Alternative Assets Boost KKR

11/23/2018 5:00 am EST

Focus: FINANCIALS

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Founded in 1976, KKR & Co. (KKR) is a leading global investment management firm. KKR manages assets through a variety of investment funds and accounts covering multiple asset classes, mostly private equity, explains Stephen Biggar, senior editor of Argus Research.

It seeks to create value by bringing operational expertise to its portfolio companies and through the active oversight and monitoring of its investments.

The company’s conversion to corporate status from a partnership structure took place on July 1. As the company envisions, we believe that the change will enable KKR to broaden its shareholder base, as many mutual funds are unable to invest in partnerships and many other investors are reluctant to deal with K- 1 dividend forms.

The conversion has also made the shares eligible for a range of indices. We note that dividends will be reduced in the early going. KKR has announced a $0.50 annualized dividend beginning in 3Q, or $0.125 per quarter, down from the prior quarterly rate of $0.17.

We expect the dividend to be raised over the next few years and to return to $0.17 per quarter in 2020, supported by strong growth in distributable earnings. KKR is unique as an alternative asset manager converting to corporate status from a partnership.

Although the move has not yet led to “conversion-mania” among alternative managers, managements at other alternatives have noted the potential benefits of a larger shareholder base and appear to be watching with interest. The stock’s yield is about 2.1%, based on the new annualized distribution of $0.50 per share.

KKR & Co. is led by co-chairman and co-CEOs Henry R. Kravis and George R. Roberts, who co-founded the firm in 1976. An investment in KKR carries substantial risks. Investors must be comfortable with the opaque nature of the alternative asset manager business model.

In short, investors in the stock are betting that the company’s outstanding investment track record will continue in the future. The firm also depends on favorable credit market conditions in order to fund its investments.

Alternative asset managers are an admittedly difficult group to value. Realized gains and carried interest are difficult to predict. However, the company’s recent change to corporate status has simplified its reporting structure relative to those of other alternative asset managers.

We believe that book value and EPS multiples are useful valuation tools. Book value was $16.68 per share as of September 30, implying a price/book multiple of 1.4.

The stock trades at 12.3-times our 2019 distributable earnings estimate, above the ENI multiples of other alternative asset managers, although we believe a premium is warranted by KKR & Co.'s unique status (for a private equity firm) as a corporation. We are raising our rating to buy with a target price of $28.

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