KKR loses $92M in Q3 as private equity portfolio declines again

The value of KKR & Co. Inc.'s traditional private equity portfolio dropped 4% in the third quarter as the publicly traded alternative asset manager ended the period with a $91.6 million loss.

Inflation, high interest rates and a slowing global economy combined to create a "very challenging" macroeconomic environment, CFO Robert Lewin said on KKR's Nov. 1 earnings call. However, Lewin emphasized that brighter prospects lie ahead for the company. KKR ended the quarter with $113 billion in uncommitted capital, up 1% year over year. Lewin said that over the next 12 to 18 months the company is "in a position to deploy a significant amount of dry powder with asset prices more dislocated and while capital is quite scarce."

"Oftentimes, our best vintages result from investments made during periods of market distress," the CFO said, comparing the current moment — roughly 2.5 years since the onset of the coronavirus pandemic — to the aftermath of the Great Recession and the post-dot-com bubble period of the early 2000s. "We think 2023 could present such an opportunity."

Still, that same market distress continues to rattle KKR, which has now reported negative income for the second consecutive quarter after losing $828 million in the second quarter. Its private equity portfolio declined for a third consecutive quarter after posting a 7% loss in the second quarter and a 5% loss in the first quarter.

Despite those ongoing struggles, KKR remains on track for what Lewin said would be its second-best year of fundraising in 2022. The company reported $13 billion in new investor commitments for the quarter and $65 billion of inflows since the start of the year.

Assets under management stood at $496 billion as of Sept. 30, up 8% year over year. Fee-paying AUM increased 14% year over year to $398 billion, and KKR reported $542 million in fee-related earnings for the quarter, up 2% compared with the year-ago quarter.

Financing deals

KKR is gearing up for more private equity dealmaking at a time when the cost of deal financing is increasing due to rising interest rates. But co-CEO Scott Nuttall said the effect of more expensive debt was more than offset by the widespread decline in valuations, which means companies targeted for acquisition are likely to sell at a significant discount from their pre-2022 prices.

"If you look over time and you run out the math, paying a little bit more to get the financing in place doesn't have that large of an impact on returns as long as you've got the right assets, the right thematic and you're able to make the company better while you own it," Nuttall said.

When it comes to financing potential transactions, according to Craig Larson, partner and head of investor relations, KKR also has a roughly 70-person global broker/dealer business, KKR Capital Markets, which provides financing for its own portfolio companies and also outside businesses.

"Our ability to access and finance the capital markets during periods of distress is actually something that we think of as being a real competitive advantage for us," Larson said.