Shares in private equity firm Kohlberg Kravis Roberts (NYSE: KKR) are up today after it announced an increase in its first-quarter net profit of 19% on a year-over-year basis, well ahead of analysts' estimates. For the quarter, net income attributable to KKR was $190.4 million, up from $159.6 million for the same quarter last year

While this is certainly nothing to shake a stick at, a closer examination of the numbers reveals the challenges the industry faces. On a conference call with reporters, a spokesperson for the firm admitted that it closed on just two new private equity transactions during the first three months of the year. And the firm's private markets division, its most prominent, collected only $37.7 million in fee-related earnings, less than half the amount in the first quarter of last year.

At the same time, the firm's bottom line was significantly helped by an increase in the value of its underlying holdings. Known as "carried interest," this figure grew by 9%, handily beating the firm's more prominent rival, Blackstone Group (NYSE: BX), which acknowledged last week that its private equity portfolio company's carrying value rose by only 4.9%. To give a rough benchmark, the S&P 500 (NYSE: SPY) rose by 12% over the same time period.

Because of these nuances, many analysts prefer to look at the economic net income of private equity firms. Unlike GAAP earnings, the economic net income of a firm accounts for both its realized and unrealized investment gains over a given time period. For KKR, this number came in at $727 million, or $0.99 a share, compared to $743 million, or $0.96 a share from a year ago. Although this was down 2% on a year-over-year basis, it nevertheless beat analysts' expected economic net income of $487 million, or $0.74 a share.

The virtues and vices of private equity
I've discussed the virtues and vices of private equity firms at length in the past. More recently, my colleague Alex Planes touched on the subject in a popular piece about the correlation between private equity initial public offerings and subsequently poor market returns.

On the one hand, you'd be investing in firms led by the richest and most powerful players on Wall Street, many of which, like both KKR and Blackstone, sport highly generous dividend yields -- KKR's is 9.2% while Blackstone's is 6.7%. But on the other, as I discussed in an article about Oaktree Capital Group's (NYSE: OAK) underwhelming IPO, the convoluted ownership structure and questions about the motives of management have made investors reluctant to venture into the sector in droves.

Consequently, if you're interested in the financial sector but want stocks with less baggage, check out our recently released free report disclosing the identity of a large financial institution that Warren Buffett recently staked a multi-billion-dollar claim in, as well as a smaller firm that he would have likely interested him during his younger years.

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