KKR is treating the crisis brought on by the coronavirus pandemic as a strategic “inflection point” for the firm, which it has been preparing for over the last decade.
In opening remarks on the firm’s first quarter earnings call on Wednesday, co-president and co-chief operating officer Scott Nuttall walked through the lessons KKR learned during the global financial crisis, and the build-out of the firm over the following 10 years to allow it to have a more powerful offensive strategy when the next crisis hit.
“The last crisis was critical developmentally for us. We made some great investments, we made large and important moves for the firm strategically, and it was an inflection point that drove us to meaningfully expand our business in the years post-crisis. We are viewing this crisis as providing similar opportunities, but off a larger base of capital, AUM and capabilities to work with.”
Nuttall said during times like this, the firm can use its balance sheet to be “aggressive”, including for new investments, strategic acquisitions and for buying back its own stock.
“We expect to be able to use this crisis, as we did the last one, to evolve and grow our business aggressively through and coming out of this and to create the next inflection point for our firm.”
Nuttall said KKR is “always looking” for strategic acquisition opportunities, but has a “really high bar”. When it comes to business areas, Nuttall pointed to “some of the younger areas for us” such as real assets, and said the firm is also thinking about opportunities on the distribution side. Asked about a potential to move into the secondaries market, Nuttall said it is “one of the areas we look to periodically as we think about other opportunities for us strategically, but nothing to report today”.
Nuttall said the KKR business model positions the firm well for periods of volatility: “When you have contractually committed capital that cannot be taken away and a liquid balance sheet, it is good news when asset prices get cheaper.”
Nuttall said that, beginning a few years ago, KKR repositioned its distressed and private equity teams to be closer together, and created target lists for debt and equity that the firm would want to buy when dislocation occurred. Since 21 February, KKR has invested or committed around $8 billion, approximately $5 billion in credit and the remainder in equity.
Nuttall added KKR is also finding opportunities for portfolio companies to pursue acquisitions and is looking at non-core subsidiary sales from companies looking to de-lever or buy back stock.
New York-headquartered KKR’s entire private equity portfolio delivered a gross loss of 12 percent for the quarter; its three flagship funds, the $13.9 billion Americas Fund XII, the $9.3 billion Asia Fund III and the €3.5 billion Europe Fund IV, delivered a gross loss of 6 percent.
“We’ve been playing a good amount of defense over the last several weeks, largely protecting what we have,” Nuttall said.
“We were fortunate from a portfolio construction standpoint as we’ve been quite underweight direct energy, retail and hospitality.”
Those account for 2 percent, 4 percent and 1 percent of global investments, respectively. Direct energy funds, which make up 1 percent of total AUM, delivered a gross loss of 33 percent for the quarter.
“We definitely have a number of tough situations to manage, but it’s a relatively small percentage of the total right now.”
Asked whether KKR was facing any clawback situations across its vehicles, chief financial officer Rob Lewin said the firm has roughly $90 million of clawback exposure across a number of different funds, which he described as “normal course for us”.
On the fundraising front, the firm raised $7 billion in Q1, driven by fundraising in real estate and Asia infrastructure strategies and within private equity. Between 1 March and 1 May, the firm raised $10 billion.
KKR is in market with its fourth Asia buyout fund, with a reported target of $12.5 billion. On the firm’s Q4 earnings call in January, Nuttall said KKR was set to launch fundraising for KKR Americas Fund XIII and Global Infrastructure Investors IV in the following several months, and expects fundraising for 20 additional strategies over the next three years.
“We’re still confident in our trajectory, but our best judgement sitting here today is that the three-year path will now take us a few additional quarters to achieve,” Lewin said.
Nuttall said the firm has been spending much more time with its investors and is seeing two to three times as much engagement from them.
“Part of this is making sure they know what is happening with their portfolios, but a lot of it is discussing how to invest into these markets and ways we can work together.”
Since the beginning of the year, 40 first-time clients have committed capital to the firm, he added. During this period there continues to be a lot of interest from the insurers, as well as high-net-worth individuals and retail investors, Nuttall said.
Firmwide, KKR booked a loss of $1.29 billion in the first quarter. Assets under management were down 5 percent to $207 billion.