KKR’s economic net income (ENI) was $86.6 million and $1.73 billion for the quarter and year ended 31 December 2014, respectively, down from $789.6 million and $2.19 billion in the comparable periods of 2013, according to an earnings announcement by the firm today (10 February). The fourth quarter figure represents an 89 percent year-on-year (y-o-y) fall while full year ENI declined 42 percent y-o-y.
Scott Nuttall (pictured), the firm’s global head of capital and asset management, attributed some of these losses to energy sector mark-to-market paper losses following the sharp fall in oil prices in the last quarter of 2014, as well as write-downs of its credit portfolio stemming from loan market declines in the quarter and credit selection, he said on the investment firm’s earnings call.
Some of the written-down assets included CLOs and loans that lost value in the fourth quarter. “There were assets that we liked more than the market liked them,” Nuttall explained.
Even though the firm’s energy holdings, which represent about 7 percent of the firm’s $99 billion in assets, are causing it some pain at present, Nuttall said he expects the sector to create a lot of opportunities in the coming year. He is particularly keen on investing in energy via private credit, which could backing drilling programmes directly with capital for stressed energy companies, as GSO had recently did via an agreement with LINN Energy.
The firm has been busy in its private credit portfolios and expects to focus heavily on them this year, whether through energy opportunities, Europe and other areas. In energy, Nuttall said he expects to do more work in second lien loans, as well as drilling partnerships. Its European Direct Lending Fund, meanwhile, plans to mirror the strategy of its US Direct Lending Fund and invest in mid-market corporates. Nuttall described them as good companies with poor capital structures that other loan providers might have over looked.
The firm is currently in fundraising mode for several successor funds, including its US Direct Lending Fund II, its Special Situations Fund II and Infrastructure Fund II. Nutall expects to attack energy investments via several of these vehicles and others. He estimated the firm already has about $5 billion in dry powder for energy investments across its businesses. “We’re getting asked a lot about energy and opportunities we’re seeing because of materially lower prices. We believe the opportunity is immense and our relationships and expertise will be key to success here,” Nuttall said.
KKR recently created “an energy swat team” across its various platforms for people to attack energy opportunities from different sides and see where investments might be viable and via which vehicle. “We’re well positioned with dry powder across the franchise in energy,” Nuttall said.
The firm enjoyed decent performance across several funds in 2014, delivering returns in the mid-teens or high single digits. Its direct lending, mezzanine and special situations businesses returned 8 percent, 19 percent and 24 percent for the year, respectively.