Henry Kravis highlights lending opportunities

Private equity is not just about taking over companies, KKR’s co-founder said on the firm’s third quarter earnings call.

KKR is seeing increasing opportunities in its credit and real asset businesses as banks cut back on lending, according to co-chairman Henry Kravis.

Speaking on KKR’s third quarter earnings call, Kravis said: “As a number of the financial institutions have cut back on lending to certain companies, it’s enabled us to have a much more meaningful role and it has created many more opportunities for us around the world.

“When people think about private equity, a lot of people think about it only as buying 100 percent of the company. In fact, that's not the case at all anymore, it’s anything on the balance sheet or in the capital structure that is needed, including minority investments, that can help a company make an acquisition or delever their balance sheet.”

Scott Nuttall, head of asset management, said KKR’s private equity interests had eased while areas such as credit and real assets were increasing.

He pointed to the fact that the firm was currently in the market with its second special situations fund, a European direct-lending fund, a second mezzanine fund, a European real-estate fund, as well as North America VII and Europe IV, KKR’s flagship US and European PE funds. The firm is also working on raising growth equity and hedge fund strategies.

“We are seeing opportunities in special situations in private credit areas, especially areas like Europe where we’ve seen the banks pull back meaningfully and we see opportunities to step into the breach, whether it’s direct lending or distressed,” Nuttall said.

“In particular, where we see complexity, illiquidity and dislocation we’re finding the most interesting opportunities, and the volatility of the late summer has created quite a bit of opportunity for us. It’s a wonderful thing to have locked up capital to be able to invest behind the opportunities we see.”

That “volatility” also dragged down some of KKR’s financials for the quarter. Economic net income (ENI) after taxes was negative $315 million, or minus $0.37 per common unit, representing a 175 percent drop from the same period last year, when earnings were at $419 million.

The firm declared a fixed quarterly dividend of $0.16 per share and announced a $500 million share buyback programme.

Kravis said: “We’ll still pay a healthy distribution that is now fixed and we’ll have more capital to invest behind our ideas, including repurchasing our own stock. We think our shareholders will do better and since we own or control 45 percent of the stock, we will do better as well.”

Craig Larson, head of investor relations, added: “The best way for us to create equity value over the long term is to participate to a greater extent in everything that we do. This includes the investments that we make and this includes owning even higher percentage of our stock by implementing our buyback programme.”

William Janetschek, chief financial officer, said: “Within equities, the S&P 500 and MSCI world indices were down 6.4 percent and 8.3 percent, respectively, for Q3. We've not experienced a quarter where both of these indices were down more than 5 percent since the third quarter of 2011, which was the only other quarter we reported negative ENI since being a public company.”

The firm had $98.7 billion assets under management as of the end of the third quarter, while its fee-earning assets under management were at $82.9 billion. These represented slight increases from this time last year, when the figures were $96.1 billion and $82.3 billion, respectively.