KKR & Co: Value, Income & Growth

There is a lot to like about KKR & Co Ltd (KKR) – value, income, and growth, wrapped in an aggressive management history.    KKR, also known as  KOHLBERG, KRAVIS and ROBERTS, is a private equity  and hedge fund management firm, known for buying and selling companies.


KKR trades at a PE ratio that is half its growth rate, is structured as an LLP offering an 8.0% tax-advantages yield, and should grow earnings at 12% to 14% a year.  KKR manage a portfolio of assets worth $99 billion.  These include private equity ownership of companies and debt to these same companies.

KKR thrives on its brand name and expertise to buy top tier companies, improve margins and revenues, and then sell or spin off the company when appropriate.   In the interim, KKR offers mezzanine and direct financing for companies under their wing, especially after the re-incorporation of their specialty financing are, KKR Financial, in 2014.  An advantage to selling a business to KKR is their access to cheaper and more diversified capital than the majority of their portfolio companies could on their own.  

The underlying business of private equity is expected to continue to grow in size.  Morningstar believes by 2020 alternative asset managers could command 40% of the global asset manager revenue pool versus 33% in 2013. KKR invests its own capital into buyout pools along with investors.  In this way, KKR generates both an equity position in the subsequently owned asset, but charges the pool a management fee.  For example, in a recent pool offering, KKR garnished $1 billion from third-party investors, and matched that with a $250 million contribution sourced from other selling transactions.  

KKR has been very successful in generating money for additional investments, raising over $16 billion in third-party capital in 2012 to 2013. 

In addition, its reputation has helped hire and retain executives in specific field that work diligently to turnaround targeted companies.   One aspect of being taken into the fold is the fees the portfolio companies pay to KKR for consulting services utilized in the design and implementation of a new business strategy. 

In essence, KKR earns management consulting fees, becomes the portfolio company’s lender, and realizes capital gains when the company is sold. 

For example, KKR purchased a safety harness company, Capital Safety in 2012 for $645 million.  Last month, 3M (MMM) agreed to buy Capital Safety for $2.5 billion.  KKR will receive a profit of $1.9 billion for its investment, including a dividend last year.  

Bloomberg’s comments:

 KKR is notching wins as it prepares to market a new private equity fund later this year targeting as much as $12 billion. The New York-based firm has beat analysts’ profit expectations in five of the past seven quarters, benefiting from sales of drugstore chain Alliance Boots GmbH, digital-photo company Fotolio, financial-data provider Ipreo Holdings LLC, South Korean beer maker Oriental Brewery Co., retailer Dollar General Corp. and Biomet Inc., a maker of artificial hips and knees.

In a rising interest rate environment supported by underlying economic expansion, KKR should experience greater spreads in its portfolio financing and fee based businesses.  

Over the longer term, there will be a consolidation of the industry as institutions become more selective in their asset allocations.  Those firms with larger portfolios and stronger brand names will the survivors.  

Long-term investors should consider buying KKR for its current 8.9% distribution yield and the potential for capital gains.

This first appeared in the July issue of Guiding Mast Investments.  Thanks for reading, George Fisher