Like buyout competitors Blackstone Group LP and Apollo Global Management LLC, KKR has suffered from a slump in the value of its private equity funds as weak financial markets drag down asset valuations.
The firm boasted a 41 percent year-on-year increase in fee-related income, boosted by a record quarter in its capital market business.
“Fees were up, which is big positive, but also their unrealized markdowns were less than their peers,” said Sandler O’Neill & Partners analyst Michael Kim.
As well as making private equity investments, KKR has a capital markets division that arranges debt and equity financing for deals and underwrites securities offerings. It also has an asset management unit.
More and larger transaction closings led to higher capital market activity for the group, raising its transaction fee income. KKR closed the acquisition of Pfizer’s Capsugel and Academy Sports and Outdoors in the third quarter.
“For the nine months to September 30, our private equity investments outperformed the S&P 500 by over 1,000 basis points despite the recent market volatility,” CEOs and co-founders Henry Kravis and George Roberts said in a statement.
KKR partner and director Scott Nuttall said the firm saw attractive debt investment opportunities in direct lending to companies, particularly through mezzanine debt, and in relieving the balance sheets of some of Europe’s banks.
Energy — shale in particular — is also a major area of interest for KKR, Nuttall added, even if it constitutes only about 4 percent of the firm’s investments.
The firm is in exclusive talks to buy most of Samson Investment Co, a privately held U.S. oil and gas company, sources said this week.
Marathon Oil Corp in June struck a deal to buy oil and gas properties in the Eagle Ford shale field in Texas for $3.5 billion from KKR and Hilcorp. With the sale, KKR nearly tripled the investment it made just a year before.
KKR’s economic net income (ENI), a measure used by private equity firms to report earnings, was a loss of $592.1 million in the third quarter, a steep reversal from a $317.3 million gain a year earlier.
ENI after tax per adjusted unit was a loss of 91 cents, compared with a gain of 39 cents a year earlier. Analysts on average were expecting a loss of 97 cents.
Using general accepted accounting principles, the net loss was $243.4 million, compared with a gain of $8.9 million a year ago.
KKR said it would pay a distribution to shareholders of 10 cents per unit, one cent less than in the previous quarter.
Assets under management totaled $58.7 billion, down from $61.9 billion in the second quarter. Its uncalled commitments, or “dry powder,” amounted to $12.8 billion at the end of September.
The fund-raising environment for KKR was good overall as investors turned to alternative asset managers for better returns than those seen in listed equities and debt, Nuttall said.
(Reporting by Greg Roumeliotis and Paritosh Bansal in New York; Editing by Gary Hill and Steve Orlofsky)