KKR & Co. Inc. is steering through an "anxiety-creating environment," with valuations sinking while the cost of capital ticks up, said co-CEO Scott Nuttall on the firm's first-quarter earnings call May 3.
Challenges facing KKR's private equity portfolio companies include "a stickier inflation environment," added CFO Robert Lewin, who predicted inflation of 7% to 8% over the course of the year before moderating in 2023.
KKR's traditional private equity portfolio, which consists of three geographically focused funds, posted a loss for the first quarter with a negative 5% gross return, but year on year the portfolio was up 19%.
Lewin tied inflation to the tight labor markets and wage inflation, an undersupply of housing affecting the U.S. in particular and a lack of investment in energy infrastructure, which was driving up energy costs.
However, the CFO noted signs of supply chain difficulties easing.
Nuttall said KKR was helping portfolio companies navigate supply chain bottlenecks by sharing information across its lines of business, which include real estate and credit as well as private equity.
"In addition to the very specific procurement programs and other things that we do to kind of be able to use our scale thoughtfully, we're making sure that [all business lines] have access to the information that we have, that the information is traveling," Nuttall said.
In the current environment, management believes the company's core private equity strategy is well-positioned. KKR's long-duration core private equity strategy is centered on investments the firm intends to hold for 10 to 15-plus years. The strategy is seen as having a "more modest risk-return profile compared to traditional private equity," Lewin said.
"This portfolio is performing extremely well, and we believe has many of the right attributes to outperform if we go through a period of volatility and real inflation, including having real pricing power," Lewin added.
Fundraising outlook
Asked about the fundraising challenges some private equity fund managers face, Nuttall pointed to a "crowding effect" as GPs "come back to the market faster than expected" to raise new funds, which has put pressure on some traditional institutional limited partners to free up capital for reinvestment.
"We're not hearing that about other alternative asset classes. We're also not hearing that from newer investors in the alternative asset class broadly defined, including private equity," Nuttall said.
KKR recently completed a roughly $40 billion fundraising cycle for almost all of its flagship private equity funds, the CEO said, and therefore had less of a need to raise funds quickly.
The firm's European private equity strategy has collected $7.1 billion so far, surpassing the size of the previous vintage, management said. In 2022, the focus is on gathering capital for its real estate, infrastructure and credit strategies.
Across all strategies, KKR raised $26 billion in new capital from investors during the first quarter, while total assets under management were $479 billion, a 30% increase over the same period a year prior, management said.
