KKR moves to ‘success-based’ compensation model to enhance transparency

The move benefits shareholders and fund limited partners by enhancing transparency around how its compensation pool is formed, CFO Robert Lewin said on the firm's earnings call Tuesday.

Compensation at private equity giant KKR will become more “success-based” beginning this year.

Employee compensation at the New York-headquartered firm will be calculated based on its fee revenues and the realised investment performance of its funds, the firm revealed in its fourth-quarter and full-year 2020 results on Tuesday. Previously, KKR’s compensation margin has been a single number based on all forms of revenue.

“In a normalised operating environment, you should expect our comp ratio to be roughly in line with our current levels,” chief financial officer Robert Lewin said on a call accompanying the earnings. “In an environment where we have elevated levels of successful monetisation, our comp margin is likely to tick up a bit.

But in a more challenged environment where our monetisations are lower, you should also expect to see our comp margins go down, which will provide some level of added protection to our operating earnings.”

The move benefits shareholders and fund limited partners in a number of ways, Lewin noted, including enhancing transparency on how its compensation pool is formed and creating better alignment as compensation becomes linked to the realised investment performance of its funds.

Beginning with the first quarter of this year, KKR will de-couple compensation into its component pieces in its financial statement. Instead of a single “compensation and benefits” line item, compensation will now show fee-related compensation, realised performance income compensation and realised investment income.

In addition, the firm will no longer include equity-based compensation as an expense in its total distributable earnings, which has caused confusion at times, noted Lewin.

“We are going to conform to our peers and make it easier for our shareholders to compare results.”

KKR said the compensation change is based on the growth of its management business, its fundraising pipeline and the closing of the Global Atlantic acquisition, which will add a significant stream of management fees for the firm. This backdrop is “enabling KKR to change its compensation framework”, the firm noted in the earnings materials.

“We feel that we’ve never had better line of sight, better visibility into our management fees as we do right now,” Lewin said.

On the compensation framework, Scott Nuttall, co-president and co-COO, said the firm has been “talking about this potential change internally for the last few years”.

“We talked about this with all partners of the firm, everybody gets the alignment…We think it’s the right change and we have been building over it the last couple of years,” he said.

Fresh capital raised by KKR last year grew 72 percent to $43.8 billion, compared with $25.5 billion in 2019. US- and Europe-focused funds garnered $27 billion from investors, while Asia-Pacific funds collected $15 billion, representing almost 30 percent of capital raised.

KKR’s private equity funds generated the highest aggregate gross return compared with other strategies. Its flagship funds, the $13.9 billion Americas XII, the $9.3 billion Asia III and the €3.5 billion Europe IV delivered a gross return of 32 percent.

The value of the firm’s private equity portfolio appreciated by 16 percent during the quarter, while real estate and infrastructure funds rose 6 percent and 10 percent respectively. KKR’s leveraged credit funds rose by 5 percent.

Management fees increased 16 percent year-on-year to $1.4 billion. Aggregate revenue increased 8 percent last year, while operating earnings were up 11 percent .

KKR’s AUM as of end-December grew 15 percent to $252 billion, from $219 billion a year ago. The firm expects its AUM to grow to $342 billion following the completion of its $4.7 billion acquisition of Global Atlantic.