 billion of fee paying AUM this quarter on an organic basis, and over the last 12 months, our total fee paying assets under management have increased by $23 billion or 46%.

Second we've been particularly active on the investment front. Within Private Markets, we invested $1.8 billion of fund capital this quarter, the largest figure for any quarter in almost 2 years and essentially equal to the amount we invested over the first 9 months of 2012. And in addition, we have announced several investments that have yet to close. Scott shortly is going to walk through with you some of the drivers of this activity.

And finally, we're continuing to build out our franchise as evidenced by the announcement last week of our agreement to acquire Avoca Capital, a leading European credit investment manager with about $8 billion in assets under management.

Turning to our financial results. We reported economic net income of $614 million this quarter, which equates to $0.84 of aftertax ENI per unit, 22% higher than the $0.69 per unit we reported for the third quarter of last year. Fee-related earnings were $106 million, up 8% quarter-over-quarter and 25% year-to-date. And we've also reported total distributable earnings of $251 million for the quarter and almost $950 million for the first 9 months of 2013.

Finally we have announced a $0.23 distribution per unit for the third quarter, which brings our year-to-date distribution figure to $0.92 per unit.

And with that, I'll now turn it over to Bill to discuss our financial performance in more depth.

William J. Janetschek

Thanks, Craig. We ended the third quarter with assets under management of $90 billion, up 8% from last quarter and 36% from the same time last year. The majority of AUM growth was due to the $4.7 billion of new capital we raised in our Private Market segment, which includes an incremental $800 million of NAXI commitments as well as $1.8 billion of new capital raised in public markets.

As of September 30, our fee paying assets under management were $74 billion, an increase of 8% from last quarter and 46% from last year.

Similar to AUM, the new capital raised in the quarter positively impacted our fee paying assets under management. Keep in mind, these figures do not include approximately $3 billion of committed capital that will be included once it's invested.

To underscore how this fee paying AUM growth is translating into higher fee streams, we've reported record management fees for both the quarter and 9-month period. Third quarter management fees are almost 40% greater in 2013 than 2012. In addition, both fee paying AUM growth and increased transaction activity have led to record fee revenue for both the quarter and the first 9 months of 2013. To give you a sense, total fee revenue in the third quarter of 2013 is over 25% higher than the same time last year.

Turning to our segment results. In Private Markets, fee related earnings were $44 million, up 4% from the second quarter, driven by greater transaction fees related to heightened deal activity. The 6% appreciation in our private equity portfolio, combined with higher fee related earnings in the quarter translated into ENI of $245 million, an increase from the $72 million we recorded last quarter. Our Publics went up 17% in the third quarter, which compares favorably to the 8% increase in the MSCI World. While the private fee portfolio companies were up about 3.5%.

Touching on Public Markets, fee related earnings were $20 million, down from both last quarter and last year, which was primarily driven by lower incentive fees. As a reminder, Prisma incentive fees crystallized generally on June 30 and December 31. We also incurred a 1-time $10 million expense associated with the closed-end fund we raised in the third quarter, which hurt our fee related earnings. Before this 1-time expense, fee related earnings would have been about $30 million, up over 25% from the third quarter of last year.

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