Choppy financial markets nudged private equity firm KKR & Co LP (KKR.N) into its second quarterly loss in less than a year on Monday, while a tough investment environment led to its undeployed capital soaring to a record $35 billion.
The ballooning pile of unused funds at KKR underlines a trend in the U.S. buyout sector, where difficult market conditions have not slowed fundraising as investors continue to hand over money in the hope of making outsized returns.
To sit atop a growing pool of cash is a boon for buyout firms as it allows them to earn a management fee that is a cornerstone of their revenues. Private equity firms typically charge a management fee worth 2 percent of the money they manage, and a “carried interest” fee equivalent to a fifth of returns earned beyond an agreed level.
Amid turbulent financial markets, New York-based KKR incurred a bigger-than-expected economic net loss of $0.65 a share between January and March after taxes, compared with a year ago when it earned an economic net income (ENI) of $0.62.
Analysts had expected an economic net loss of $0.35 per share in the quarter, according to Thomson Reuters I/B/E/S.
KKR shares were trading down 5 percent at $14.19 in afternoon trading in New York.
ENI is a key earnings metric for U.S. private equity firms that includes unrealized gains or losses in investments. As such, some of KKR’s economic net losses may never materialize as troubled investments could be sold at a profit in future when markets rebound. Private equity firms can hold onto their investments for as long as 12 years.
“The first quarter of 2016 was a challenging environment with pronounced volatility across global capital markets,” KKR said in a statement.
Known for multi-billion-dollar corporate takeovers that were all the rage before the 2008 global financial crisis, the U.S. private equity industry has been off to a slow start this year.
Dealmaking has moderated as the market for high-yield bonds and loans, the lifeblood of buyouts, struggles to recover after stumbling late last year when investors shunned risk.
Only $44 billion worth of buyout deals were signed between January and March, less than half the $101 billion in the same time last year, according to the private equity data provider Preqin.
A turbulent stock market was also a source of headache for private equity houses looking to buy or sell companies. The U.S. benchmark S&P 500 .SPX equity index tumbled in the first 1-1/2 months of the year to near two-year lows, but rebounded to finish the first quarter little changed.
KKR said its first-quarter loss was driven by unrealized losses in the falling share price of First Data Corp. (FDC.N), a U.S. payment processor controlled by KKR.
KKR had taken First Data private for about $29 billion in 2007, before listing the company in a $2.6 billion initial public offering that was the largest in the United States in 2015.
In line with its policy of distributing a fixed dividend every quarter, KKR reiterated that shareholders would receive a cash distribution of 16 cents per share.
The last time KKR posted a loss was in the third quarter of 2015, when a stock market rout weighed on the value of its assets. The firm managed $126 billion of capital as of March 31.
(Reporting by Koh Gui Qing. Editing by Bernadette Baum)
Photo: CEO of Kohlberg Kravis Roberts & Co (KKR) Henry Kravis (R) departs after meeting India’s Prime Minister Narendra Modi at a breakfast in the Manhattan borough of New York September 29, 2014. REUTERS/Carlo Allegri