KKR 'pleasantly surprised' by quick return of LBOs

Kohlberg Kravis Roberts reported economic net income of $515.3 million for the fourth quarter of 2009, down from $822.7 million for the third quarter. The firm reported $1.9 billion in economic net income for the full year of 2009 and will pay a dividend of $0.08 per KKR Guernsey Common Unit.

KKR plans to list on the New York Stock Exchange in the near future. In terms of timing for the IPO, KKR treasurer and head of investor relations Jonathan Levin said during an earnings call on Thursday that the firm “cannot predict an exact date or even which quarter this process would be completed”. But he added, “The firm does not plan to maintain a dual listing and intends to concentrate its float in New York.” Scott Nuttall, a director of KKR Financial Corporation, added later in the call that the overall level of activity in the IPO market would not impact KKR’s plans.

KKR gave a mixed outlook for the economy going forward. Although the firm was able to mark up its private equity portfolio by 34 percent in 2009, most earnings growth during the year was driven by cost cutting. Nuttall said creating value will be more difficult in 2010.

During the call, KKR revealed information on their 2009 transactions. The acquisitions of Northrop Grumman’s consulting division TASC and pet supplier Pets at Home deals were made at between five and six times debt-to-EBITDA ratios, with equity at roughly half of the purchase price. The firm deployed $600 million in private equity deals in the first half of 2009, and $1.5 billion in the second half.

In 2010, KKR is seeing more activity and a broader array of sellers, whereas last year the firm only saw opportunities from firms that “had to sell assets”. Though KKR is interested in both growth equity investments and buyouts,  Nuttall said the firm is “pleasantly surprised by how quickly the traditional leveraged buyouts have come back”.

During the question-and-answer period, KKR was asked about the fundraising environment and terms and conditions. Nuttall said KKR is not currently raising a fund, but he expects that the general pushback on all terms will continue over the next couple of years. 

“What we’ve found is that if we perform, we’re still able to justify to our investors the economics that we derive from the funds,” Nuttall said.

KKR was also asked about whether its $15 billion in dry powder would put “pressure” on the firm to invest, and whether pricing in the year ahead would reflect other firms facing pressure. Nuttall said that because most funds today have several years left to invest their dry powder – including KKR – he doesn’t expect pressure from LPs to invest to play a role in pricing.

When asked about the potential impact of the Volcker rule, Nuttall said that it would not negatively impact KKR, and could be slightly positive for the firm if it presented new opportunities to bring talent on board or manage new portfolios.