10-QPeriod: Q3 FY2016

KKR & Co. Inc. Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 4, 2016For Securities:KKRKKRTKKR-PDKKRS

Summary

KKR & Co. Inc. reported a strong third quarter of 2016, with a significant increase in "Fees and Other" revenue, driven by substantial growth in carried interest and management fees. This surge is largely attributable to the adoption of ASU 2015-02, which led to the de-consolidation of several investment funds, bringing their previously eliminated revenues into the "Fees and Other" category. The company's Private Markets segment saw robust growth in performance income, primarily due to realized carried interest. Despite a decrease in monitoring fees, overall transaction fees in this segment increased, reflecting more numerous and larger fee-generating deals. The Public Markets segment also experienced growth, particularly in management fees, driven by strategic investments and increased capital deployment. Overall, KKR demonstrated solid operational performance, with notable improvements across its segments, although the company faces ongoing market volatility and currency risks.

Financial Highlights

24 data points
Beta

Net Income

$360.35M

Total Assets

$37.98B

Cash & Equivalents

$2.20B

Free Cash Flow

$630.71M

Financial Statements
Beta
Interest Expense$255.10M
Net Income$360.35M

Key Highlights

  • 1Significant increase in "Fees and Other" revenue, primarily driven by the de-consolidation of investment funds due to ASU 2015-02 adoption, leading to the inclusion of previously eliminated carried interest and management fees.
  • 2Private Markets segment reported a substantial increase in performance income, with realized carried interest up significantly year-over-year, supported by strong performance in funds like North America Fund XI and Asian Fund II.
  • 3Transaction fees across segments increased, reflecting a higher number and larger size of fee-generating transactions, particularly in Private Markets and Capital Markets.
  • 4Public Markets segment saw growth in management fees, fueled by strategic investments (e.g., Marshall Wace LLP) and increased capital deployed in various credit and hedge fund strategies.
  • 5Economic Net Income (ENI) improved across most segments, driven by higher fees and performance income, though partially offset by increased compensation and operating expenses in some areas.
  • 6KKR continues to actively manage its capital structure, evidenced by ongoing unit repurchases ($453.8 million bought back year-to-date as of September 30, 2016) and the issuance of Series A and Series B Preferred Units.
  • 7Assets Under Management (AUM) grew across key segments, with Private Markets AUM reaching $75.2 billion and Public Markets AUM reaching $55.9 billion, indicating continued fundraising success and asset growth.

Frequently Asked Questions

The adoption of ASU 2015-02 on January 1, 2016, resulted in the de-consolidation of most of KKR's investment funds. This means that revenues and expenses from these previously consolidated funds are now included in KKR's consolidated "Fees and Other" and "Investment Income (Loss)" line items, rather than being eliminated in consolidation. This change significantly increased reported "Fees and Other" revenue, particularly carried interest and management fees, and altered the presentation of noncontrolling interests.

The Private Markets segment showed strong performance, with "Total Segment Revenues" increasing significantly to $548.8 million from $11.8 million in the prior year's quarter. This was driven by a substantial increase in "Performance Income," specifically realized carried interest, which rose to $350.5 million from $265.3 million. Transaction fees also increased, offsetting a decline in monitoring fees. Assets Under Management (AUM) grew to $75.2 billion, indicating continued investor confidence and capital deployment.

"Unrealized Carry" represents the portion of carried interest that has been earned by KKR based on the current fair value of underlying investments but has not yet been distributed. On the segment balance sheet, it is shown as an asset, reflecting the potential future income that KKR is entitled to. A decrease in "Unrealized Carry" from $1.4 billion to $1.3 billion suggests either a reduction in the fair value of underlying investments or a distribution of previously unrealized carry.

KKR is actively managing its liquidity through various means, including operating activities, investment realizations, and borrowings. The company has a unit repurchase program, having bought back approximately $453.8 million in common units year-to-date as of September 30, 2016. Additionally, KKR issued Series A and Series B Preferred Units, raising capital and diversifying its funding structure. The company also has significant uncalled capital commitments, providing future funding for investments.