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KKR hit by falling income

KKR posted a surprise decline in earnings during Q2, with economic net income falling by 27% despite the group growing assets under management to $61.9bn as of 30 June, up from $54.4bn at the same point last year.

KKR surprised analysts by revealing economic net income – a popular measure for listed alternative asset managers to report performance, which excludes one-off costs such as those associated with the company’s original flotation – had fallen to $315 million for the quarter. That represented a 27 percent fall from the $433 million reported at the end of the second quarter last year.

The figures for the first six months of the year were $1.06 billion, down from $1.11 billion in the first half last year, representing a 4.5 percent drop. Economic net income per adjusted unit, after tax, fell from 48 cents to 36 cents. Analysts had forecast an average figure of 40 cents, according to newswire Reuters.

The market greeted the results with dismay, causing KKR's share price to fall by 9.2 percent on the New York Stock Exchange to $12.16 at 1700 BST on Thursday, a day after the results were announced.

“The decrease in both comparative periods was primarily due to a lower level of investment income earned from our principal investments. While the fair value of our principal investments increased during the second quarter and first six months of 2011, the level of appreciation was lower than in the comparable periods of 2010,” KKR said in a statement.

The group’s assets under management grew 14 percent to $61.9 billion however, which KKR attributed to continued investment appreciation as well as new capital raised, “partially offset by distributions to the limited partners of our investment funds”.

KKR’s fee-paying AUM were $46.4 billion as of June 30 this year, up 11.5 percent from a year earlier. The increase was driven primarily by new capital raised, it said.

KKR's co-founders Henry Kravis and George Roberts sought to flag up the group's successes despite the disappointing income figure, issuing a joint statement as part of the results, which said: “In an increasingly challenged global economic environment, our business continued its growth trajectory across all segments. Our private equity investments outperformed the S&P 500 by nearly 400 basis points for the quarter, while our liquid credit strategies maintained top-quartile rankings, beating their benchmarks since inception. In addition, activity has been particularly robust despite the market volatility. This is especially true for our private markets segment, where we have announced 12 new investments and several realisations around the world since March 31.”

The group is looking to diversify further as part of a process of increasing institutionalisation. Its recently-established long / short equities hedge fund team will launch officially in the coming months. Earlier this year, Private Equity International sister title PERE exclusively reported that KKR had laid the foundations for a push into real estate investing. It hired former Goldman Sachs Whitehall Funds co-chief operating officer Ralph Rosenberg from Eton Park Capital Management to lead its efforts in the asset class and to build a team.