Private equity firm KKR (NYSE: KKR) recently announced weaker-than-expected quarterly results after a key measure of profitability plunged 27% from a year ago.
Let’s head straight into the numbers.
The numbers
Though assets under management grew by 13.8% to $61.9 billion, economic net income, a measure of profitability used in private equity, nosedived 27.3% to $315 million. This was because the company earned lower levels of investment income from the principal invested. Funds invested did not appreciate in value as much as they did in the previous periods. Assets under management mostly grew because of additional investments.
KKR’s public market investments saw impressive growth in fees and economic net income. However, private investments, which comprise 76% of the company’s assets, saw declines. This does not paint a picture of confidence in an economy where private markets are growing.
Competitor Blackstone (NYSE: BX) recently posted second-quarter results, reporting a threefold increase in economic net income owing to favorable economic conditions and lower operating expenses. The inability to benefit from a recovering economy raises doubts about KKR’s strategy in allocating its assets.
The positives
The company has investments in diversified industries such as health care and hospitals -- HCA Holdings (NYSE: HCA); retail -- Dollar General (NYSE: DG); and media ratings -- Nielsen Holdings (NYSE: NLSN). KKR’s private equity portfolio grew 3.8%, which, although below year-ago levels, exceeded the performance of the S&P during the same period.
Since the end of the first quarter, the company has invested $3.5 billion in private markets and continued to raise money. It announced 12 new investments in private markets and several realizations around the world. KKR has available capital of $14 billion to invest; of this, it plans to invest $12 billion in private equity. This capital, if invested in the right places, will add to the company’s profits. How efficiently KKR manages its fund will be seen in future earnings reports.
The Foolish bottom line
KKR’s dip in profit growth shows some weakness. However, with economic growth and strategic investments, the company shouldn’t have too many problems. I would wait for better numbers before buying this one, though it’s worth noting that the stock could be starting to get fairly cheap.
