KKR is excited at the prospect of the recent US public market volatility translating into good buying opportunities for the firm.
Speaking on the firm’s third quarter earnings call on Thursday, co-president and co-chief operating officer Scott Nuttall said the “meaningful downward move in stocks” over the last month is “good news” for KKR, which has $58 billion in dry powder ready to put to work.
“It’s good news when things get cheaper. We can buy assets at lower valuations. In fact, in our 40-plus years of experience some of our best investments have been made in periods of dislocation and volatility in the public markets,” he said.
The S&P 500 has lost 9 percent since the start of October while the Dow Jones Industrial Average is down 7 percent.
Nuttall said the recent volatility is a sign “the US is starting to catch up a little bit with the rest of the world”, pointing to a “meaningful sell-off” in China and “the beginnings of some valuation changes” in Europe, and adding that KKR has “been waiting for this, to some extent”.
“Our teams have been waiting for a valuation adjustment to make some assets that they really like more attractive, and we’re hopeful there will be even more to do from a deployment standpoint going forward given that, and then work with these assets and then monetise them over the long term,” he said.
“The presiding emotion here is excitement that the valuations have started, maybe, in the US, to come down a bit.”
Nuttall noted that KKR’s own stock is not immune from the volatility, and is down around 20 percent over the last month. This shows the disparity between the short-term thinking in public markets and the long-term thinking in private markets, he said. Around 80 percent of KKR’s AUM is contractually committed to the firm for eight or more years at inception.
“From our seats, our stability is worth more today and the firm has even more opportunities and better prospects today than a month ago,” he said. “We believe our stock will be worth more down the road because of what’s going on, and we continue to be committed to equity value creation.”
Head of investor relations Craig Larson said KKR’s private equity entry multiples are lower today compared with two years ago because “there is a different risk-reward in those investments”, and the firm is buying into complexity rather than growth.
“We’re leaning into complexity, we’re focused on opportunities where we can bring expertise to help reposition an investment.”
The firm’s assets under management reached $195 billion in the quarter, up 27 percent on the same period last year. KKR raised $38 billion over the last 12 months, including $7.4 billion for its third infrastructure fund, the largest infrastructure fundraise so far this year. A further $15 billion of inflows came from its partnership with FS Investments and an incremental 5 percent stake in hedge fund Marshall Wace, in which it acquired a minority stake in 2015.
KKR’s private equity portfolio appreciated 7.3 percent for the quarter and 19.9 percent for the last 12 months.
The firm is fundraising for its latest European private equity fund and its debut impact investment fund, as well as vehicles for real estate credit, energy and direct lending. Fundraising is “likely to be launched across an additional half-dozen carry-paying strategies over the coming months”, Larson said.
KKR posted after-tax distributable earnings of $496.7 million or $0.60 per share for the quarter, compared with $0.49 for the previous quarter.
“Through our differentiated model – the combination of our investment funds, balance sheet and capital markets capabilities – we generated one of the highest distributable earnings quarters in our history,” co-chairmen and co-chief executives Henry Kravis and George Roberts said in a statement accompanying the firm’s results.