Why did GAAP net income fall year-over-year even though the non-GAAP metrics grew strongly?

GAAP net income attributable to KKR common stockholders was $655 million in 3Q'24 versus $1.47 billion in 3Q'23. The non-GAAP measures (FRE, TOE, ANI) exclude items such as unrealized gains and losses on investments, unrealized carried interest, and equity-based compensation, and the GAAP results include them. Insurance-related GAAP results, including investment gains and losses, also differ materially from the operating earnings used in KKR's segment reporting. Investors should review the GAAP reconciliations in the appendix to understand the drivers.

How much of KKR's earnings are recurring, and why does that matter?

Management says about 81% of LTM total segment earnings come from the more durable and recurring components: Fee Related Earnings, Insurance Operating Earnings, and Strategic Holdings Operating Earnings. These are generally less dependent on the timing of asset sales than realized performance income and investment income. Investors often value recurring earnings more highly because they are more predictable.

What is the outlook for the Strategic Holdings segment?

KKR expects Strategic Holdings Operating Earnings to be modest in 2024, to exceed $300 million by 2026, $600 million by 2028, and $1 billion by 2030. These targets depend on dividends from its core private equity portfolio companies, which are forward-looking estimates that may not materialize. KKR does not provide a GAAP reconciliation for these forecasts.

What is the source of the quarter's record fee growth, and is it likely to persist?

Growth came mainly from higher management fees on a larger fee base, which rose from organic capital raised, along with a lower fee-related compensation margin and strong capital markets transaction fees. Transaction fees of $424 million were a record quarter, and management attributed them to elevated deal activity. Transaction fees are more cyclical than management fees, so their contribution may vary. Investors should distinguish between recurring management fees and episodic transaction revenue when assessing sustainability.

KKR & Co. Inc. 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed October 24, 2024. Cited figures are marked; the original filing is the authoritative source.

KKR & Co. Inc. reported third quarter 2024 results on October 24, 2024, with its strongest operating metrics in company history.

Fee Related Earnings (FRE) reached $1.0 billion^a ($1.12 per adjusted share), up 79% year-over-year, and Total Operating Earnings (TOE) reached $1.3 billion, up 71%. Management described both as the highest quarters in KKR's history. Adjusted Net Income (ANI) rose 58% to $1.2 billion ($1.38 per adjusted share).

Roughly 81% of LTM segment earnings came from the more durable, recurring components of the business, which investors typically weight more heavily than realized investment gains. Growth in the asset base was also strong. Assets Under Management (AUM) grew 18% year-over-year to $624 billion^b, and Fee Paying AUM grew 19% to $506 billion.

KKR raised $24 billion^c of new capital in the quarter and $118 billion over the last twelve months, and deployed $24 billion in the quarter. Transaction fees of $424 million in the quarter were a record, driven by capital markets activity. Global Atlantic, which KKR fully owned from the start of 2024, contributed $308 million of Insurance Operating Earnings.

The main caveat is GAAP net income. Net income attributable to KKR common stockholders was $655 million^d in 3Q'24, versus $1.47 billion in 3Q'23, a decline driven by GAAP accounting items such as unrealized gains and carried interest, which are excluded from the non-GAAP metrics.

The company declared a regular quarterly dividend of $0.175 per share, and management guided that Strategic Holdings Operating Earnings would rise from modest levels in 2024 to over $300 million by 2026, over $600 million by 2028, and over $1 billion by 2030. These are forward-looking estimates that carry execution risk.

02—Key points

Key Highlights

Record quarter: FRE of $1.0 billion ($1.12/adj. share) rose 79% year-over-year, and TOE of $1.3 billion rose 71%, both the highest quarters in KKR's history.
Adjusted Net Income grew 58% to $1.2 billion ($1.38/adj. share), and LTM ANI reached $4.0 billion ($4.44/adj. share), up 32%.
GAAP net income to KKR common stockholders was $655 million in 3Q'24, down from $1.47 billion in 3Q'23, though it was $2.0 billion year-to-date.
AUM reached $624 billion (+18% YoY) and FPAUM reached $506 billion (+19% YoY), with perpetual capital of $259 billion (+27% YoY), largely from Global Atlantic's organic growth.
Fundraising was $24 billion in the quarter and $118 billion LTM; capital invested was $24 billion in the quarter and $77 billion LTM, and uncalled commitments (dry powder) were $108 billion.
Record transaction fees of $424 million in the quarter (LTM capital markets activity), with roughly half from debt-focused products.
Balance sheet is strong: $5.1 billion of cash and short-term investments, $16.3 billion of cash and investments, $8.8 billion of debt at par, net cash and investments of $7.5 billion, and an 'A' rating from both S&P and Fitch. Quarterly dividend of $0.175 per share is payable November 19, 2024.

03—Questions

Frequently Asked Questions

Why did GAAP net income fall year-over-year even though the non-GAAP metrics grew strongly?
GAAP net income attributable to KKR common stockholders was $655 million in 3Q'24 versus $1.47 billion in 3Q'23. The non-GAAP measures (FRE, TOE, ANI) exclude items such as unrealized gains and losses on investments, unrealized carried interest, and equity-based compensation, and the GAAP results include them. Insurance-related GAAP results, including investment gains and losses, also differ materially from the operating earnings used in KKR's segment reporting. Investors should review the GAAP reconciliations in the appendix to understand the drivers.
How much of KKR's earnings are recurring, and why does that matter?
Management says about 81% of LTM total segment earnings come from the more durable and recurring components: Fee Related Earnings, Insurance Operating Earnings, and Strategic Holdings Operating Earnings. These are generally less dependent on the timing of asset sales than realized performance income and investment income. Investors often value recurring earnings more highly because they are more predictable.
What is the outlook for the Strategic Holdings segment?
KKR expects Strategic Holdings Operating Earnings to be modest in 2024, to exceed $300 million by 2026, $600 million by 2028, and $1 billion by 2030. These targets depend on dividends from its core private equity portfolio companies, which are forward-looking estimates that may not materialize. KKR does not provide a GAAP reconciliation for these forecasts.
What is the source of the quarter's record fee growth, and is it likely to persist?
Growth came mainly from higher management fees on a larger fee base, which rose from organic capital raised, along with a lower fee-related compensation margin and strong capital markets transaction fees. Transaction fees of $424 million were a record quarter, and management attributed them to elevated deal activity. Transaction fees are more cyclical than management fees, so their contribution may vary. Investors should distinguish between recurring management fees and episodic transaction revenue when assessing sustainability.

04—Continue

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