KKR’s Realization Earnings Rise on Secondary and Private Exits

Realizations and distribution

KKR & Company (KKR) generated strong realizations in 3Q16, mainly due to improved markets, higher liquidity, and consolidation in select sectors. Higher realizations allow for better distribution among limited partners or investors in various funds.

The company saw $350 million of realized carried interest, or realization income, in 3Q16, as compared to its performance fees of $424 million. On an average, the company’s exits were made at 2.6x of its investment costs, with an implied internal rate of return of 26%. These returns reflect a strong performance on realizations of investee companies.

KKR’s Realization Earnings Rise on Secondary and Private Exits

Limited partners, or investors of alternative asset managers, demand better returns with higher distributable earnings. KKR can seek higher assets by improving its distributable earnings, which can be supported by strong realizations.

In 3Q16, KKR’s major realizations during the quarter included Walgreens Boots Alliance (WBA), Zimmer-Biomet (ZBH), Galenica, Tarkett (TKTT), Rundong, and Far East Horizon in secondary sales. The strategic sales of Alliance Tire, WMF, SMCP, Gland Pharma, GenesisCare, Sedgwick, and United Envirotech.

The company realized performance income of $424 million in 3Q16, as compared to a loss of $162 million in 3Q15.

KKR’s realized investment income rose to $350.5 million in 3Q16, as compared to $265.3 million in 3Q15. This rise was on the back of exits from profitable holdings.

KKR’s competitors posted the following debt-to-asset ratios:

  • Apollo Global Management (APO): 65%
  • Carlyle Group (CG): 48%
  • Blackstone Group (BX): 28%

By comparison, KKR’s total debt-to-asset ratio was 16.5%, the lowest among peers in the iShares US Financials ETF (IYF).

Balance sheet

KKR’s leverage ratio in 3Q16 remained in line with the previous quarter. The company’s total debt obligations and preferred share obligations stood at $3.0 billion on September 30, 2016. The company has $2.8 billion in cash and short-term investments.

On September 30, 2016, KKR had an undrawn $1 billion revolving credit facility. It also had an undrawn $500-million revolving credit facility for its Capital Markets business. KKR’s balance sheet and leverage position have remained low to moderate for the past few quarters.