KKR: ‘Best opportunities are outside the US’

The firm's private equity activity in Q4 was mostly in Europe and Asia, totalling a little less than half of $4bn of total investments.

Private equity giant KKR is seeing more value in opportunities outside the US because of the market’s higher valuations.

“We are really seeing this dynamic around the world – in the US certainly and other parts of the world – of a bifurcated market,” said KKR co-president and co-chief operating officer Scott Nuttall on the firm’s fourth quarter 2019 earnings call Friday.

“If you’ve got growth and simplicity, valuation multiples are incredibly high,” he added. “If you’ve got complexity or less growth, you can be left behind by the market.”

Craig Larson, managing director of investor relations, added: “We have been seeing more opportunity, better risk-reward outside of the US and part of that is valuation related.”

In Europe, the New York-headquartered firm is focused on corporate partnerships, opportunities in growth and tech as well as making investments alongside families. In Asia, the firm is finding attractive opportunities in partnerships in Japan, according to Larson.

“If you look at total returns over the last five years, returns of the S&P have exceeded the MSCI Asia-Pacific by almost 2x,” he said. “I think we have been seeing that risk-reward, and you see that in some of the deployment figures.”

Private equity activity was mostly in Europe and Asia, totalling a little less than half of the $4 billion of private and public markets investments in the fourth quarter.

The firm’s private equity flagship funds – the $13.9 billion Americas Fund XII, the $9.3 billion Asian Fund III and the €3.5 billion European Fund IV – delivered gross returns of 29 percent for the quarter, the highest across its investment strategies.

The firm is in market with its fourth Asia buyout fund, with a reported target of $12.5 billion. It is also said to be seeking $300 million for its debut tech fund for the region.

KKR’s assets under management grew 12 percent year-on-year to $218 billion at the end of 2019, according to an earnings statement. The increase was primarily attributable to $7.7 billion of new capital raised across multiple strategies including infrastructure, real estate, leveraged credit and strategic partnerships, as well as an increase in the value of its private equity portfolio. Fee-paying AUM saw a 14 percent increase to $161 billion.

In 2019, capital raised from retail investors made up about 20 percent of the firm’s total fundraising efforts. Nuttall said he expects that figure to “keep going up” over time. To tap more retail investors, the firm plans to introduce more products and to staff up, he added.KKR is also set to launch fundraising for KKR Americas Fund XIII and Global Infrastructure Investors IV in the next several months, Nuttall said on the call. It also expects fundraising for 20 additional strategies over the next three years.

The firm’s retail initiative has grown from $9 billion of its AUM in 2015 to $37 billion today.

Although the firm has seen a significant change in its investor base since its conversion to a C-corporation, completed on 1 July 2018, with many more mutual funds and index funds owning its stock and being added to several indices, the fact that it is not being included in the Russell indices is a disadvantage, Nuttall said. “We are still introducing ourselves to investors that are new to this space and new to KKR, so the full impact of C-corp conversion is not yet in our stock.

“We believe being part of Russell’s indices would allow us to further our goal of broadening our shareholder base and is the sensible next step in our journey to getting proper price discovery and a proper valuation for our stock.”

As a result, the firm is discussing with its board the steps necessary to be included in the Russell indices when they rebalance this spring.