Asset managers and private equity firms may not come to mind when
you think of the hottest industries this year, but this week they
notched higher again in the Zacks Industry Rank into the top 6%.
And since these masters of investing are a group I really enjoy
researching and investing in, I had a hard time choosing which #1
Rank company to write about.
I decided to go with the firm that started it all:
Kohlberg Kravis Roberts & Co., now simply called KKR
(KKR). As the company says, "The story begins on May 1, 1976, when
KKR opened its doors as a firm specializing in management buyouts,
a unique approach to investing that pioneered an entire industry:
private equity."
KKR provides a range of asset management services
to its investors and delivers capital markets services to its firm,
its portfolio companies and its clients. The company operates
private equity funds that take either controlling or strategic
minority ownership positions for long-term appreciation.
They are also very active in the debt and credit
markets, investing in leveraged loans, high-yield bonds and less
liquid credit products. And, on behalf of portfolio companies, KKR
arranges equity and debt financing and offers capital market
advice.
Money Flows to Expertise
With a market cap of $7 billion, KKR grew its
assets under management (AUM) to $90.2 billion as of September 30,
2013, up from $83.5 billion in the June quarter.
Asset managers and private equity (PE) firms do
especially well in bull markets as the value of their investments
rise, more dollars are attracted to them, and more revenue is
generated from fees. The leading PE firms like KKR,
Blackstone (BX), and Apollo Global (APO) leverage
specialized areas of research around the globe to find undiscovered
opportunities in non-public companies and debt markets.
Institutional investors such as pension funds,
endowments, foundations, insurance companies, and sovereign wealth
funds allocate to these "money masters" because they trust their
unique expertise in diverse corners of global financial markets.
And a KKR can often provide the non-correlated investment exposure
that these big funds need but can't find on their own.
But as you may know, Blackstone has been a big
buyer of single family homes in the past two years with a special
fund that they allocated over $13 billion to. And the old pro KKR
has not been resting on its laurels either, noting recently...
"Our expanded focus encompasses exciting and
growing areas for KKR: energy & infrastructure, real estate,
growth equity investments, and a range of debt and public equity
investing."
And another thing to keep in mind about the
pursuits of PE firms is that they generally have some of the
longest time horizons on Wall Street. They develop and nurture
their non-public investments over many years before harvesting the
gains. They are the steady elephants in a world of frenetic,
high-frequency chimps.
Rising Estimates, Favorable Acquisition
After KKR's 3rd quarter earnings report, where they
beat the Zacks consensus EPS by 50%, analysts scrambled to raise
estimates. The full year 2013 consensus went from $2.19 to $2.53
and 2014 was bumped from $2.35 to $2.50.
GAAP net income was $204.7 million for the quarter
ended September 30, 2013, up from $127.4 million in the comparable
period of 2012. And over half of this haul was due to fees with
fee-related earnings of $106.0 million and $292.2 million for the
quarter and nine months, respectively, up from $90.7 million and
$233.8 million in the comparable periods of 2012.
For the quarter and nine months ended September 30,
2013, the carrying value of KKR's private equity investment
portfolio appreciated 5.9% and 12.5%, respectively.
And this week, KKR announced a deal to acquire KKR
Financial Holdings LLC (KFN) in an all-stock deal worth $2.6
billion. KKR Financial is currently managed by a subsidiary of KKR
Asset Management, a subsidiary of Kohlberg Kravis.
Based in San Francisco, KKR Financial was founded
in 2004 as a mortgage real estate investment trust (REIT) but later
turned into an investor in corporate debt after being hit by the
sub-prime mortgage crisis in 2007. Being a specialty finance
company, it operates a wide range of asset portfolios and primarily
invests in financial assets including private and public equity
investments, high yield bonds and distressed securities.
The purchase will be funded from a proposed new
issue of 100 million shares. The deal, which is subject to a vote
by shareholders of KKR Financial, is expected to close by the first
half of 2014.
According to Kohlberg Kravis, upon closure the deal
is expected to pave the way for a 2% accretion on Kohlberg Kravis'
total distribution per unit basis while its balance sheet is
expected to grow from $7.2 billion as of Sep 30,2013 to $9.3
billion. Further, it is expected that the acquisition will enhance
liquidity, increase return to shareholders and build capital.
Private equity firms are often structured as
limited partnerships where a certain percentage of earnings are
distributed to partners and shareholders through regular and
special dividends. According to analysts at Wells Fargo...
"The deal is accretive to most of KKR’s metrics
with the biggest positive being a bump-up in cash flow and the
dividend. Even though the metrics look good in our view, we are a
bit surprised by the deal given KKR IPO’d KFN as recently as
2005."
But overall, the analysts felt that this was
another positive step in KKR's continued transformation beyond
traditional PE roles. They reiterated their Outperform rating and a
$26-29 valuation range for KKR shares.
Whether or not you find KKR to be an worthy
investment opportunity at this point, be sure to check out the
whole Investment Management industry group on our site. With asset
managers like Artisan Partners (APAM) and Virtus
(VRTS) also holding the Zacks #1 Rank, while BlackRock (BLK)
and Affiliated Managers Group (AMG) carry the #2 Rank, there
are plenty of solid financial companies to choose from if you want
exposure to the "money masters" in this persistent bull market.
Kevin Cook is a Senior Stock Strategist for
Zacks where he runs the Follow The Money portfolio.
ARTISAN PTNR AM (APAM): Free Stock Analysis Report
APOLLO GLOBAL-A (APO): Free Stock Analysis Report
BLACKROCK INC (BLK): Free Stock Analysis Report
BLACKSTONE GRP (BX): Free Stock Analysis Report
KKR & CO LP (KKR): Free Stock Analysis Report
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