KKR Gains Momentum Among Rivals After Switching to a Corporation

KKR & Co.’s stock has raced ahead of its private-equity rivals after becoming a corporation.

In its first earnings report as a C-corp, the company said on Thursday that second-quarter profit rose 46 percent and assets under management expanded. But lately all eyes have been on a different metric — KKR’s stock price.

It has jumped 29 percent to a record high since the firm announced plans on May 3 to convert from a partnership. The surge caught the attention of Jonathan Gray, president of Blackstone Group LP, who gave KKR a shout-out.

“We’ve been impressed by their stock performance post-conversion,” Gray said on Blackstone’searnings call last week.

KKR made the switch on July 1 following passage of the U.S. tax law, which reduced the corporate tax rate to 21 percent from 35 percent. The new structure enables firms to be included in indexes, potentially boosting stock valuations and mutual fund ownership. Gray said his firm needs more information about index inclusion, stock-price performance and mutual-fund ownership before deciding whether to also convert to a corporation.

Hedge Fund Money

KKR Co-Chairmen Henry Kravis and George Roberts said in the earnings report that the switch, designed to broaden the firm’s investor base, increases their ability to generate long-term equity value for shareholders. “In terms of our results, operating fundamentals across the firm remain strong,” they said.

Some analysts are watching to see if KKR’s gains from the conversion last.

“The question has become in the short-term, does some of the nimble hedge fund money move from KKR to another conversion candidate, or has that dynamic already occurred?” said Sandler O’Neill analyst Andrew Disdier. “Over the longer term, at what point do we see mutual funds start to buy KKR and does that really provide enough new demand to drive share prices higher?”

Shares of Apollo Global Management LLC, Carlyle Group LP and Blackstone have also risen since early May. Ares Management LP, the first major publicly traded private-equity firm to make the switch, has seen its stock fall in the period.

Following the conversion, New York-based KKR has changed the way it reports results. Starting with the second quarter, the firm said it’s using distributable earnings as the main profit metric because stockholders will find it more useful than economic net income.

KKR also redefined distributable earnings, which typically reflect cash profits on asset sales and fund management fees. KKR is including equity-based compensation in the calculation as well.

  • In the second quarter, KKR’s distributable earnings rose to $404.7 million, or 49 cents a share, from $276.9 million, or 34 cents, a year earlier, according to the statement. The results beat analysts’ estimates of 45 cents a share.
  • Realized performance income on private markets investments jumped to $342 million from $264.7 million in the year-ago period. Management fees rose to $261.5 million from $229.6 million.
  • KKR’s AUM expanded to $191.3 billion as of June 30, compared with $176.4 billion at the end of the first quarter. The gain was mostly from the closing of the FS Investments deal in April and inflows of capital into leveraged credit and infrastructure strategies.

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