New York-based KKR said Wednesday that AUM was $55.5 billion for third quarter ended September 30, up from $50.4 billion for the same time period in 2009. Economic net income (ENI)—which represents income from fees, investment income minus expenses and gains on investments– dropped by 61.4% to $317.3 million for the quarter. KKR said the drop “reflects lower levels of appreciation of KKR’s private equity portfolio when compared to the prior period,” according to a statement. The firm said that while the fair value of its investments increased in third quarter, the amount of net unrealized gains was lower than in 2009.
The $317 million ENI was well below the $511 million expected by Michael Kim, Sandler O’Neill’s associate director of research. Kim, in a research note, said KKR’s after-tax ENI per unit was 34 cents a share, missing his estimate of 72 cents and the consensus of 50 cents.
“The miss was entirely driven by lower than expected investment income, as fee related earnings of $70 million were actually 18% ahead of our $59 million forecast, driven primarily by higher fees,” Kim said in the note.
KKR as of Sept. 30 had $1.1 billion of available cash and about $760 million of debt. Employee compensation and benefits rocketed by 272% to $331.2 million for the quarter, compared to $58.6 million in 2009. Fee related earnings rose 3.7% to $69.5 million for the quarter.
KKR’s private equity funds invested $350 million in the third quarter, down from the $1.1 billion invested in the second quarter. KKR’s uncalled commitments, from several of its PE funds and vehicles, now stand at roughly $12.5 billion.
“Despite somewhat disappointing 3Q10 results, we still think fundamentals are improving across deal activity/fundraising, and management remains committed to further diversifying the business,” Kim wrote in the note.
On a conference call, KKR executives said the high yield market has improved. Dividend refinancings have also returned, which is typically an indicator of a strong market. However, IPOs continue to be uncertain, said Scott Nuttall, a KKR member that heads the firm’s global capital and asset management group. “While we feel things are a lot better than they were a year ago, we still have a long way to go,” Nuttall said.
KKR did not disclose how big their next North American fund would be but that fundraising would start in earnest in early 2011. The firm’s last North American fund raised $17.6 billion in 2006 and about 70%, or $12.7 billion, has been invested. KKR is currently fundraising for its China growth fund, which has so far raised $700 million. The pool is expected to reach $1 billion by the end of the year, the execs says.
“We’re seeing a much improved fundraising market relative to a year ago,” Nuttall said. “Still, institutional investors are cautious.”
The PE firm has been active in deals and has about $5 billion in dry powder to invest from its 2006 North America fund, executives said. KKR earlier this year acquired Pets At Home in the U.K. and invested in Coffee Day Resorts of India as well as Hilcorp Energy Property in Houston.
“We feel like we’ve been active,” Nuttall said. KKR, he said, has invested $2.2 billion in private equity for the first three quarters of the year. “We’re going to close, or have closed, about $2 billion in fourth quarter,” he said.
KKR has returned $2.4 billion of capital to LPs so far in 2010 and $3.4 billion since the beginning of 2009, execs said.
Last month, KKR was in talks to hire nine members of Goldman Sachs’s famed proprietary trading desk to form a new hedge fund. KKR execs said Wednesday that the Goldman traders will join in January. The business will be a third party business and KKR will likely seed the unit with a modest amount of capital, the executives said. KKR will begin talking with third party investors in the latter part of 2011, executives said.